As filed with the Securities and Exchange Commission June 1, 2004
File No. 333-108655
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 1
BUYERS UNITED, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 7389 87-0528557
------------------------------- ---------------------------- -------------------
(State or Other Jurisdiction of (Primary Standard Industrial (IRS Employer
Incorporation or Organization) Classification Code Number) Identification No.)
14870 Pony Express Road, Bluffdale, Utah 84065
(801) 320-3300
---------------------------------------------------------------
(Address and telephone number of registrant's principal offices)
Paul Jarman
14870 Pony Express Road, Bluffdale, Utah 84065
(801) 320-3300
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(Name, address and telephone number of agent for service)
Copies to:
Mark E. Lehman, Esq.
Mark N. Schneider, Esq.
Parsons Behle & Latimer
One Utah Center
201 South Main Street, Suite 1800
Salt Lake City, Utah 84111
(801) 532-1234
(801) 536-6111 fax
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the registration statement becomes effective.
The securities being registered on the Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
CALCULATION OF REGISTRATION FEE
Title of Each Class Of Amount to be Proposed Proposed Maximum Amount of
Securities to be Registered Registered Offering Price Aggregate Offering Price Registration Fee
Per Share
------------------------------- --------------------- -------------------- ------------------------- --------------------
Common Stock 4,576,231 $2.425 $11,097,360 $898
$0.0001 par value (1)(2) shares
------------------------------- --------------------- -------------------- ------------------------- --------------------
Common Stock 672,700 $2.50 $1,681,750 $137
$0.0001 par value (1)(2) shares
------------------------------- --------------------- -------------------- ------------------------- --------------------
Common Stock 682,163 $2.425 $1,654,245 $134
$0.0001 par value (1)(3) shares
------------------------------- --------------------- -------------------- ------------------------- --------------------
Common Stock 1,506,989 $2.45-$5.39 $4,658,103 $377
$0.0001 par value (1)(3) shares
------------------------------- --------------------- -------------------- ------------------------- --------------------
Common Stock 581,250 $2.425 $1,409,531 $115
$0.0001 par value (1)(4) shares
------------------------------- --------------------- -------------------- ------------------------- --------------------
Common Stock 710,000 $2.50 $1,775,000 $144
$0.0001 par value (1)(4) shares
------------------------------- --------------------- -------------------- ------------------------- --------------------
Common Stock 50,000 $2.425 $121,250 $10
$0.0001 par value (5) shares
------------------------------- --------------------- -------------------- ------------------------- --------------------
Total $22,397,239 $1,815
------------------------------- --------------------- -------------------- ------------------------- --------------------
------------------
(1) These shares are registered on behalf of the selling security holders
who hold outstanding warrants and options to purchase common stock of
the Registrant and convertible notes that are convertible to common
stock of the Registrant. The amount registered also includes such
additional shares as may be issued as a result of the anti-dilution
provisions of the warrants, options, and convertible notes in
accordance with Rule 416 under the Securities Act of 1933.
(2) These shares are registered on behalf of the selling security holders
who hold outstanding warrants to purchase common stock; 4,576,231
shares have an exercise price less than $2.425 per share (the average
bid and asked price on September 5, 2003), and 672,700 shares have an
exercise price of $2.50. The offering price and gross offering proceeds
are estimated solely for the purpose of calculating the registration
fee in accordance with paragraphs (c) and (g)(3) of Rule 457 under the
Securities Act of 1933.
(3) These shares are registered on behalf of the selling security holders
who hold outstanding options to purchase common stock; 682,163 shares
have an exercise price less than $2.425 per share and 1,506,989 shares
have an exercise greater than $2.425. The offering price and gross
offering proceeds are estimated solely for the purpose of calculating
the registration fee in accordance with paragraphs (c) and (g)(3) of
Rule 457 under the Securities Act of 1933.
(4) These shares are registered on behalf of the selling security holders
who hold notes convertible to common stock; 581,250 shares have a
conversion rate less than $2.425 per share and 710,000 shares have a
conversion price of $2.50. The offering price and gross offering
proceeds are estimated solely for the purpose of calculating the
registration fee in accordance with paragraphs (c) and (g)(3) of Rule
457 under the Securities Act of 1933.
(5) These shares are registered on behalf of a selling security holder who
holds the common stock directly. The offering price and gross offering
proceeds are estimated solely for the purpose of calculating the
registration fee in accordance with paragraph (c) of Rule 457 under the
Securities Act of 1933.
ii
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
Subject to completion June __, 2004
Amended Prospectus
BUYERS UNITED, INC.
COMMON STOCK
This prospectus covers 8,779,333 shares of the common stock of Buyers
United, Inc., that may be sold from time to time by the persons listed under the
caption "Selling Security Holders," beginning on page 37. The selling security
holders own
o Warrants to purchase 109,375 shares at a price of $1.25 per
share
o Warrants to purchase 4,466,856 shares at a price of $2.00 per
share
o Warrants to purchase 672,700 shares at a price of $2.50 per
share
o Options to purchase 2,189,152 shares at prices ranging from
$2.00 to $5.392 per share
o Convertible notes in the amount of $1,162,500 convertible at
$2.00 per share
o Convertible notes in the amount of $1,775,000 convertible at
$2.50 per share
o 50,000 shares of common stock
Of these shares, 620,000 have been sold by the selling security
holders, options for 289,700 shares have expired, and 710,000 shares will not be
issued on conversion of convertible notes due to the fact the notes were repaid.
Consequently, 7,159,633 shares remain unsold.
Buyers United will receive the proceeds from exercise of the warrants
and options and will benefit from extinguishment of the debt represented by the
convertible notes, but will not receive any proceeds or benefit from the resale
of the shares by the selling security holders.
Quotations for our common stock are reported on the OTC Bulletin Board
under the symbol "BYRS." On May 28, 2004, the closing bid price for our common
stock was $2.47 per share.
See "Risk Factors" beginning on page 3 for information you should
consider before you purchase shares.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is _______________, 2004.
This prospectus replaces the prospectus dated October 14, 2003 in its
entirety.
PROSPECTUS SUMMARY
Our company
Buyers United, Inc., is a Delaware corporation that has been engaged
for the past seven years in the business of selling telecommunication services
and now services approximately 150,000 small businesses and residential
consumers across America. Buyers United was originally formed as a Utah
corporation in 1995 and changed its corporate domicile to Delaware in March
1999. We will propose for stockholder approval at our next annual meeting on
June 29, 2004 a change in our name to "UCN, Inc."
Buyers United's offices are located at 14870 Pony Express Road,
Bluffdale, Utah 84065. The telephone number is (801) 320-3300.
The offering
Maximum shares that may be offered by selling security
holders 8,779,333
Number of shares sold by selling security holders as of
the date of this prospectus 620,000
Number of shares covered by expired options and
convertible notes that were repaid 999,700
Common stock outstanding assuming all warrants,
options, and convertible notes covering shares that
may be offered by selling security holders are
exercised and converted (1) 20,010,212
Proceeds to Buyers United assuming all warrants and options
covering shares that may be offered by selling security
holders are exercised $16,093,270
Extinguishment of debt assuming all convertible notes
covering shares that may be offered by selling
security holders are converted $1,162,500
Use of proceeds from warrant and option exercise Proceeds will be used
to retire debt and
for working capital
OTC Bulletin Board Symbol BYRS
------------------------
(1) Does not include 7,133,969 shares of common stock reserved for issuance on
exercise of other outstanding warrants and options, exercise of additional
options that may be granted under our Long Term Stock Incentive Plan or Director
Stock Plan, conversion of outstanding convertible preferred stock, and
conversion of outstanding notes.
Summary consolidated financial information
The following summary consolidated financial information is qualified
by reference to the financial statements of Buyers United included at the end of
this prospectus.
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Statements of Operations Data
Three months
Ended Year ended December 31
March 31, 2004 2003 2002
-------------- ---- ----
Revenues $ 16,743,707 $ 63,312,964 $ 30,163,450
Operating expenses:
Costs of revenues 9,176,193 34,597,486 16,295,201
General and administrative 4,017,284 14,830,565 7,365,569
Selling and promotion 3,103,991 10,839,529 4,646,029
---------------- ---------------- ----------------
Income from operations 446,239 3,045,384 1,856,651
Other income (expense):
Interest income 13,850 13,513 17,980
Interest expense (357,424) (1,884,258) (1,544,448)
Gain on early extinguishment of debt 109,150 - -
---------------- ---------------- ----------------
Net income $ 211,815 $ 1,174,639 $ 330,183
Total preferred stock dividends (202,313) (873,495) (749,725)
---------------- ---------------- ----------------
Net income (loss) applicable
to common stockholders $ 9,502 $ 301,144 $ (419,542)
================ ================ ================
Net income (loss) per common share:
Basic $ - $ 0.05 $ (0.07)
Diluted $ - $ 0.04 $ (0.07)
Balance Sheet Data
December 31,
March 31, 2004 2003 2002
-------------- ---- ----
Working capital deficit $ (3,529,305) $ (11,921,235) $ (7,276,814)
Total assets $ 28,778,455 $ 23,971,158 $ 13,144,948
Long-term debt and
capital lease obligations $ 245,980 $ 646,126 $ 3,887,803
Stockholders' equity (deficit) $ 7,254,196 $ (1,627,250) $ (5,463,114)
RISK FACTORS
An investment in Buyers United involves a high degree of risk and
common stock should not be purchased by anyone who cannot afford the loss of his
or her entire investment. You should carefully consider all of the following
risk factors discussed below as well as other information in the prospectus
before purchasing the common stock. The risks described below are not all of the
risks facing us. Additional risks, including those that are currently not known
to us or that we currently deem immaterial, may also impair our business
operations.
Our revenues and operating results may be negatively impacted by the pricing
decisions of our competitors and our providers.
Our revenues from period to period depend on the pricing for long
distance service we can obtain from the wholesale providers of these services.
We also must price our services at levels that are
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competitive in the marketplace. This industry has a history of downward pressure
on long distance service rates as a result of competition among providers. To
acquire and retain customers we offer these services at prices that are
perceived as competitive in conjunction with the other benefits we provide.
Consequently, falling prices will likely result in lowering our rates to
customers, which will reduce revenues. On the other hand, higher prices charged
by our providers will cut into gross profit margins unless we raise prices to
our customers, which may be difficult for us to do if our competitors are not
subject to the same upward pricing pressures or chose not to increase prices
notwithstanding such pressure. To make up for potential reductions in either
revenues or profits, it would be necessary for us to continue to make
significant increases in our customer base from period to period, and there is
no assurance that that we will be successful in doing so.
Our substantial debt adversely affects our operations and financial condition.
At March 31, 2004 borrowings and long term debt included $3.5 million
of notes payable to certain of our directors that pay interest at 12 percent per
annum, $2.3 million of obligations related to the purchase or acquisition of
customer accounts, and $3.5 million of borrowings under our line of credit. In
May 2004 we paid $3.0 million on the foregoing notes, and we intend to maintain
approximately $1.0 million of borrowings outstanding under the line of credit
through the remainder of 2004. Notwithstanding the reduction in our debt, a
substantial amount of our cash flow from operations is used to service our debt
rather than to promote and expand our business, which adversely affects results
of operations.
Disruptions in the operation of our technology could adversely affect our
operations.
We are dependent on our computer databases, billing and account
computer programs, Internet protocol network, and computer hardware that houses
these systems to effectively operate our business and market our services. Our
customers and providers may become dissatisfied by any system failures that
interrupt our ability to provide our service to them. Substantial or repeated
system failures would significantly reduce the attractiveness of our services.
Significant disruption in the operation of these systems would adversely affect
our business and results of operations.
Our enhanced services are dependent on leased telecommunications lines, and a
significant disruption or change in these services could adversely affect our
business.
The enhanced services we offer, such as automatic call distribution,
fax to email, real time account management, and the inNetwork(TM) family of
products, are provided to customers through a dedicated network of equipment we
own connected through leased telecommunications lines with capacity dedicated to
us that is based on Internet protocol, which means the communication initiated
by the customer is converted to data packs that are transmitted through the
dedicated network and managed by our software that resides on our equipment
attached to the network. We also move a portion of our voice long distance
service over this dedicated network, because it lowers our cost of providing the
service from the cost of using traditional transmission methods.
We lease telecommunication lines and space at co-location facilities
for our equipment, which represents the backbone of our dedicated network, from
third party suppliers. If any of these suppliers is unable or unwilling to
provide or expand their current levels of service to us that enable us to serve
our customers, the services we offer would be adversely affected. Although we
believe leased telecommunications lines and co-location facilities are available
from alternative suppliers, we might not be able to obtain substitute services
from other providers at reasonable or comparable prices or in a timely fashion.
Any resulting disruptions in the services we offer that are provided over our
dedicated network would likely result in customer dissatisfaction and adversely
affect our operations. Furthermore, pricing
4
increases by any of the suppliers we rely on for the dedicated network could
adversely affect our results of operations if we are unable to pass pricing
increases through to our customers.
Our business could be materially harmed if our computer systems were damaged.
Substantially all of our dedicated network systems are located at four
locations in Los Angeles, Salt Lake City, Dallas, and New York. Our customer
service, billing, and service management systems are located at out offices in
Bluffdale and Draper, Utah. Fires, floods, earthquakes, power losses,
telecommunications failures, break-ins and similar events could damage these
systems. Computer viruses, electronic break-ins, human error, or other similar
disruptive problems could also adversely affect our systems. We do not carry
business interruption insurance. Accordingly, any significant systems disruption
could have a material adverse effect on our business, financial condition, and
results of operations.
We use the Internet in various aspects of our business. The viability of the
Internet as an information medium and commercial marketplace will depend in
large part upon the stability and maintenance of the infrastructure for
providing Internet access and carrying Internet traffic.
Historically we have relied on the Internet for customer service and
billing. Failure to develop a reliable network system or timely development and
acceptance of complementary products, such as high-speed access systems, could
materially harm our business. In addition, the Internet could lose its viability
due to delays in the development or adoption of new standards and protocols
required to handle increased levels of Internet activity or due to increased
government regulation. If the Internet does not remain a viable conduit for data
and transactional traffic or the manner in which it now operates changes
significantly, then our business and results of operations could be adversely
affected.
A fundamental requirement for online communications is the secure transmission
of confidential information over public networks. Our failure to protect this
confidential information could result in liability.
If third parties succeed in penetrating our network security or
otherwise misappropriate our customer information, we could be subject to
liability. Our liability could include claims for unauthorized purchases with
credit card or banking information, impersonation or other similar fraud claims,
as well as for other misuses of personal information, including for unauthorized
marketing purposes. These claims could result in litigation and adverse
publicity, which could have a material adverse effect on our reputation,
business, and results of operations.
Our growth and results of operations are not predictable, which means an
investment in us has greater risk.
Buyers United experienced significant growth in 2003, primarily through
internal growth and the purchase of customer accounts. Recent acquisitions of
assets and customers have substantially increased our operations. We have no
other customer base acquisitions under consideration and cannot predict if or
when another such acquisition opportunity may present itself. Consequently, it
is not possible to predict with any certainty the growth of our business over
the next year, whether internally or through acquisitions. Our ability to
continue our growth and profitability will depend on a number of factors,
including our ability to maintain and expand our independent agent network, the
availability of capital to fund purchases of customers or acquisitions, existing
and emerging competition, and our ability to maintain sufficient profit margins
despite pricing pressures. Furthermore, the growth and development of our
business may be harmed if we are unable to adapt and expand our systems,
procedures, and controls
5
to support and manage our growth. All of these factors indicate there could be
fluctuations in our results of operations and volatility in our stock price that
could expose an investor to greater risk.
Our inability to promote our name and service could adversely affect the
development of our business.
Building recognition of our brand name, "UCN", is beneficial to
attracting additional customers, obtaining favorable reseller agreements with
providers of long distance, and establishing strategic relationships with
independent agents and businesses that can facilitate or enhance our service
offerings and marketing efforts. In January 2004 we filed an application with
the U.S. Patent and Trademark Office to register the mark, but have yet to
receive any response on the application. If we fail to obtain registration of
UCN, we may consider adopting new marks for promotion, so we would gain little
from promoting UCN. Even if we are successful in registering the mark, our
failure to promote and maintain our brand name successfully may result in slowed
growth, loss of customers, loss of market share, and loss of strategic
relationships. We cannot assure you that we will be able to promote our brand
names as fully as we would like, or that promoting our brand name will enable us
to be competitive or improve our results of operations.
Our development of enhanced services could subject us to claims of patent
infringement that would adversely affect our results of operations.
We offer enhanced services through our dedicated network, such as fax
to email. This, and other enhanced services, has been the subject of claims by
certain patent holders that providing the enhanced services violates existing
patent rights covering the manner and method by which the services are
performed. We have not received any notice or claim from any party that any
service we offer violates any such rights. Should we receive such a notice, we
expect that the patent holder would seek a licensing arrangement in which we
would be required to pay a license fee to continue to offer the service, and may
seek license payment for past sales of the service using the alleged patented
technology. Payment of any such license fees would have an adverse impact on the
net revenue generated from sales of the enhanced services.
Regulation of IP telephony services is unclear, so the imposition of significant
regulation in the future could adversely affect our operations.
We deliver our enhanced services and move other long distance service
through our VoIP Network. At both the Federal and state level, proceedings and
investigations are pending with respect to whether IP-enabled voice
communications are telecommunications services subject to Federal and state
regulation. A determination that such services are subject to regulation would
likely increase the cost of services we provide, which would adversely affect
our results of operations. Even if a determination is made that our IP delivered
services are not subject to current regulation, there is no assurance that
Federal or state governments will not impose regulation on IP-enabled
communications in the future that would add substantially to our costs of doing
business.
Future sales or the potential for sale of a substantial number of shares of our
common stock could cause the trading price of our common stock to decline and
could impair our ability to raise capital through subsequent equity offerings.
As of May 28, 2004, we have 13,633,204 shares of common stock
outstanding, of which 4,663,755 shares are freely tradable, 3,628,903 shares may
be sold subject to the volume, timing, and other conditions of Rule 144 adopted
under the Securities Act of 1933, and the remaining 5,340,546 shares may be sold
subject to the volume, timing, and other conditions of Rule 144 beginning
March 15,
6
2005. All of the 5,340,546 shares that can not be sold until March 2005 under
Rule 144 have been registered for resale by the holders through a separate
registration statement under the Securities Act of 1933 and may now be sold.
In addition, we have outstanding 782,625 common shares and warrants,
options, and convertible notes to acquire 6,377,008 additional shares that are
registered for sale by the selling security holders as described in this
prospectus. Assuming all these warrants and options are exercised and the notes
converted, there would be 20,010,212 shares of common stock issued and
outstanding. We have also reserved for future issuance 7,133,969 additional
shares of common stock as follows:
o 3,916,500 shares issuable on conversion of outstanding
preferred stock;
o Up to 2,009,351 shares underlying other warrants and options
that were granted and remained outstanding as of the date of
this filing; and
o Up to 1,208,118 shares reserved for issuance under our stock
plans.
Of the 7,133,969 shares of common stock reserved for issuance,
3,916,500 may be sold without limitation under Rule 144(k).
Sales of a substantial number of shares of our common stock in the
public markets, or the perception that these sales may occur, could cause the
market price of our stock to decline, which could adversely affect an investment
in our stock and could materially impair our ability to raise capital through
the sale of additional equity securities. The holders of these outstanding
warrants, options, and convertible securities have the opportunity to profit
from a rise in the value or market price of our common stock and to exercise
purchase or conversion rights when we could obtain equity capital on more
favorable terms than those contained in these securities.
INFORMATION ABOUT BUYERS UNITED
Our periodic reports
We currently file periodic reports pursuant to the Securities and
Exchange Act of 1934. All of our reports, such as annual and quarterly reports,
and other information are filed electronically with the Securities and Exchange
Commission ("SEC"). Our corporate website is http://www.ucn.net. We make
available on this website, free of charge, access to our Annual Report on Form
10-KSB, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy
Statement on Schedule 14A and amendments to those materials filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 as
soon as reasonably practicable after we electronically submit such material to
the SEC. In addition, the SEC's website is http://www.sec.gov. The SEC makes
available on its website, free of charge, reports, proxy and information
statements, and other information regarding issuers, such as us, that file
electronically with the SEC.
Forward-looking statements
You should carefully consider the risk factors set forth above, as well
as the other information contained in this prospectus. This prospectus contains
forward-looking statements regarding events, conditions, and financial trends
that may affect our plan of operation, business strategy, operating results, and
financial position. You are cautioned that any forward-looking statements are
not guarantees of future performance and are subject to risks and uncertainties.
Actual results may differ materially from those included within the
forward-looking statements as a result of various factors. Cautionary statements
in the "Risk Factors" and "Management's Discussion and Analysis of Operating
Results and Financial Condition" sections and elsewhere in this prospectus
identify important risks and uncertainties affecting
7
our future, which could cause actual results to differ materially from the
forward-looking statements made in this prospectus.
USE OF PROCEEDS
We will receive funds if any of the warrants or options held by the
selling security holders are exercised. Furthermore, we will extinguish
$1,162,500 of debt if the convertible notes are converted. Assuming all of the
warrants and options pertaining to the shares that may be reoffered by the
selling security holders under this prospectus are exercised, and after
deducting our expenses for registering the shares for resale, we would receive
approximately $15,783,270. To date we have received $2,824,031 from the exercise
of options and warrants. We intend to use funds we receive from the exercise of
warrants and options to retire debt and for working capital and general
corporate purposes. We have broad discretion in the allocation and use of these
funds, and will determine as and when funds are received from the exercise of
warrants or options how the funds will be used. Investors in the shares will not
have the opportunity to evaluate the economic, financial, or other information
on which we base our decisions on how to use the funds derived from the exercise
of warrants and options. If we fail to apply the net proceeds effectively, our
business could be negatively affected. We will not receive any funds obtained by
the selling security holders from their reoffer and sale of the common stock
covered by this prospectus.
MARKET FOR COMMON STOCK
The common stock of Buyers United trades in the over-the-counter
market. The following table sets forth for the respective periods indicated the
prices of the common stock in the over-the-counter market, as reported and
summarized on the OTC Bulletin Board. Such prices are based on inter-dealer
quotations, without markup, markdown, commissions, or adjustments and may not
represent actual transactions.
Calendar Quarter Ended: High Bid ($) Low Bid ($)
----------------------- ------------ -----------
March 31, 2002 1.30 0.61
June 30, 2002 2.00 1.10
September 30, 2002 1.93 1.30
December 31, 2002 2.00 1.25
March 31, 2003 2.45 1.52
June 30, 2003 2.22 1.20
September 30, 2003 2.95 1.71
December 31, 2003 3.05 2.00
March 31, 2004 3.35 2.52
DIVIDEND POLICY
Since inception of Buyers United, no dividends have been paid on the
common stock. Buyers United intends to retain any earnings for use in its
business activities, so it is not expected that any dividends on the common
stock will be declared and paid in the foreseeable future. There are currently
outstanding 1,827,500 shares of Series A Convertible Preferred Stock and 417,800
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 May 7, 2004
there were approximately 3,076 holders of record of the common stock.
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CAPITALIZATION
The following tables sets forth our capitalization (unaudited) as of
March 31, 2004, and as adjusted to give effect to the exercise of all options
and warrants and conversion of notes by the selling security holders and payment
of our estimated offering expenses. This table should be read in conjunction
with our financial statements and notes thereto.
March 31, 2004 As Adjusted (1)
-------------- --------------
Stockholders' equity:
Preferred stock, $0.0001 par value; 15,000,000
shares authorized Series A 8% cumulative
preferred stock 1,827,500 shares issued and
outstanding (liquidation value of $3,655,000) $ 183 $ 183
Series B 8% cumulative preferred stock 420,300
shares issued and outstanding (liquidation value
of $4,203,000); 42 42
Common stock, $0.0001 par value, 100,000,000
shares authorized; 13,080,079 shares issued and
outstanding; as adjusted, 19,847,712 shares
issued and outstanding 1,308 1,985
Additional paid in capital 29,250,294 47,980,889
Warrants and options outstanding 4,012,394 211,141
Accumulated deficit (25,740,025) (25,740,025)
-------------- --------------
Total stockholders' equity $ 7,524,196 $ 22,454,215
============== ==============
-------------------
(1) The adjusted figures do not give effect to the issuance of up to 3,202,469
shares underlying other warrants and options, up to 150,000 shares reserved
for issuance on conversion of other outstanding notes, or up to 3,929,000
shares issuable on conversion of outstanding preferred stock.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATING RESULTS
AND FINANCIAL CONDITION
Overview
Buyers United is a domestic telecommunications company that offers and
sells a wide range of long distance and related communication services to
business and residential customers. Historically we functioned as an aggregator
and reseller of telecommunications services provided by others. We intend to
continue to pursue and develop this type of business. However, in December 2002
Buyers United entered into agreements to purchase and manage assets of Acceris
Communications Inc. (formerly I-Link, Inc.) and its subsidiary, I-Link
Communications, Inc., and license in perpetuity software developed by I-Link for
the operation of a Voice over Internet Protocol communications network (VoIP
Network). We closed the transactions in May 2003. With these newly acquired
assets we have been developing and offering, as a provider, enhanced services
such as fax to email, and transmit data and other communication services for a
portion of the journey over our VoIP Network rather than entirely through third
party providers. In October 2003, Buyers United acquired the exclusive right to
sell and manage the enhanced telecommunications functions of MyACD, Inc. with a
one-year option to purchase it at a price of approximately $6.8 million. With
the MyACD technology we are now offering a new product approach that combines
our national VoIP Network with on-demand proprietary telephony software for
contact
9
handling/management applications. We are changing the way mission critical
applications are delivered and priced for the contact center marketplace, or for
any business or department seeking to improve how it manages the productivity
and quality of its customer contact opportunities.
Buyers United entered into an agreement to purchase 37 dedicated long
distance customers from Source Communications, LLC for $750,000 in February
2004. The transaction was completed in March 2004. In June 2003 and December
2002 we purchased a total of approximately 50,000 switched and dedicated long
distance customers from Touch America at an aggregate purchase price of $6.5
million. Also in August 2003 we purchased 12,000 long distance customers from
Glyphics Communications, Inc. for $543,558.
We generate internal growth by pursuing multiple marketing avenues,
including using independent agents, marketing through the Internet, and selling
through our direct sales force. We intend to expand and develop our direct sales
force and value-added reseller programs during 2004. We believe continuing
financial difficulties and uncertainty in the telecommunications industry may
result in opportunities to acquire customers from unrelated companies, and we
intend to remain open to these opportunities. However, at present we are not
evaluating any new acquisitions.
Results of operations - three-month periods ended March 31, 2004 and 2003
Revenues
Total revenues increased 8.2 percent to $16.7 million for the
three-months ended March 31, 2004 as compared to $15.5 million for the same
period in 2003. The increase in revenue is primarily due to the revenues
generated from customers purchased throughout 2003 and the acquisition of
customers from Source Communication, LLC, which closed in March 2004. We also
generated growth internally from ongoing promotional efforts, primarily
involving independent agents.
Cost of revenues
Cost of revenues for the three-month period ended March 31, 2004 were
$9.2 million, a 5.9 percent increase, compared to $8.7 million for the
comparable period in 2003. Cost of revenues as a percentage of revenue for the
three-month period ended March 31, 2004 was 54.8 percent, as compared to 56.0
percent during 2003.
The increase in gross margin in the first quarter of 2004 compared to the first
quarter of 2003 is the result of a decrease in carrier costs for long-distance
minutes.
General and administrative expenses
General and administrative expenses in the first quarter of 2004
increased 10.8 percent to $4.0 million compared to $3.6 million in the first
quarter of 2003. The increase is the result of costs associated with the
increase in revenue.
Selling and promotion expenses
Selling and promotion expenses increased 33.2 percent to $3.1 million
during the three-month period ended March 31, 2004 from $2.3 million for the
same period in 2003. Selling and promotion expenses as a percentage of revenue
increased to 18.5 percent for the three-months ended March 31, 2004 compared
with 15.1 percent for the same period in 2003. The increase resulted from higher
commissions
10
paid on increased revenue and an increase in amortization expense on customer
accounts that were acquired throughout 2003.
Other income (expense)
Interest expense for the three-month period ended March 31, 2004 was
$357,424, compared to $485,929 in 2003, a decrease of 26.5 percent. The decrease
in interest expense was the result of a reduction in the outstanding debt held
throughout the period.
In the summer of 2003 Buyers United entered into a Purchase Agreement
to acquire approximately 12,000 long distance customers from Glyphics
Communications, Inc. Subsequently, the two parties agreed that Buyers United
would accelerate payments under the agreement in exchange for a discount on the
purchase price. The final payment under the agreement was made in February 2004,
and Buyers United recorded a $109,150 gain on the early extinguishment of the
debt.
Results of operations - years ended December 31, 2003 and 2002
Revenues
For the year ended December 31, 2003 revenues increased to $63.3
million, a 110 percent increase compared to revenues for the year ended December
31, 2002 of $30.2 million. While a significant portion of the increase in
revenue is due to the acquisition of customer accounts, we also generated growth
internally from ongoing promotional efforts, primarily involving independent
agents.
For the year ended December 31, 2002, revenues increased 110 percent to
$30.2 million as compared to $14.3 million for the year ended December 31, 2001.
The change was due to a substantial increase in our customer base. These new
customers were generated through independent sales agents and referrals from
unrelated Internet marketing companies.
Costs of Revenues
Costs of revenues for the year ended December 31, 2003 increased to
$34.6 million, a 112 percent increase as compared to $16.3 million for the year
ended December 31, 2002. As a percentage of revenue, costs increased to 54.6
percent in 2003 compared to 54.0 percent for same period in 2002. The decrease
in gross margin for the year ended December 31, 2003 as compared to the previous
year is the result of costs related to an increase in customers using dedicated
circuit services. This type of service typically has lower profit margins, but
higher volumes, than other types of long distance services. Also contributing to
a lower gross margin was the combination of costs related to integration efforts
involved in the I-Link acquisition and higher costs of Touch America customers.
Buyers United agreed with Touch America on certain wholesale prices during a
phase-in period after acquiring the customers. However, Buyers United
immediately began switching new customers over to other lower-cost wholesale
providers. The higher Touch America costs were offset slightly by a decrease in
other costs for long-distance minutes.
Costs of revenues for the year ended December 31, 2002 were $16.3
million, or 54 percent of revenue, as compared to costs of $9.3 million, or 65
percent of revenue, for the year ended December 31, 2001. During 2002, Buyers
United increased volume and new customer sign-ups with two of our largest
long-distance wholesale carriers resulting in decreased rates for long-distance
minutes and an increase in gross margin for the year.
11
General and administrative
General and administrative costs for the year ended December 31, 2003
increased 101 percent to $14.8 million compared to $7.4 million for the year
ended December 31, 2002. The increase in costs is due to expenses required to
support Buyers United's significant revenue growth, and costs associated with
the I-Link, Touch America and the MyACD transactions. To meet the needs of
increased revenue levels we hired additional customer service and collection
personnel. In addition, several employees of I-Link were retained by Buyers
United in order to effectively maintain the VoIP Network, as well as provide
customer support and billing services. Buyers United also assumed certain office
lease obligations of I-Link, which resulted in additional occupancy expenses.
General and administrative expenses for the year ended December 31,
2002 increased 20 percent to $7.4 million or 24 percent of revenue as compared
to $6.1 million or 43 percent of revenue for the year ended December 31, 2001.
The increase resulted from increases in bad debt expense, customer service and
support expenses and billing costs, all incidental to the increase in revenue.
These increases were offset by decreased costs of maintenance and depreciation
expense from the termination of high-cost equipment leases and the write-off of
obsolete web-site development costs during 2001.
Selling and promotion
Selling and promotion expenses increased 133 percent to $10.8 million
or 17 percent of revenue for the year ended December 31, 2003 compared to $4.6
million or 15 percent of revenue for the year ended December 31, 2002. The
increase resulted from higher commissions paid on increased revenue. Selling and
promotion costs for 2003 include higher amortization expenses associated with
the customer lists acquired during 2003.
Selling and promotion expenses for the year ended December 31, 2002
were $4.6 million or 15 percent of revenue, an increase of 40 percent over the
prior year's expenses of $3.3 million or 23 percent of revenue. The increase was
the result of higher expenses for sales commissions, sales support staff, and
the amortization of deferred customer referral fees. These increases were
directly related to the increase in revenue during the 2002 year.
Other income (expense)
Interest expense for the year ended December 31, 2003 was $1.9 million
compared to $1.5 million for the comparative period in 2002. The increase in
interest expense was the result of higher debt balances outstanding throughout
2003 compared to 2002.
Interest expense for 2002 was $1.5 million as compared to $997,882 for
2001, an increase of 55 percent. The increase is attributable to the significant
amount of additional debt financing Buyers United had outstanding throughout
2002, which we raised to fund operations and an online marketing opportunity
with an unrelated Internet marketing company.
Liquidity and Capital Resources
Buyers United's current ratio as of March 31, 2004 increased to 0.83:1
from 0.52:1 at December 31, 2003. The components of current assets and current
liabilities that changed significantly since the end of 2003 were cash and
accounts payable.
The increase in cash resulted from a private placement of common stock.
On March 15, 2004, Buyers United sold 3,782,000 shares of common stock at $2.30
per share, or a total of approximately $8.7 million. Net proceeds of the
offering after placement fees and expenses were approximately $8.1 million.
12
The net proceeds of the private placement will be used for various corporate
purposes, including sales and marketing related programs, funding further
development of our VoIP Network, reducing debt, and for working capital and
other general corporate purposes.
During the three months ended March 31, 2004 long-term debt and the
related current portion of long-term debt decreased by $1.9 million. On April
12, 2004 the Company repaid $2.3 million in promissory notes to one of its
directors. The director subsequently exercised warrants to purchase 297,500
shares of common stock. The proceeds received by the Company totaled $595,000.
On April 26, 2004, the Company repaid a $50,000 note payable to another of its
directors.
Buyers United has a line of credit agreement with RFC Capital
Corporation that expires in January 2006. The available borrowing limit is $5
million. Interest accrues at prime plus three percent, or seven percent as of
March 31, 2004. The facility allows Buyers United to obtain financing on its
eligible accounts receivable, including unbilled receivables and regular monthly
billings. The facility is collateralized by the underlying receivables. On March
31, 2004, Buyers United financed the maximum amount available based on eligible
accounts receivable at that time. This amount, less draws by RFC applied against
the outstanding amount, aggregated $3.5 million. The facility requires Buyers
United to maintain a restricted cash account for the collection of the
receivables. As of March 31, 2004, Buyers United had $1.4 million of restricted
cash associated with the RFC arrangement.
On September 10, 2003, Buyers United filed a registration statement on
Form SB-2 with the Securities and Exchange Commission to register for resale up
to approximately 8.8 million shares of common stock underlying outstanding
warrants, options and convertible debt. In mid-March 2004 the registration
statement was temporarily suspended until Buyers United could file an amendment
updating the registration statement with current financial statements and other
information. The prospectus included in the original registration statement is
now replaced with this prospectus, which was filed with the recent amendment.
During 2003, investors exercised warrants to purchase 522,500 shares of common
stock providing cash to Buyers United of approximately $1.0 million. By the
beginning of March 2004, investors had exercised warrants for 71,000 shares of
common stock, providing cash of $147,000. The suspension meant those investors
holding securities convertible into common stock covered in the registration
statement could not sell any of the common shares under the terms of the
prospectus. Notwithstanding this temporary restriction, since the date the
prospectus was suspended through May 7, 2004, investors had exercised warrants
for an additional 461,000 shares of common stock, thus providing cash to Buyers
United of $1,003,750.
Critical accounting policies and estimates
Revenue Recognition. Buyers United's revenue recognition policy with
respect to reseller agreements is to record gross revenues and receivables from
customers when Buyers United acts as principal in the transaction; takes title
to the products or services; and has risks and rewards of ownership, such as
risk of loss for collection, delivery, or returns. Revenues from sales of
services are recognized upon providing the services to the customers.
Accounts Receivable and Allowance for Doubtful Accounts. Accounts
receivable is comprised of amounts billed and billable to customers, net of an
allowance for uncollectible amounts. The allowance for doubtful accounts is
estimated by management and is based on specific information about customer
accounts, past loss experience, and general economic conditions. An account is
written off by management when deemed uncollectible, although collections
efforts may continue.
Property and Equipment. Property and equipment are stated at cost.
Major additions and improvements are capitalized, while minor repairs and
maintenance costs are expensed when incurred. In
13
accordance with Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," Buyers United
capitalizes certain costs incurred for the development of internal use software.
These costs include the costs associated with coding, software configuration,
upgrades, and enhancements.
Advertising Costs. Buyers United advertises its services through
traditional venues such as print media to the general public. Costs associated
with these advertising efforts are expensed as incurred.
Debt Issuance Costs. As an inducement to various investors,
shareholders, and board members to lend monies to Buyers United, shares of
common stock and warrants to purchase shares of common stock were issued to
them. The fair market value of those shares at the date of issuance has been
capitalized as debt issuance costs and is being amortized over the life of the
loans.
Income Taxes. Buyers United recognizes a liability or asset for the
deferred income tax consequences of all temporary differences between the tax
bases of assets and liabilities and their reported amounts in the financial
statements that will result in taxable or deductible amounts in future years
when the reported amounts of the assets and liabilities are recovered or
settled. These deferred income tax assets or liabilities are measured using the
enacted tax rates that will be in effect when the differences are expected to
reverse. Recognition of deferred tax assets is limited to amounts considered by
management to be more likely than not of realization in future periods.
BUSINESS
General
Buyers United, Inc. is a telecommunications company that offers a wide
range of long distance, toll free, data transmission, and related communication
service options at competitive prices, and provides to its customers a standard
of service it believes is comparable to other industry participants. The
telecommunications services we offer include the following:
o Switched long distance services to business and residential
customers
o Dedicated access long distance service
o Toll-free 800/888/877/866 services
o Dedicated data transmission
o Private line data services
o Calling card services
o Conference calling
o Automatic call distribution
o Interactive voice response
o Outbound dialing and voice message broadcasting
o Fax to email
o Voice mail
o Real time account management
These services can be offered individually, or in a suite of services
tailored to a customer's needs. During 2003 we acquired and integrated into our
operations a voice over Internet protocol network (VoIP Network) that enables us
to offer a number of services in the form of software solutions that are
delivered through our VoIP Network.
For the past eight years Buyers United has been engaged in the business
of reselling telecommunication services provided by others to Buyers United at
wholesale rates. Domestic long
14
distance services make up a major portion of our sales with the other services
listed above making smaller contributions to our sales mix.
Buyers United now services approximately 150,000 business and
residential consumers across America. We have refined our business model over
the past several years to address specific niche opportunities in the vast
communications industry. Our brand, United Carrier Networks (UCN), was adopted
in the last quarter of 2001 for providing our services to business customers. We
previously used the brand name BuyersOnline to service residential customers.
Buyers United is now marketing its services primarily through
independent agents to business customers. Our UCN web site supports the
marketing effort of our agents by providing a resource for exploring and
selecting the specialized services and options we offer business customers.
During the past year we acquired both business and residential customers by
purchase from other providers and may consider opportunities for additional
purchases in the future, although at the present time we are not considering any
purchase opportunities.
Buyers United was originally formed as a Utah corporation in 1994. In
March 1999, Buyers United changed its corporate domicile from Utah to Delaware
through a merger with a Delaware corporation formed for that purpose. When we
changed the corporate domicile our name became BUI, Inc., and we effected a
1-for-4 reverse split in the issued and outstanding common stock. On April 20,
2000, we changed our name to BuyersOnline.com, Inc., and on November 20, 2001,
our name was changed again to Buyers United, Inc.
Recent developments
Buyers United entered into an agreement to purchase 37 dedicated long
distance customers from Source Communications, LLC for $750,000 in February
2004. Closing of the acquisition was subject to complying with applicable
federal and state regulation pertaining to transfer of the customers. All of the
regulatory requirements were satisfied and the acquisition of the customers is
complete.
In October 2003, Buyers United acquired the exclusive right to sell and
manage the enhanced telecommunications functions of MyACD, Inc., with a one-year
option to purchase MyACD. MyACD develops and distributes telephony software
solutions for call center traffic management and related functions that Buyers
United can now offer to its customers over its VoIP Network. During the term of
the agreement, Buyers United has the sole right to manage sales, service and
billing of MyACD services. Under the agreement MyACD will continue to provide
enhanced service development and configuration and Buyers United will reimburse
MyACD for actual costs related to these activities.
During August 2003, Buyers United purchased approximately 12,000 long
distance customers from Glyphics Communications, Inc. for $543,558.
Services and products
Buyers United is an aggregator and provider of telecommunications
services. As an aggregator we mean that we contract with a number of third party
providers for the right to resell the various telecommunication services and
products they provide, and then offer all of these various services to our
customers. We are also a provider, in that we operate a dedicated VoIP Network
and advanced customer contact handling/management software applications that
enable us to offer enhanced services to our customers. The variety of services
and products we offer enables the customer to buy only those telecommunications
services it needs from one source, combine those services in a customized
package, receive one bill for those services, and make one call to Buyers United
if a service problem or billing
15
issue arises. The separate services Buyers United can sell singly or bundled to
meet customer needs include:
o Switched long distance service to business and residential
customers. This is traditional 1+ long distance service. The
customer dials the long-distance number and the local exchange
carrier switches the call to the long distance provider we
have designated for the customer based on the customer's
account selections. We bill the customer for the long distance
service at the applicable retail rate, as well as local access
fees for the local exchange carrier, taxes, and universal
service fund charges.
o Dedicated access long distance service. Some business
customers require multiple line concurrent long distance
access for high volume telemarketing or call center
operations. Dedicated access connects the customer directly to
the long distance carrier, by-passing the local exchange
carrier, through a T-1 or higher capacity local loop
connection. We bill the customer for the local loop connection
and for the long distance service.
o Toll-free 800/888/877/866 services. Toll free calling service
allows clients of our customer to call into the customer at
the customer's expense, rather than the client's expense. This
is a service traditionally used by our business customers. We
own and assign the toll free numbers to our customers and bill
our customers for the toll free number and the long distance
service.
o Dedicated data transmission. This is similar to dedicated
access long distance service, except the primary use is for
data transmission, such as Internet access, and the local loop
is connected to the Internet through one of our providers. We
bill the customer for the local loop connection and for
Internet access fees.
o Private line data services. This type of services is provided
through a T-1 or higher capacity circuit, and encompasses a
variety of data transmission media, including Frame Relay,
dedicated Internet access or Asynchronous Transfer Mode (ATM)
data networks. Each of these data products rely on a shared
network architecture where the bandwidth on the network
backbone is shared by the users connected into these networks.
Customers frequently select these types of networks because it
is much more cost-effective than installing a private line
network, or because of the need to access the public Internet.
o Calling card services. The calling card feature is often
provided with our switched and dedicated long distance
services. The calling card allows the customer to use a toll
free number and PIN to make long distance calls from any
location on its account. We bill the customer for the long
distance service.
o Conference calling. This service allows a customer to
interconnect simultaneously a number of callers for conference
purposes. This feature is of particular value to business
customers that have a need for multiple members of the
organization to speak together from remote locations on a
periodic basis. The customer is assigned a toll free number
and PIN that allows each participant in the conference call to
access the call simply by dialing the toll free number and
entering the PIN when prompted. We bill the customer for the
conference call feature and the long distance minutes of each
participant in the conference call.
o Outbound dialing and voice message broadcasting. This is the
ability to allow a customer to automatically dial outbound and
to broadcast voice messages to predefined lists.
16
Customers can pay by the call, by the minute or by the port.
They can also link directly to their own database to
automatically generate call lists with sophisticated call
scheduling capabilities. They can also choose between autodial
(one at a time), powerdial (dial sequentially through a list),
or predictive dialers (computer algorithms with dial ahead to
screen out busies, no answers, etc.).
o Fax to Email. This service allows a customer to send or
receive faxes through an Email address with the customer's
personal computer.
o Voice mail. This feature allows customers to receive, store,
forward, and access voice mail messages.
o Real time service account management on the Internet. Real
time management allows the customer to redirect phone calls
received during the day to the customer's location. For
example, the customer can access its account through the
Internet and direct that phone calls be forwarded to wherever
the customer happens to be during the day - office, home,
cellular phone, or other location. With its personal computer,
the customer can review billing on its account, make service
inquiries, or add or remove services, all over the Internet.
In addition, Buyers United offers a flexible set of advanced call
center traffic handling/management applications, such as skills-based routing,
automated call distribution, automated interactive voice response, database
integration with the call handling technology, multimedia contact handling
(voice, fax, email, chat), and management reporting features. These capabilities
have previously been available only by purchasing and integrating expensive
equipment at substantial installation expense, so only the large call center
operations with 200 or more agents on call at any one time could afford to
establish these capabilities. Buyers United can deliver the same capabilities
through a software solution hosted on our VoIP Network at a much lower cost that
makes it possible for the smaller traditional call center to make the transition
to a full-featured contact center with improved agent productivity and the
ability to respond quickly to customer requirements for voice, email, fax and/or
chat contact methods.
The Buyers United inNetwork(TM) family of products is a set of
pre-integrated application services hosted within our VoIP Network designed to
meet the needs of call centers and other businesses that demand greater contact
flexibility. Current products include inContact(TM), a complete set of advanced
contact handling/contact management software applications (as referenced in the
above paragraph), plus additional features for handling multi-media contact
methods - voice plus email, fax or web chat. InControl(TM) is a rapid
application development tool with a visual drag and drop programming interface
for creating or modifying contact routing processes.
Marketing strategy
By the end of 2001, Buyers United employed two distinct brands for our
telecommunications services, "UCN" or "United Carrier Networks" for commercial
and business customers, and "BOL" or "BuyersOnline" for residential customers.
We are now focusing on promoting "UCN" or "United Carrier Networks" for all of
our service offerings, so toward the end of 2003 we discontinued marketing to
residential customers, and discontinued the BuyersOnline brand name. Our plan is
to change our name to "UCN" or a similar variation in 2004.
We market our services primarily through independent sales agents. We
engage independent telecommunications agents around the country who sell
primarily to commercial and business customers.
17
Independent agents are responsible for a substantial amount of annual U.S.
telecommunication sales to commercial and business users. The service
presentation we developed for UCN is targeted to the independent agent, and is
intended to make available to the agent a coordinated package of services
designed to be attractive to commercial and business customers. With UCN our
marketing effort focuses on providing businesses with the ability to access
multiple long distance carriers with which we have agreements to resell
services, allowing the business owners to choose services provided through
various long distance providers. A business customer can choose various services
from any or all of the different telecommunications providers we use, yet only
have to contract through UCN for the selected services. The business customer is
not required to deal with these carriers separately. UCN provides a single
source for customer service, regardless of how many networks the business uses,
and sends a single billing statement that combines all of the services used from
any combination of wholesale service providers.
We have been, and should continue to be, successful in engaging
independent agents because our package of services appeals to commercial and
business customers, and because of our back office support infrastructure,
incentive programs, customer retention efforts, and additional product/service
revenue opportunities. Buyers United earned the "2002 Agent's Choice Award" in
March 2003 from the Agent Alliance, a national trade association of independent
telecom agents. The award was given in recognition of the effectiveness of our
customer service and support programs.
Buyers United's early growth came from the residential consumer
long-distance market. We plan to continue providing our services to residential
customers using the UCN brand. We do not intend, however, to pursue an active
marketing effort in the residential market because we believe our resources are
better used in pursuing business customers. We had a substantial increase in
residential customers over the past year as a result of the Touch America
transaction.
Provisioning
Buyers United is a reseller of domestic and international long distance
and other services provided by national and regional providers. Our primary
providers are MCI, Qwest, Global Crossing, AT&T, Dancris, WilTel, and CNM.
Buyers United resells switched long distance minutes that it has contracted to
obtain from our providers at wholesale rates that averaged 54.0 percent of the
retail rates charged to customers in 2002 and 53.3 percent in 2003. In 2002 and
2003, retail rates were between $0.02 and $0.08 per minute for switched domestic
long distance. International rates vary substantially on the basis of the
country and number called, but we believe our rates are comparable to rates
available from our competitors.
The contracts with our providers are standard and customary in the
industry, requiring payment net 30 days for minutes used in a month and
designate Buyers United as the point of contact for all customer service calls.
These agreements are for one to three years and are generally renewable at the
end of each contract term, when rates are often renegotiated on the basis of
prevailing rates in the industry. We are responsible for all customer billing
and collections, so that as far as the customer is concerned we are the long
distance service provider. Qwest and Global Crossing accounted for approximately
80 percent of our cost of revenues in 2002 and 70 percent in 2003.
Buyers United also acquires its other services from its providers at
rates or fees fixed in our contracts, which include dedicated long distance
service, toll-free 800/888/877/866 services, dedicated data transmission
service, and calling cards. These services are billed to us at rates or fees
stated in our contracts with the providers and are payable on the same terms as
switched long distance service.
18
We maintain a call center in Bluffdale, Utah for receiving customer
service and billing inquiries. Presently we employ approximately 62 customer
service personnel to respond to customer calls, and our call center specialists
are available from 7:00 a.m. to 10:00 p.m. Monday through Friday and 8:00 a.m.
to 5:00 p.m. on Saturday. We also provide emergency service 24-hours a day,
seven days a week. We place a high priority on customer service, since we
believe that when our rates are similar to rates offered by our competitors,
service is a primary factor in acquiring and retaining customers.
The VoIP Network enables our customers to use existing telephone, fax
machine, pager, or modem equipment to achieve high-quality communications
through Internet Protocol technology. The VoIP Network consists of a fully
integrated dedicated network of equipment and leased telecommunications lines
augmented by the licensed I-Link "softswitch" software. It provides the
necessary operational platform for the enhanced services we began offering in
the third quarter of 2003 and is adaptable for use with new or specialized
service applications developed by others. The VoIP Network is a data
packet-based network that ties together local loop dial-up and broadband
connections via gateways located in New York, Salt Lake City, Dallas, and Los
Angeles. Each of these gateways consists of off-the-shelf hardware elements and
the softswitch software. The softswitch software can distinguish among and
"handle" voice, fax, and modem communications as programmed for the customer's
suite of service selections. Handle means the voice or data transmission can be
delivered directly, redirected (to a different location), redistributed (to a
different or multiple recipients), stored for later delivery, or altered (such
as converting a fax to email).
The VoIP Network allows us to provide cost advantages over traditional
transmission networks with respect to both lower transmission cost and lower
capital infrastructure cost. Lower transmission cost results from transmitting
long distance traffic over the network between our gateways for retransmission,
which has greater capacity because transmissions are converted to data packets
and transmitted concurrently over the network bandwidth capacity. Access and
transmission costs for our VoIP network are less than traditional transmission
networks. The second component of cost advantages is lower capital
infrastructure costs. In a traditional telecommunications network, each service
-- voicemail, fax mail, conference calling, and single number forwarding -- must
be processed through one or more separate hardware switches. We offer all of
these services through the VoIP Network as modified or as new software
applications are added to the network software platform, which is less expensive
than purchasing and maintaining hardware switches. It is this ability to host
different software applications on the VoIP Network to configure the software to
deliver different connectivity solutions that enables us to offer the
inNetwork(TM) family of products to call centers and other businesses that
demand greater contact flexibility.
We began integrating this network with our traditional provider network
systems and service offerings in the first quarter of 2003 and completed the
process in the third quarter of 2003. While we believe the VoIP Network will
lower our costs of operation in 2004 and generate internal growth from enhanced
service products, we cannot predict whether these lower costs or growth will be
significant.
Technology and our business
Buyers United has always leveraged information technology to create
consistent streamlined business processes. Buyers United relies on the following
systems, which represent its current technology initiatives:
o Automatic customer call distribution. This system is a unified
solution for managing customer communications that integrates
telephone, email, fax, web text chat, and co-browsing into a
unified interface. The distribution system enables Buyers
United to
19
enhance customer relationships, reduce costs, and improve the
management of all types of business communications.
o BuyersUnitedDashboard (BUD) is a customer service software
application that provides a single interface for call center
representatives to perform their service tasks. BUD utilizes a
"wizard" interface methodology that simplifies the customer
service representatives' daily tasks by breaking them into
smaller steps. The "wizard" framework provides increased
quality and consistency into our customer service model.
o CostGuard(R), is a fully convergent, open and flexible billing
system designed to facilitate collaboration among customer
service representatives, business affiliates, and customers.
Customers can access the system through a standard web-browser
to initiate and fulfill billing and service tasks. Buyers
United believes the CostGuard system provides a consistent and
flexible billing solution that supports our current needs and
is expandable for future growth.
o The VoIP Network employs an architecture emphasizing security,
reliability, and carrier diversity. A "Security in Layers"
approach has been adopted utilizing security enforcement
points comprised of inspection firewalls, packet filters, and
intrusion detection and prevention systems. Measures have been
implemented to audit data integrity and access. Significant
subsystems are geographically dispersed and data replicated
between sites to protect against fiber optic disruption or
other environmental event.
Full backups of all our core data are performed weekly. Differential
backups are performed nightly. Transaction log backups take place every 30
minutes. Backups are copied to two file servers in different locations. We use
SSL encryption to protect all sensitive areas of our customer information and
service-oriented websites. Remote access to our systems is made possible through
a 168 bit encrypted Virtual Private Network. System passwords are changed on a
periodic basis and stored in a secure folder with restricted access. All local
desktops are scanned for viruses on a real-time basis and report to a central
server. We believe our backup, maintenance, and security systems are adequate
for preserving the delivery of service to our customers and operation of our
business without significant outages or interruptions. However, an extraordinary
unforeseen and catastrophic event is always possible that could have a
significant impact on our business, and we do not have business interruption
insurance from which we could recoup losses resulting from such an event.
Governmental regulation
Federal Regulation of Telecommunications Services
-------------------------------------------------
Our telecommunications services are subject to federal regulation under
the Telecommunications Act of 1996 (Telecom Act). The Telecom Act was designed
to foster local exchange competition by establishing a framework to govern new
competitive entry in local and long distance telecommunications services and
allow any entity, including cable television companies and electric and gas
utilities, to compete in the telecommunications market. The ongoing
implementation and interpretation of the Telecom Act remains subject to numerous
federal and state policy rulemaking proceedings and judicial review and we
cannot predict any future impact on our business.
Pursuant to the Telecom Act, the Federal Communications Commission
(FCC) regulates our interstate and international telecommunications services.
The FCC imposes more extensive requirements on incumbent common carriers that
have some degree of market power, such as the Regional Bell Operating Companies
(RBOCs) and other independent local exchange carriers (ILECs), than it imposes
20
on companies like ours, which are non-dominant interexchange carriers that lack
market power. For example, the FCC permits non-dominant interexchange carriers
to provide domestic interstate services without prior authorization.
As a non-dominant interexchange carrier, our costs of providing long
distance services could be affected by changes in FCC rules controlling the form
and amount of "access charges" local exchange carriers (which generally include
the RBOCs and ILECs) are permitted to impose on connecting companies to
originate and terminate long distance traffic over their local networks. The FCC
currently has several rulemaking proceedings in which it is considering changes
to the existing interstate access charge system. It has also recently been
reported that the nation's largest local exchange and long distance providers,
who have been engaged in private negotiations for several months, have
tentatively reached an agreement on a proposal that would eliminate or
substantially reduce interstate local access charges. If such an agreement is
reached, it would have to be presented to and approved by the FCC.
We cannot predict the outcome of these or other federal or state access
charge proceedings or whether they will have a material impact on us. It is even
more difficult to predict the outcome and impact of private negotiations in
which we are not directly involved. It is recognized, however, that the access
charge payments Buyers United must pay to the RBOCs and ILECs are a material
part of its cost to provide services over its network.
The Telecom Act requires that every telecommunications carrier
contribute, on an equitable and non-discriminatory basis, to federal universal
service mechanisms established by the FCC. The federal Universal Service Fund
(USF) provides subsidies to defray the costs of telephony services in high-cost
areas for low-income consumers and helps subsidize telecommunications and
Internet services for qualified schools, libraries and rural health care
providers. Our payments to the federal USF are based on a percentage of our
interstate and international retail telecommunications revenues and the
contribution factor issued by the FCC, which varies quarterly. In 2003, the
quarterly USF contribution factor averaged around nine percent of billed retail
revenue. The amounts contributed may be passed through to customers.
The FCC currently has an open rulemaking proceeding in which it is
considering converting the current revenue-based USF contribution system to a
"connection-based" system with a fixed, monthly fee. It is too soon to predict
whether the transition to a connection-based USF contribution system would have
a financial impact on us.
State Regulation of Telecommunications Services
-----------------------------------------------
State regulatory agencies have jurisdiction when our telecommunications
services are provided on an intrastate basis. The state regulatory environment
varies substantially from state-to-state and in some cases can be more extensive
than FCC regulations. In most instances, we are required to obtain and maintain
certification from a state public utility commission (PUC) before providing
telecommunications services in that state. Consequently, we are subject to the
obligations that the applicable state laws place on all similarly certified
carriers, including the regulation of services, payment of regulatory fees, and
preparation and submission of reports. If state regulators or legislators change
current regulations or laws it may negatively impact our ability to provide
services.
Regulation of Internet Telephony and the Internet
-------------------------------------------------
The use of the Internet and private Internet Protocol (IP) networks to
provide voice communications services is a relatively recent market development.
Although the provision of such services is currently permitted by United States
law and remains largely unregulated within the United States, several FCC and
state regulatory proceedings aimed at evaluating the future regulatory treatment
of such services have recently been initiated. More aggressive regulation of the
Internet in general, and
21
Internet telephony providers and services specifically, may materially affect
our business, financial condition, operating results and future prospects,
particularly if increased numbers of governments impose regulations restricting
the use and sale of IP telephony services.
Federal
To date the FCC has reached no conclusion on whether IP telephony
services constitute telecommunications services subject to regulation under the
Telecom Act. The FCC is now examining the question whether certain forms of
phone-to-phone Internet telephony are information services or telecommunications
services. Recent actions taken by the FCC and proceedings now pending before the
FCC may affect the regulatory status of Internet telephony.
o In February 2004 the FCC ruled that computer-to-computer IP
telephony that transmits data packets carrying voice
communications via the same lines that carry e-mail and
instant messages is an unregulated "information service" that
is subject to exclusive federal jurisdiction. Accordingly,
this type of computer-to-computer IP telephony service is
likely to remain free of traditional telephony regulation.
o Also in February 2004 the FCC adopted a broad Notice of
Proposed Rulemaking seeking comment on the appropriate
regulatory classification and treatment of Internet-based
communications services, most notably Voice over IP (VoIP).
o In October 2002 AT&T filed a petition with the FCC seeking a
declaratory ruling that would prevent RBOCs and other ILECs
from imposing traditional circuit-switched access charges on
phone-to-phone IP services.
o In September 2003 Vonage Holdings Corporation filed a petition
for declaratory ruling requesting that the FCC find an order
of the Minnesota Public Utilities Commission requiring Vonage
Holdings to comply with state laws governing providers of
traditional telephone service to be preempted because its
broadband Internet telephony service is an information
service.
o In January 2004, Level 3 Communications, LLC filed a
"forbearance petition" with the FCC asking the agency to
reaffirm that legacy switched access charges do not apply to
VoIP.
We cannot predict either the timeframe or outcome of the foregoing open
proceedings before the FCC or what regulations, if any, the FCC will impose on
providers of IP-enabled voice communications services as a result of these
proceedings.
State
State governments and their regulatory authorities may assert
jurisdiction over the provision of intra-state IP-enabled communications
services where they believe that their telecommunications regulations are broad
enough to cover regulation of such services. Of primary concern to the
IP-enabled communications providers is that the imposition of state regulation
would result in the provider being subject to local access charges for
intra-state service, which would significantly increase the cost of service.
While a majority of state commissions have not imposed traditional
telecommunications regulatory requirements on IP telephony at this time, a
number of state regulatory authorities have initiated proceedings to examine the
regulatory status of Internet telephony services.
In October 2003 a Federal court in Minnesota issued a permanent
injunction against the Minnesota public utilities commission to prevent it from
imposing state regulations on a provider's VoIP
22
services offered over broadband connections. This permanent injunction was
recently upheld in the face of multiple challenges. Prior to the Minnesota
Federal court ruling, several states, including California, Washington,
Wisconsin and Florida issued directives to various VoIP providers directing them
to register as telecommunications providers. There can be no assurance that
these states will respect the Minnesota Federal court ruling or accept the
position asserted by VoIP providers that they are information, as opposed to
telecommunications, service providers.
Internet Taxation.
------------------
In addition to regulations addressing Internet telephony and broadband
services, other issues relating to the Internet in general could affect our
ability to provide our services. Federal, state and local governmental
organizations are considering various legislative proposals that might impose
additional taxes on Internet services and products. We cannot predict whether
new taxes will be imposed on our IP-enabled communications services or the
Internet in general and, depending on the type of taxes imposed, whether and how
our services would be affected thereafter. Increased taxation of the Internet
may decrease its growth and hinder technological development, which may
negatively impact the cost of doing business via the Internet or otherwise
materially adversely affect our business, financial condition and results of
operations.
Competition
Presently we are an aggregator and reseller of long distance and
related telecommunications services. Many of our competitors are substantially
larger with greater financial and other resources.
The U.S. long distance telecommunications industry is highly
competitive and significantly influenced by the marketing and pricing practices
of the major industry participants such as AT&T, Sprint and MCI. Buyers United
also competes with other national and regional long distance carriers that
employ various means to attract new subscribers, including television and other
advertising campaigns, telemarketing programs, network marketing, cash payments,
and other incentives. The ability of Buyers United to compete effectively will
depend on its ability to provide quality services at competitive prices.
Buyers United competes on the basis of variety of services offered,
customer billing and service, and price. Since we can access and offer switched
long distance rates from a number of providers, customers can select the rate
plan best suited to their needs without having to shop each long distance
carrier separately. We offer to our customers, directly and through agents, a
wide selection of telecommunications products. This provides the customer a
one-stop shopping opportunity to obtain many of its telecommunication services
from one source, Buyers United. We believe customers are attracted by the fact
that Buyers United provides many of their services because they receive one bill
and have only one provider to call with any billing or service questions. We
further believe this aggregated service approach enables us to attract agents to
sell our services. By selling Buyers United services, agents no longer have the
burden of managing multiple contracts with many telecommunications companies.
Our agents can complete a sale at the customer site and count on accurate
commissions for even complicated product suites. Additionally, agents enjoy
dedicated customer service. We believe customers see positive differences in the
way our services are sold and served compared to other providers. With Buyers
United, customers are not forced to take bundled services or enter into
long-term contracts from one provider, which we believe are typical sales
practices of competitors. Because our customer contracts are based on user
requirements rather than bundled services, Buyers United delivers only the
requested services at an appropriate capacity and competitive price.
Building recognition of our brands is beneficial to attracting
additional customers and new strategic alliances. Our failure to promote and
maintain our brands successfully may result in slower growth, loss of customers,
and loss of market share and strategic alliances. Accordingly, we intend to
23
continue pursuing an aggressive brand-enhancement strategy, which includes
promotional programs and public relations activities.
Employees
As of December 31, 2003, Buyers United employed a total of 167 full
time and 28 part time persons. None of our employees is represented by a labor
union. We have not experienced any work stoppages and believe relations with our
employees are good.
LEGAL PROCEEDINGS
Buyers United is the subject of certain other legal matters, which it
considers incidental to its business activities. It is the opinion of
management, after discussion with legal counsel, that the ultimate disposition
of these other matters will not have a material impact on the financial
position, liquidity or results of operations of Buyers United.
MANAGEMENT
Directors and officers
Our officers and directors manage our business. The following table
sets forth the names, ages, and positions with Buyers United for each of the
directors and officers.
Name Age Positions Since
---- --- --------- -----
Theodore Stern 74 Chairman of the Board,
Chief Executive Officer
and Director 1999
Gary Smith 69 Director 1999
Edward Dallin Bagley 65 Director 1999
Steve Barnett 62 Director 2000
Paul Jarman 34 President and Director 1997
David R. Grow 48 Chief Financial Officer 2003
G. Douglas Smith 34 Executive Vice President 1997
Kenneth D. Krogue 38 Executive Vice President 1997
All directors hold office until the next annual meeting of stockholders
and until their successors are elected and qualify. Officers serve at the
discretion of our Board. The following is information on the business experience
of each director and officer.
Theodore Stern became a director of Buyers United in June 1999 and
subsequently the Chief Executive Officer in September 2000. Mr. Stern has served
as a director of Northern Power Systems of Waitsfield, Vermont, a manufacturer
of renewable generation systems, from September 1998 until its acquisition by
Distributed Energy Systems Corporation in December 2003, and as a director of
Distributed Energy Systems since then.
24
Gary Smith became a director of Buyers United in June 1999. During the
past five years he has been self-employed as a business consultant.
Edward Dallin Bagley became a director of Buyers United in June 1999.
He has been self-employed as an attorney and investor for the past five years.
During that time he has also served as a director of Tunex International, Inc.,
an automotive tune-up franchise company based in Salt Lake City, Utah, and Clear
One Communications, Inc., a manufacturer of electronic products based in Salt
Lake City, Utah.
Steve Barnett has been self-employed for the past five years as a
consultant to manufacturing and distribution companies on improving operations
and business restructuring. He has continued to purchase and manage privately
held manufacturing companies, as well as serving on the boards of non-owned
private companies in connection with his consulting services. For over five
years, Mr. Barnett has been a director of Chicago's Jewish Federation and Jewish
United Fund, and a Vice Chairman of the Board of Directors since 1997. He is
also a Director of Bank Leumi USA.
Paul Jarman has served as an officer of Buyers United during the past
five years, first as an Executive Vice President and as President since December
2002.
David R. Grow, a Certified Public Accountant, joined Buyers United in
June 2003 and currently serves as its Chief Financial Officer. From January 2002
to June 2003, Mr. Grow served as the Chief Financial Officer and member of the
Board of Directors of Spectrum Engineers, Inc., a mechanical and electrical
engineering firm in Salt Lake City, Utah. From February 2000 to January 2002, he
served as the Chief Financial Officer and member of the Board of Directors of
webBASIS, Inc., a web-based software development company in Bakersfield,
California. During the two-year period prior to February 2000, he served as the
Chief Financial Officer of Daw Technologies, Inc., a manufacturer and installer
of cleanrooms for the semiconductor industry, based in Salt Lake City, Utah.
G. Douglas Smith has served as an Executive Vice President of Buyers
United during the past five years.
Kenneth D. Krogue has served as an Executive Vice President of Buyers
United during the past five years.
Board compensation
Each Director received a monthly director fee of $1,000 during 2003,
which was increased to $2,000 per month in January 2004. The past practice of
the Board is to compensate directors for their annual service by issuing to each
of them options to purchase 25,000 shares of common stock exercisable over a
term of five years from the date of issue. Pursuant to this practice, each
director received 25,000 options in March 2002 with an exercise price of $2.50
per share, and in November 2002 (for year 2003) with an exercise price of $2.00
per share. It has also been the past practice of the Board to compensate the
Chairman of the Board, and beginning with those issued for 2003, the Chairman of
the Audit Committee, for their annual service by issuing to each of them options
to purchase 15,000 shares of common stock exercisable over a term of five years
from the date of issue. Pursuant to this practice, Theodore Stern received as
Chairman of the Board 15,000 options in March 2002 and November 2002, with
exercise prices of $2.50 and $2.00 per share, respectively. Steve Barnett
received as Chairman of the Audit Committee 15,000 options in November 2002 (for
year 2003) with an exercise price of $2.00 per share.
25
The Director Stock Option Plan was adopted by the Board in May 2003 and
approved by the stockholders in June 2003. The purposes of the plan are to
attract, motivate and retain experienced and knowledgeable directors by offering
them opportunities to increase their stock ownership interest in Buyers United.
Each person serving as a director on the date options are issued under the plan
is eligible to participate. The persons serving as Chairman of the Board and
Chairman of the Audit Committee on the date options are issued for those
positions under the plan are eligible to participate.
The Board has authorized the issuance or delivery of options to
purchase an aggregate of 1,000,000 shares of common stock under the plan,
subject to customary antidilution and other adjustments provided for in the
plan. Each person serving as a director on March 1 of each year is entitled to
receive an option to purchase 25,000 common shares at an exercise price per
share equal to the average fair market value on that date, but in no event less
than the conversion price for the Series B Convertible Preferred Stock of Buyers
United, which is now $2.00 per share. On the dates the Board appoints the
Chairman of the Board and Chairman of the Audit Committee to serve for the next
year, each person so appointed is entitled to receive an option to purchase
15,000 common shares at an exercise price per share equal to the average fair
market value on that date, but in no event less than the conversion price for
the Series B Convertible Preferred Stock of Buyers United. Each option issued
under the plan is exercisable over a term of five years. The number of options
issuable each year under the plan, as well as options outstanding under the
plan, is subject to customary antidilution and other adjustments provided for in
the plan. Options issued under the plan are not exclusive and the plan does not
limit the authority of the Board or its committees to grant awards or authorize
any other compensation, with or without reference to shares, under any other
plan or authority.
The plan is administered by a committee, which is either the Board of
Directors or a committee appointed by the Board for such purpose. The Board of
Directors has not appointed a committee to administer the plan, so the entire
Board is now the committee administering the plan. Subject to the limitations of
the plan, the committee has broad authority under the plan, including, for
example, the authority:
o To construe and interpret this plan;
o To make all other determinations required by this plan;
o To maintain all the necessary records for the administration
of this plan; and
o To make and publish forms, rules and procedures for
administration of the plan.
In 2004 the Board, and each of our directors individually, agreed to
renounce their right to receive options under the plan for 2004, and instead
receive options outside the plan for a lower number of shares. Accordingly, the
Board approved in January 2004 the issuance to each director of options to
purchase 10,000 shares of common stock and to Steve Barnett as chairman of the
Audit Committee options to purchase 5,000 additional shares. All of the options
are exercisable over a term of five years at $3.05 per share, which was the
market price for our common stock in the public market on the date of grant.
26
COMPENSATION
Annual compensation
The table on the following page sets forth certain information
regarding the annual and long-term compensation for services in all capacities
to Buyers United for the prior fiscal years ended December 31, 2003, 2002, and
2001, of those persons who were either (i) the chief executive officer during
the last completed fiscal year or (ii) one of the other four most highly
compensated executive officers as of the end of the last completed fiscal year
whose annual salary and bonuses exceeded $100,000 (collectively, the "Named
Executive Officers").
Annual Long Term
Compensation Compensation
------------ ------------
Securities Underlying All Other
Name and Principal Position Year Salary ($) Options/SARs (#) Compensation ($)
--------------------------- ---- ---------- ---------------- ----------------
Theodore Stern 2003 -0- -0- 74,750
Chairman and Chief 2002 -0- 80,000 70,000
Executive Officer 2001 -0- 40,000 70,000
Paul Jarman 2003 132,808 174,500 18,463
President and Director 2002 125,000 11,668 21,481
2001 122,710 -0- 57,067
G. Douglas Smith 2003 132,808 -0- 18,463
Executive Vice President 2002 125,000 7,668 21,252
2001 124,405 178,334 -0-
Kenneth D. Krogue 2003 137,698 -0- 18,463
Executive Vice President 2002 123,538 106,739 22,282
2001 109,851 40,000 13,866
Stock Options
The following table sets forth certain information with respect to
grants of stock options during 2003 to the Named Executive Officers.
Number of % of Total Options/SARs
Securities Underlying Granted to Employees Exercise or Expiration
Name and Principal Position Options Granted In Fiscal Year Base Price ($/Sh) Date
--------------------------- --------------------- ----------------------- ----------------- ----------
Theodore Stern -0- - - -
Chairman, Chief
Executive Officer
Paul Jarman 12,000 1.8 $2.42 01/15/08
President and Director 12,500 1.8 $2.40 09/24/08
150,000 21.9 $2.50 11/11/08
G. Douglas Smith -0- - - -
Executive Vice President
Kenneth D. Krogue -0- - - -
Executive Vice President
27
The following table sets forth certain information with respect to
unexercised options held by the Named Executive Officers. No outstanding options
held by the Named Executive Officers were exercised in 2003.
Number of Securities Value of Unexercised
Underlying Unexercised Options In-the-Money Options
at Fiscal Year End (#) At Fiscal Year End ($) (1)
Name and Principal Position Exercisable/ Unexercisable Exercisable/ Unexercisable
--------------------------- -------------------------- --------------------------
Theodore Stern 172,500 / -0- $88,200 / -0-
Chairman, Chief
Executive Officer
Paul Jarman 452,966 / 150,000 $152,848 / $82,500
President and Director
G. Douglas Smith 624,916 / -0- $262,218 / -0-
Executive Vice President
Kenneth D. Krogue 333,770 / -0- $199,664 / -0-
Executive Vice President
------------------
(1) This value is determined on the basis of the difference between the
fair market value of the securities underlying the options and the
exercise price at December 31, 2003. The fair market value of Buyers
United's common stock at December 31, 2003 is determined by the last
sale price on that date, which was $3.05 per share.
Description of Long Term Stock Incentive Plan
The purpose of the Long Term Stock Incentive Plan (the "Plan") is to
provide directors, officers, employees, and consultants with additional
incentives by increasing their ownership interests in Buyers United. Directors,
officers, and other employees of Buyers United and its subsidiaries are eligible
to participate in the Plan. In addition, awards may be granted to consultants
providing valuable services to Buyers United. As of December 31, 2003, Buyers
United and its affiliates employed approximately 190 individuals who are
eligible to participate in the Plan. The Board grants awards under the Plan.
Awards may include incentive stock options, non-qualified stock options, stock
appreciation rights, stock units, restricted stock, restricted stock units,
performance shares, performance units, or cash awards.
The Board has discretion to determine the terms of an award under the
Plan, including the type of award, number of shares or units covered by the
award, option price, term, vesting schedule, and post-termination exercise
period or payment. Notwithstanding this discretion: (i) the number of shares
subject to an award granted to any individual in any calendar year may not
exceed 100,000 shares; (ii) the option price per share of common stock may not
be less than 100 percent of the fair market value of such share at the time of
grant or less than 110% of the fair market value of such shares if the option is
an incentive stock option granted to a stockholder owning more than ten percent
of the combined voting power of all classes of the stock of Buyers United (a
"10% stockholder"); and (iii) the term of any incentive stock option may not
exceed 10 years, or five years if the option is granted to a 10% stockholder. As
of December 31, 2003, awards in the form of qualified incentive stock options to
purchase a total of 863,639 shares were outstanding under the Plan.
A maximum of 1,200,000 shares of common stock may be subject to
outstanding awards, determined immediately after the grant of any award under
the Plan. Shares of common stock, which are
28
attributable to awards that have expired, terminated, or been canceled or
forfeited during any calendar year, are available for issuance or use in
connection with future awards.
The Plan was effective March 11, 1999, and is not limited in duration.
No incentive stock option may be granted more than 10 years after the effective
date. The Plan may be amended by the Board without the consent of the
stockholders, except that stockholder approval is required for any amendment
that materially increases the aggregate number of shares of stock that may be
issued under the plan or materially modifies the requirements as to eligibility
for participation in the Plan.
PRINCIPAL STOCKHOLDERS
The table on the following page sets forth, as of May 7, 2004, the
number and percentage of the outstanding shares of common stock and warrants and
options that, according to the information supplied to Buyers United, were
beneficially owned by (i) each person who is currently a director, (ii) each
executive officer, (iii) all current directors and executive officers as a group
and (iv) each person who, to the knowledge of Buyers United, is the beneficial
owner of more than five percent of the outstanding common stock. Except as
otherwise indicated, the persons named in the table have sole voting and
dispositive power with respect to all shares beneficially owned, subject to
community property laws where applicable.
Common Percent of
Name and Address Shares Class (1)
---------------- ------ ---------
Principal stockholders:
-----------------------
033 Asset Management, LLC (2) 1,195,000 8.9
125 High Street Suite 1405
Boston, MA 02110
Jon D. Gruber and J. Patterson McBaine (3) 870,000 6.5
50 Osgood Place, Penthouse
San Francisco, CA 94133
I-Link Incorporated 808,546 6.0
9775 Business Park Avenue
San Diego, CA 92131
Shannon River Capital Management, LLC (4) 775,000 5.8
650 Fifth Avenue, 6th Floor
New York, NY 10019
Officers and Directors:
-----------------------
Theodore Stern (5) 1,984,435 13.8
2970 One PPG Place
Pittsburgh, PA 15222
Gary Smith (5)(6) 520,084 3.8
14870 Pony Express Road
Bluffdale, UT 84065
29
Edward Dallin Bagley (5) 1,371,954 9.6
2350 Oakhill Drive
Salt Lake City, UT 84121
Steve Barnett (5) 394,949 2.9
666 Dundee Road, Suite 1704
Northbrook, IL 60062
Paul Jarman (5) 742,052 5.3
14870 Pony Express Road
Bluffdale, UT 84065
David R. Grow (5) 150,000 1.1
14870 Pony Express Road
Bluffdale, UT 84065
G. Douglas Smith (5)(6) 688,768 4.9
14870 Pony Express Road
Bluffdale, UT 84065
Kenneth D. Krogue (5) 352,226 2.6
14870 Pony Express Road
Bluffdale, UT 84065
All Executive officers and Directors (8 persons) 6,204,468 36.1
------------------
(1) These figures represent the percentage of ownership of the named
individuals assuming each of them alone has exercised his or her
options or conversion rights to purchase common shares, and percentage
ownership of all officers and directors as a group, assuming all
purchase and conversion rights held by such individuals are exercised.
(2) 033 Asset Management, LLC is the investment manager for 033 Growth
Partners I, L.P., 033 Growth Partners II, LP, Oyster Pond Partners, LP,
and 033 Growth International Fund Ltd., which hold an aggregate of
1,195,000 shares of Buyers United common stock. Consequently, 033 Asset
Management, LLC may be deemed to hold an indirect beneficial interest
in the shares held by these funds. 033 Asset Management, LLC disclaims
any economic interest or beneficial ownership of the shares.
(3) Jon D. Gruber and J. Patterson McBaine are the direct beneficial
holders of a total of 152,172 shares of common stock. Messrs. Gruber
and McBaine are two of the three portfolio managers of Gruber McBaine
Capital Management, LLC. Gruber McBaine Capital Management is the
general partner of Lagunitas Partners LP and Firefly Partners LP.
Further, Gruber McBaine Capital Management is the investment advisor of
Gruber & McBaine International, with full voting and investment
discretion. As a result of these relationships, Messrs. Gruber and
McBaine may be deemed to have an indirect beneficial interest in a
total of 717,828 shares held by Lagunitas Partners LP, Firefly Partners
LP and Gruber & McBaine International.
(4) Shannon River Capital Management, LLC may be deemed to hold an indirect
beneficial interest 241,129 shares of common stock held by Shannon
River Partners, L.P. and 333,871 shares held by Shannon River Partners
II, L.P. Furthermore, Shannon River Partners, L.P. and Shannon River
Partners II, L.P. may be deemed to hold an indirect beneficial interest
in 77,000 shares held by Wynnefield Partners Small Cap Value, LP I,
71,000 shares held by Wynnefield Partners Small Cap Value, LP, and
52,000 shares held by Wynnefield Small Cap Value Offshore Fund, Ltd.
because of their status as portfolio managers for the
30
funds, which means Shannon River Capital Management, LLC may also be
deemed to hold an indirect beneficial interest in those shares.
(5) These figures include: for Mr. Stern Series A and B Preferred Stock
convertible to 377,500 shares of common stock, warrants to purchase
382,500 shares of common stock at an exercise price of $2.00 per share,
options to purchase 102,500 shares of common stock at exercise prices
ranging from $2.50 to $5.06 per share, and 56,250 common shares for
which outstanding promissory notes are convertible at a rate of $2.00
per share; for Mr. Gary Smith options to purchase 122,500 shares at
prices ranging from $2.00 to $5.06 per share; for Mr. Bagley Series A
and B Preferred Stock convertible to 157,500 shares of common stock,
warrants to purchase 275,000 shares of common stock at an exercise
price of $2.00 per share, options to purchase 47,500 shares of common
stock at exercise prices ranging from $3.05 to $5.06, and 375,000
common shares for which outstanding promissory notes are convertible at
the rate of $2.00 per share; for Mr. Barnett Series A Preferred Stock
convertible to 20,000 shares of common stock and options to purchase
130,000 shares at exercise prices ranging from $2.00 to $5.06 per
share; for Mr. Jarman options to purchase 452,966 shares of common
stock at exercise prices ranging from $2.00 to $5.39 per share and
options that vest over three years to purchase 150,000 additional
shares at $2.50 per share; for Mr. G. Douglas Smith options to purchase
624,916 shares of common stock at exercise prices ranging from $2.00 to
$5.39 per share; for Mr. Grow options to purchase 150,000 shares of
common stock at exercise prices ranging from of $2.00 to $3.05, of
which options to purchase 125,000 shares vest over three years; and for
Mr. Krogue options to purchase 333,770 shares of common stock at
exercise prices ranging from $2.00 to $2.70 per share.
(6) Gary Smith is G. Douglas Smith's father.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Theodore Stern
Beginning in December 2000 and continuing into 2003, Theodore Stern,
the Chairman of the Board of Directors and Chief Executive Officer, made loans
to Buyers United for working capital purposes. All of the loans bear interest at
the rate of 12 percent per annum payable monthly and are unsecured. One loan
made in February 2003 for $100,000 and another made in July 2003 for $86,563
were repaid in full later in 2003. Another loan for $112,500 made in December
2002 remains outstanding, is due in December 2004, and is convertible at the
election of Mr. Stern to 56,250 shares of common stock. Further, a loan made in
July 2003 for $348,825 remains outstanding and is due in July 2005, but it is
not convertible to common stock.
In consideration for the loans listed in the following table, we issued
common stock to Mr. Stern and recorded the value of the stock at the market
price on the date of issuance. All of these loans were repaid in 2004. The table
shows the date and principal amount of the loans, the number of shares of common
stock issued in consideration for the loans, and the value of the common stock:
Date of Loan Principal Amount ($) Number of Shares Value of Shares ($)
------------ -------------------- ---------------- -------------------
December 7, 2000 100,000 10,000 16,562
January 4, 2001 180,000 20,000 22,500
January 19, 2001 100,000 10,000 15,625
February 15, 2001 10,000 1,000 1,500
March 26, 2001 100,000 10,000 10,312
June 5, 2001 500,000 50,000 60,000
June 15, 2001 150,000 15,000 18,750
June 21, 2001 100,000 10,000 12,500
June 26, 2001 50,000 5,000 6,250
31
July 6, 2001 100,000 10,000 11,000
July 18, 2001 150,000 15,000 12,750
August 30, 2001 275,000 27,500 22,000
September 5, 2001 100,000 10,000 8,500
September 19, 2001 100,000 10,000 6,800
October 15, 2001 50,000 10,000 6,100
December 12, 2001 100,000 10,000 6,400
January 18, 2002 100,000 10,000 10,000
In October 2000, the Board approved a consulting agreement with Mr.
Stern. Pursuant to this contractual arrangement Mr. Stern receives a monthly fee
of $6,250 and expense allowance of $500 in connection with duties performed as
our Chief Executive Officer. He earned, respectively, $74,750 and $70,000 in
2003 and 2002 under this arrangement, and $6,250 remained unpaid as of December
31, 2003.
In November 2001, we agreed to issue 50,000 shares to Mr. Stern in
consideration of extending the maturity date of the June 5, 2001 $500,000
promissory note to July 5, 2003. The value of the shares was recorded at
$31,500. On December 4, 2001, we agreed to issue 156,500 shares to Mr. Stern in
consideration of extending the maturity date of the remaining $1,565,000 then
owing in notes payable listed above to July 5, 2003. The value of the shares was
recorded at $93,900. All these notes were later extended further to July 5,
2004, but no additional compensation was paid to Mr. Stern.
In September 2001, Buyers United issued 25,000 shares to Mr. Stern in
consideration for Mr. Stern's personal guaranty of Buyers United's payment
obligations under a new contract with Global Crossing Communications, Inc., that
provides telecommunication services to us for resale. The shares were valued at
$17,500 based on the then current market price.
In February 2002, Mr. Stern gave his personal guaranty of up to
$250,000 of obligations arising under our resale contract with MCI WorldCom,
Inc. In consideration for providing the guaranty, we issued 25,000 shares to Mr.
Stern valued at $30,750 based on the then current market price.
In December 2002, Mr. Stern participated in providing funding for a
deposit in connection with acquiring customers from Touch America, Inc. The
total amount raised was $3,187,500, of which total Mr. Stern contributed
$137,500 under terms identical to the other unaffiliated investors. All the
unsecured promissory notes bear interest at 10 percent, payable monthly.
Principal payments are also due monthly, based on 10 percent of the net billings
collected from the Touch America customers during the prior calendar month, and
the notes have no maturity date. As of December 31, 2003, we had repaid $84,854
of the principal on this note.
On January 15, 2003, Mr. Stern gave his personal guaranty of up to
$250,000 of obligations arising under a resale contract with Williams
Communications. In consideration for providing the guaranty, we issued 15,000
shares to Mr. Stern valued at $36,300 based on the then current market price.
Transactions with other related parties
In October 2000, the Board approved a two-year consulting arrangement
with Gary Smith, a member of the Board. No fees were actually paid to Mr. Smith
during 2000, and up through October 2002, Mr. Smith was paid $110,000 in fees
under his consulting arrangement.
On January 15, 2002, Paul Jarman, G. Douglas Smith, and Kenneth D.
Krogue made unsecured loans to Buyers United in the total principal amount of
$79,998, due July 15, 2003 and bearing interest at the rate of 12 percent per
annum. In consideration for making the loans, Buyers United agreed to issue a
32
total of 7,998 shares to these individuals valued at $8,798 based on the market
price on the date of issuance. These loans were repaid in July 2003.
At the end of 2002 and during the first part of 2003, Edward Dallin
Bagley made two-year unsecured loans to Buyers United aggregating $750,000. The
notes bear interest at 12 percent payable monthly, and are convertible into
375,000 shares of common stock (conversion rate of $2.00 per share).
In February 2003, Buyers United issued a 12 percent unsecured
promissory note to Steve Barnett in exchange for a loan of $50,000. Interest is
payable monthly and the loan matures on July 1, 2004.
DESCRIPTION OF CAPITAL STOCK
Buyers United's charter authorizes it to issue up to: (i) 100,000,000
shares of common stock, $0.0001 par value per share; and (ii) 15,000,000 shares
of preferred stock, $0.0001 par value per share. As of the date of this
Prospectus, there are 13,633,204 shares of common stock outstanding, and
1,827,500 shares of Series A Convertible Preferred Stock and 417,800 shares of
Series B Convertible Preferred Stock outstanding. In addition, there are
outstanding options, warrants and convertible notes to acquire up to an
additional 8,386,359 shares of common stock.
Common stock
Holders of the common stock are entitled to one vote per share on all
matters submitted to the stockholders for a vote. There are no cumulative voting
rights in the election of directors. The shares of common stock are entitled to
receive such dividends as may be declared and paid by the board of directors out
of funds legally available there for and to share, ratably, in the net assets,
if any, of Buyers United upon liquidation. The stockholders have no preemptive
rights to purchase any shares of our capital stock.
Preferred stock
General. The board of directors, without further action by the holders
of the common stock, is authorized to classify any shares of our authorized but
unissued preferred stock as preferred stock in one or more series. With respect
to each series, the board of directors may determine:
o The number of shares which shall constitute such series;
o The rate of dividend, if any, payable on shares of such
series;
o Whether the shares of such series shall be cumulative,
non-cumulative or partially cumulative as to dividends, and
the dates from which any cumulative dividends are to
accumulate;
o Whether the shares of such series may be redeemed, and, if so,
the price or prices at which and the terms and conditions on
which shares of such series may be redeemed;
o The amount payable upon shares of such series in the event of
the voluntary or involuntary dissolution, liquidation or
winding up of the affairs of Buyers United;
o The sinking fund provisions, if any, for the redemption of
shares of such series;
33
o The voting rights, if any, of the shares of such series;
o The terms and conditions, if any, on which shares of such
series may be converted into shares of capital stock of Buyers
United of any other class or series;
o Whether the shares of such series are to be preferred over
shares of capital stock of Buyers United of any other class or
series as to dividends, or upon the voluntary or involuntary
dissolution, liquidation, or winding up of the affairs of
Buyers United, or otherwise; and
o Any other characteristics, preferences, limitations, rights,
privileges, immunities or terms not inconsistent with the
provisions of the Charter.
The availability of preferred stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of discouraging takeover proposals, and the
issuance of preferred stock could have the effect of delaying or preventing a
change in control of Buyers United not approved by the board of directors.
Series A Convertible Preferred Stock. Buyers United has outstanding
1,827,500 shares of Series A Convertible Preferred Stock. The Series A Stock is
senior to the common stock with respect to payment of dividends and
distributions in liquidation. Holders of the Series A Stock are entitled to
receive dividends payable semi-annually equal to 8 percent of the liquidation
preference value of the Series A Stock, which is $2.00 per share or a total of
$3,655,000. No dividends or distributions may be made with respect to the common
stock unless all dividend payments on the Series A Stock are current. Each share
of Series A Stock is convertible at the election of the holder to one share of
common stock, subject to adjustment in certain circumstances to prevent dilution
of the equity interest of the holders of the Series A Stock. Buyers United may
convert the Series A Stock to common stock when the market price of our common
stock is $4.00 or more during 30 consecutive trading days. We may redeem the
Series A Stock at the liquidation preference value after January 1, 2005. The
Series A Stock does not have voting rights.
Series B Convertible Preferred Stock. Buyers United has outstanding
417,800 shares of Series B Convertible Preferred Stock. The Series B Stock is
senior to the common stock with respect to payment of dividends and
distributions in liquidation. Holders of the Series B Stock are entitled to
receive dividends payable semi-annually equal to 8 percent of the liquidation
preference value of the Series B Stock, which is $10.00 per share or a total of
$4,178,000. No dividends or distributions may be made with respect to the common
stock unless all dividend payments on the Series B Stock are current. Each share
of Series B Stock is convertible at the election of the holder to five shares of
common stock, subject to adjustment in certain circumstances to prevent dilution
of the equity interest of the holders of the Series B Stock. Buyers United may
convert the Series B Stock to common stock when the market price of our common
stock is $4.00 or more during 30 consecutive trading days. We may redeem the
Series B Stock at the liquidation preference value after January 1, 2005. The
Series B Stock does not have voting rights.
Statutory business combinations provision
Buyers United is subject to the provisions of Section 203 of the
Delaware General Corporation Law. Section 203 provides, with certain exceptions,
that a Delaware corporation may not engage in any of a broad range of business
combinations with a person or an affiliate, or associate of such person, who is
an "interested stockholder" for a period of three years from the date that such
person becomes an interested stockholder unless: (i) the transaction resulting
in a person becoming an interested stockholder,
34
or the business combination, is approved by the board of directors of the
corporation before the person becomes an interested stockholder; (ii) the
interested stockholder acquired 85 percent or more of the outstanding voting
stock of the corporation in the same transaction that makes such person an
interested stockholder (excluding shares owned by persons who are both officers
and directors of the corporation, and shares held by certain employee stock
ownership plans); or (iii) on or after the date the person becomes an interested
stockholder, the business combination is approved at an annual or special
meeting by the corporation's board of directors and by the holders of at least
66 2/3 percent of the corporation's outstanding voting stock, excluding shares
owned by the interested stockholder. Under Section 203, an "interested
stockholder" is defined as any person who is: (i) the owner of 15 percent or
more of the outstanding voting stock of the corporation; or (ii) an affiliate or
associate of the corporation and who was the owner of 15 percent or more of the
outstanding voting stock of the corporation at any time within the three-year
period immediately prior to the date on which it is sought to be determined
whether such person is an interested stockholder.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or bylaws, through
action of its stockholders, to exempt itself from coverage, provided that such
bylaw or certificate of incorporation amendment shall not become effective until
12 months after the date it is adopted. Buyers United has not adopted such an
amendment to its certificate of incorporation or bylaws.
Limitation on directors' liabilities
Pursuant to the certificate of incorporation and under Delaware law,
directors and executive officers are not liable to Buyers United or its
stockholders for monetary damages for breach of fiduciary duty, except liability
in connection with a breach of duty of loyalty, acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
dividend payments or stock repurchases illegal under Delaware law, or any
transaction in which a director has derived an improper personal benefit.
Our certificate of incorporation and bylaws provide that we will
indemnify our directors and officers to the fullest extent permitted by law
against liabilities and expenses incurred in connection with litigation in which
these persons may be involved because of their offices with us if they acted in
good faith or in a manner reasonably believed to be in or not opposed to our
best interests. However, nothing in the certificate of incorporation and bylaws
protects or indemnifies a director, officer, employee, or agent against any
liability to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office. To the extent that a director or officer
has been successful in defense of any proceeding, our bylaws provides that he
shall be indemnified against reasonable expenses incurred in connection
therewith.
Penny stock rules
It is likely public transactions in our stock will be covered by the
Penny Stock rules, which impose significant restrictions on broker-dealers and
may affect the resale of our stock. A penny stock is generally a stock that
o Is not listed on a national securities exchange or Nasdaq,
o Is listed in "pink sheets" or on the NASD OTC Bulletin Board,
o Has a price per share of less than $5.00 and
o Is issued by a company with net tangible assets less than $5
million.
35
The penny stock trading rules impose additional duties and
responsibilities upon broker-dealers and salespersons effecting purchase and
sale transactions in common stock and other equity securities, including
o Determination of the purchaser's investment suitability,
o Delivery of certain information and disclosures to the
purchaser, and
o Receipt of a specific purchase agreement from the purchaser
prior to effecting the purchase transaction.
Many broker-dealers will not effect transactions in penny stocks,
except on an unsolicited basis, in order to avoid compliance with the penny
stock trading rules. It is likely our common stock will be covered by the penny
stock trading rules. Therefore, such rules may materially limit or restrict a
holder's ability to resell our common stock, and the liquidity typically
associated with other publicly traded equity securities may not exist.
Transfer agent
The transfer agent for the common stock is Atlas Stock Transfer
Company, Salt Lake City, Utah.
PLAN OF DISTRIBUTION
The selling security holders and any of their pledgees, assignees, and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock they acquire on exercise of their warrants or options on any
stock exchange market or trading facility on which our shares are traded or in
private transactions. These sales may be at fixed or negotiated prices. The
selling security holders may use any one or more of the following methods when
selling shares.
o Ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o Block trades in which the broker-dealer will attempt to sell
the shares as agent but may position and resell a portion of
the block as principal to facilitate the transaction;
o Purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o Privately negotiated transactions;
o Short sales;
o Broker-dealers may agree with the selling security holders to
sell a specified number of such shares at a stipulated price
per share;
o A combination of any such methods of sale; and
o Any other method permitted pursuant to applicable law.
Rather than sell shares under this prospectus, the selling security
holders may sell shares under Rule 144 adopted under the Securities Act of 1933,
after at least one year elapses from the date the warrants or options are
exercised and the other requirements of the Rule are satisfied. The selling
security
36
holders may also engage in short sales against the box, puts and calls, and
other transactions in our securities or derivatives of our securities and may
sell or deliver shares in connection with these trades.
The selling security holders may pledge their shares to their brokers
under the margin provisions of customer agreements. If a selling security holder
defaults on a margin loan, the broker may, from time to time, offer and sell the
pledged shares. Broker-dealers engaged by a selling security holder to sell its
shares may arrange for other broker-dealers to participate in sales.
Broker-dealers may receive commissions or discounts from the selling security
holders (or, if any broker-dealer acts as agent for the purchaser of shares,
from the purchaser) in amounts to be negotiated.
The selling security holders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act of 1933 in connection with such sales. In such
event, any commissions received by such broker-dealers or agents and any profit
on the resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts.
We have agreed to pay all fees and expenses incident to the
registration of the shares. We have agreed to indemnify the selling security
holders against certain losses, claims, damages, and liabilities, including
liabilities under the Securities Act of 1933. The selling security holders have
also agreed to indemnify us, and our directors, officers, agents, and
representatives against certain liabilities, including certain liabilities under
the Securities Act of 1933. In the opinion of the Securities and Exchange
Commission such indemnification agreements are against public policy as
expressed in the Securities Act of 1933 and are, therefore, unenforceable. The
selling security holders and other persons participating in the distribution of
the shares offered hereby are subject to the applicable requirements of
Regulation M promulgated under the Securities Exchange Act of 1934 in connection
with the sale of the shares.
SELLING SECURITY HOLDERS
The following table details the name of each selling security holder,
the number of shares owned by the selling security holder, and the number of
shares that may be offered for resale under this prospectus. Because each
selling security holder may offer all, some, or none of the shares it acquires
on exercise of its warrants or options, and because there are currently no
agreements, arrangements, or understandings with respect to the sale of any of
the shares, no definitive estimate as to the number of shares that will be held
by each selling security holder after the offering can be provided. The
following table has been prepared assuming that all shares offered under this
prospectus will be sold to parties unaffiliated with the selling security
holders. Except as indicated, none of the selling security holders has had a
significant relationship with us within the past three years, other than as a
result of the ownership of our shares or other securities. Unless otherwise
indicated, the selling security holders have sole voting and investment power
over their respective shares.
Number of Number of Percentage
Selling Security Holder shares owned shares offered owned after
----------------------- ------------ -------------- -----------
Adametz, James 33,365 20,000 0.1
Alloy, Mark 142,229 50,000 0.7
Bagley, Bryan 50,000 50,000 0.0
Bagley, Dal (1) 1,371,954 762,500 4.3
Barnett, Steve (1) 404,949 215,000 1.4
Bazelon, Richard & Eileen 250,978 50,000 1.5
Bernath, Michael & Amy 87,821 25,000 0.5
Brimhall, George & Brenda 74,898 50,000 0.2
37
Carrigan, Ellie 72,536 41,000 0.2
Cohen, Leonard 58,406 25,000 0.2
David, Philip 100,086 30,000 0.5
David, Richard 237,747 131,250 0.8
Deckelbaum, Morris Trust 63,899 5,000 0.4
Dickerson, David 270,428 130,000 1.0
Dove, Krissy 4,000 4,000 0.0
Dritz, Steven 215,098 87,500 0.9
Elliott, Lang 97,859 35,000 0.5
Engineering Fitness 87,171 37,500 0.4
Fabbri, Ina 55,000 55,000 0.0
Friedlander, Charles 29,205 12,500 0.1
Fulton, Peter 29,516 29,516 0.0
Galterio, Richard 115,165 72,288 0.3
Gatewood, Bennie 98,481 56,500 0.3
Getz, Norman 57,631 25,000 0.2
Gilbert, Warren (New Amsterdam) 25,000 25,000 0.0
Gilleland, Ned 44,162 15,625 0.2
Gleason/Orthopedic 120,172 37,500 0.6
Gomes, Zachary 137,026 25,000 0.8
Gordon, Chris 459,211 314,500 1.0
Graves, Eugene 133,531 75,000 0.4
Grow, David (1) 150,000 75,000 0.5
Herzing, Henry 547,058 225,000 2.3
Hickey, Bill & Pamela 225,428 85,000 1.0
Hickey, Kim 77,949 50,000 0.2
Huse, Wilfred & Margaret 211,709 115,000 0.7
Jackson, William & Ann 139,356 50,000 0.7
Jacobs, Norman 132,499 50,000 0.6
Jagmin, Anthony 112,805 25,000 0.6
Janis, Michael & Rosamond 99,328 45,000 0.4
Jarman, Paul (1) 742,052 440,466 2.1
Joseph, Ralph 22,933 10,000 0.1
Kandel, Brian 29,205 12,500 0.1
Keating, Patrick 29,205 12,500 0.1
Kimball, Robert 78,158 25,000 0.4
Krogue, Ken (1) 352,226 333,770 0.1
Labarbara, Luann 2,500 2,000 0.0
Labarbara, Vincent 79,036 34,036 0.3
Larbuisson, Patrick 20,000 20,000 0.0
LeBlanc, Gene 15,770 12,500 0.0
Lee, Daniel 239,520 65,625 1.3
Leithauser, Charles 65,000 25,000 0.3
Leithauser, Charles, Trustee 63,081 25,000 0.3
MacNeil, Jeff & Shelly 93,289 21,250 0.5
Markel, Rosalind 50,000 50,000 0.0
Marsillo, Mario 36,959 20,584 0.1
Menillo, Gregory 121,808 50,000 0.5
Menon, Venugopal 16,542 5,000 0.1
Mirman, Al 71,383 7,500 0.5
Mirman, Ilene 111,142 77,736 0.2
38
Moley, Andrew 116,808 50,000 0.5
Mulkey II Ltd. Partnership 41,870 15,000 0.2
Mulkey, David 88,536 50,000 0.3
Novogrodzky, Mario 34,205 25,000 0.1
Nunley Investments 185,666 50,000 1.0
Nunley, P. 25,000 25,000 0.0
Patil, Jayakumar & Purnima 177,354 12,500 1.2
Pepe, Danielle 10,000 10,000 0.0
Pobiel, Ronald 13,843 2,500 0.1
Preusser, Frank 28,985 12,500 0.1
Radulovic, Alex 54,791 50,000 0.0
Rand, Eric 388,017 241,000 1.1
Sansom, Roger 14,958 10,000 0.0
Schiller, Leonard 139,574 40,625 0.7
Schiller, Phillip 42,205 25,000 0.1
Siegel, Marc & Joyce 65,479 42,736 0.2
Smith, Donald 48,967 20,000 0.2
Smith, G. Douglas (1) 688,768 624,916 0.4
Smith, Gary (1) 480,084 112,500 2.7
Richard F. Miller & Karen E. Smith, Co-executors
FBO Estate of George L. Smith 326,771 75,000 1.8
Smith, Rodney D. 3,140 3,140 0.0
Smith, Thomas & Liz 102,399 15,000 0.6
Sommer, Frederic 800 800 0.0
Stern, Theodore (1) 1,984,435 908,750 7.6
Stewart, Stephen 55,590 25,000 0.2
Stone, Joel 178,254 50,000 0.9
Tanner, Stephen 70,906 37,500 0.2
Toombs, Walter 32,407 10,000 0.2
Trustees Bradshaw Taylor 5,000 5,000 0.0
Van Le, Linda 29,205 12,500 0.1
Volpe, Michael 22,720 16,020 0.0
Wall Street Group, Inc. 65,000 65,000 0.0
Wolfe, J. Michael 103,739 50,000 0.4
Zayed, Adam 11,000 4,000 0.1
---------------------
(1) These persons are directors, officers and/or principal stockholders.
39
LEGAL MATTERS
The legality of the issuance of the shares that may be reoffered by the
selling security holders and certain other matters will be passed upon for
Buyers United by Parsons Behle & Latimer, Salt Lake City, Utah.
EXPERTS
The financial statements of Buyers United as of December 31, 2003 and
for the years ended December 31, 2003 and 2002, appearing in this prospectus and
registration statement have been audited by Crowe Chizek and Company LLC,
independent auditors, as set forth in their report appearing elsewhere, and are
included in reliance upon such report given upon the authority of Crowe Chizek
and Company LLC as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed a registration statement on Form SB-2 under the
Securities Act of 1933, with respect to the shares offered. This prospectus does
not contain all of the information set forth in the registration statement and
the exhibits and schedules. For further information with respect to Buyers
United and the shares offered, reference is made to the registration statement
and the exhibits and schedules filed with the Securities and Exchange
Commission. Statements contained in this prospectus as to the contents of any
contract or any other document referred to are not necessarily complete, and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the registration statement, each such statement being
qualified in all respects by such reference. A copy of the registration
statement, and the exhibits and schedules, may be inspected without charge at
the public reference facilities maintained by the Securities and Exchange
Commission in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549,
telephone 1-800-SEC-0330, and copies of all or any part of the registration
statement may be obtained from the Commission upon payment of a prescribed fee.
This information is also available from the Commission's Internet web site at
http://www.sec.gov.
40
INDEX TO FINANCIAL STATEMENTS
Page
Financial Statements for the Three Months Ended March 31, 2004 (Unaudited)
Condensed Consolidated Balance Sheet as of March 31, 2004 42
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 2004 and 2003 43
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2004 and 2003 44
Notes to Condensed Consolidated Financial Statements 46
Financial Statements for the Year Ended December 31, 2003
Report of Independent Auditors 48
Consolidated Balance Sheet as of December 31, 2003 49
Consolidated Statements of Operations for the Years
Ended December 31, 2003 and 2002 50
Consolidated Statements of Stockholders' Equity
(Deficit) for the Years Ended December 31, 2003 and 2002 51
Consolidated Statements of Cash Flows for the Years
Ended December 31, 2003 and 2002 53
Notes to Consolidated Financial Statements 55
41
BUYERS UNITED, INC.
CONDENSED CONSOLIDATED BALANCE SHEET - (Unaudited)
March 31, December 31,
2004 2003
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 7,325,130 $ 3,055,384
Restricted cash 1,568,566 1,569,336
Accounts receivable, net 8,336,602 8,162,483
Other current assets 248,676 243,844
---------------------------------------
Total current assets 17,478,974 13,031,047
Property and equipment, net 2,783,195 2,424,642
Intangible assets, net 8,074,756 8,018,682
Other assets 441,530 496,787
---------------------------------------
Total assets $ 28,778,455 $ 23,971,158
=======================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Line of credit $ 3,461,104 $ 4,093,782
Current portion of long-term debt and capital lease obligations 6,234,257 7,781,484
Accounts payable 9,495,964 11,248,152
Accrued liabilities 1,816,954 1,828,864
---------------------------------------
Total current liabilities 21,008,279 24,952,282
Long-term debt and capital lease obligations 245,980 646,126
---------------------------------------
Total liabilities 21,254,259 25,598,408
Stockholders' equity (deficit):
Preferred stock
Series A 183 187
Series B 42 72
Common stock 1,308 760
Additional paid-in capital 29,250,294 20,193,148
Warrants and options outstanding 4,012,394 3,928,110
Accumulated deficit (25,740,025) (25,749,527)
---------------------------------------
Total stockholders' equity (deficit) 7,524,196 (1,627,250)
---------------------------------------
Total liabilities and stockholders' equity (deficit) $ 28,778,455 $ 23,971,158
=======================================
See accompanying notes
42
BUYERS UNITED, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - (Unaudited)
Three Months Ended March 31,
----------------------------
2004 2003
---- ----
Revenues:
Telecommunications services $ 16,743,707 $ 15,481,120
Other - -
--------------------------------------
Total revenues 16,743,707 15,481,120
Operating expenses:
Costs of revenues 9,176,193 8,664,767
General and administrative 4,017,284 3,626,700
Selling and promotion 3,103,991 2,331,069
--------------------------------------
Total operating expenses 16,297,468 14,622,536
--------------------------------------
Income from operations 446,239 858,584
Other income (expense):
Interest income 13,850 2,601
Interest expense (357,424) (485,929)
Gain on early extinguishment of debt 109,150 -
--------------------------------------
Total other expense, net (234,424) (483,328)
--------------------------------------
Net income $ 211,815 $ 375,256
8% Preferred dividends on Series A and B preferred stock (202,313) (181,895)
--------------------------------------
Net income applicable to common stockholders $ 9,502 $ 193,361
======================================
Net income per common share:
Basic $ - $ 0.03
Diluted - 0.03
Weighted average common shares outstanding:
Basic 8,786,182 6,107,466
Diluted 10,589,677 6,150,660
See accompanying notes
43
BUYERS UNITED, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Unaudited)
Three Months Ended March 31,
----------------------------
2004 2003
---- ----
Cash flows from operating activities:
Net income $ 211,815 $ 375,256
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 970,094 590,363
Amortization included in interest expense resulting from
issuing stock with notes
- 5,312
Amortization of discount on notes payable 57,276 114,064
Amortization of note financing costs 25,000 39,241
Amortization of deferred consulting fees
- 5,209
Changes in operating assets and liabilities:
Accounts receivable (174,119) (2,723,196)
Other assets (29,832) (460,358)
Checks in excess of available cash balances - 372,612
Accounts payable (1,757,254) 2,832,159
Accrued liabilities 355,724 396,677
-----------------------------------------
Net cash provided by (used in) operating activities (341,296) 1,547,339
-----------------------------------------
Cash flows from investing activities:
Increase (decrease) in other assets 16,176 (26,526)
Acquisition of customer base (757,856) -
Purchases of property and equipment (587,784) (402,918)
-----------------------------------------
Net cash used in investing activities (1,329,464) (429,444)
-----------------------------------------
Cash flows from financing activities:
Restricted cash 770 (480,485)
Net borrowings and payments under line of credit (632,678) (989,118)
Borrowings under notes payable, net of debt issuance costs - 496,810
Exercise of options and warrants 917,000 -
Private placement of common stock, net of offering costs 8,160,063 -
Repurchase of common stock (500,000) -
Principal payments on long-term debt (2,004,649) (1,077,185)
-----------------------------------------
Net cash provided by (used in) financing activities 5,940,506 (2,049,978)
-----------------------------------------
Net increase (decrease) in cash and cash equivalents 4,269,746 (932,083)
Cash and cash equivalents at the beginning of the period 3,055,384 994,360
-----------------------------------------
Cash and cash equivalents at the end of the period $ 7,325,130 $ 62,277
=========================================
See accompanying notes
44
BUYERS UNITED, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Unaudited)
Three Months Ended March 31,
----------------------------
2004 2003
---- ----
Supplemental cash flow information:
Cash paid for interest $ 386,609 $ 280,597
Supplemental schedule of noncash investing and financing activities:
Issuance of common shares in payment of preferred stock dividend $ 476,256 $ 377,688
Accrual of dividend payable on preferred stock 202,313 181,895
Issuance of common shares for officer's personal guranty - 36,300
Issuance of warrants with private placement of common stock 189,336 -
Retire and replace note payable - 800,000
Close Touch America transaction and record obligation - 3,750,000
See accompanying notes
45
BUYERS UNITED, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Unaudited)
March 31, 2004
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Buyers United, Inc. ("the Company" or "Buyers United") have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q of Regulation
S-X. Accordingly, they do not include all the information and footnotes
necessary for a comprehensive presentation of financial position and results
of operations.
It is management's opinion, however, that all material adjustments
(consisting of normal recurring accruals) have been made which are necessary
for a fair financial statement presentation. The results for the interim
period are not necessarily indicative of the results to be expected for the
year.
For further information, refer to the consolidated financial statements and
footnotes included in the Company's annual report on Form 10-KSB for the
year ended December 31, 2003.
2. Summary of Significant Accounting Policies
Stock-Based Compensation: Employee compensation expense under stock options
is reported using the intrinsic method. No stock-based compensation cost is
reflected in net income applicable to common stockholders, since all options
had an exercise price equal to or greater than the market price of the
underlying common stock at the date of grant. The following table
illustrates the effects on net income (loss) applicable to common
stockholders and earnings (loss) per share if expense was measured using the
fair value recognition provision of SFAS No. 123, "Accounting for
Stock-Based Compensation:"
Three months ended March 31,
----------------------------
2004 2003
----------- -----------
Net income applicable to common stockholders:
As reported $ 9,502 $ 193,361
Pro forma stock-option based compensation (113,092) (69,132)
Pro forma net income (loss) applicable to
common stockholders $ (103,590) $ 124,229
Basic and diluted net income (loss) per
common share:
As reported: $ - $ 0.03
Pro forma basic and diluted net income (loss)
per common share $ (0.01) $ 0.02
3. Acquisitions
Buyers United entered into an agreement to purchase 37 dedicated long
distance customers from Source Communications, LLC for $750,000 in February
2004. The transaction was closed in March 2004.
4. Gain on early extinguishment of debt
In the summer of 2003 the Company entered into a Purchase Agreement to
acquire approximately 12,000 long distance customers from Glyphics
Communications, Inc. Subsequently, the two parties agreed that Buyers United
would accelerate payments under the agreement in exchange for a discount on
the purchase price. The final payment under the agreement was made in
February 2004, and the Company recorded a $109,150 gain on the early
extinguishment of the debt.
46
5. Accrued liabilities
Accrued liabilities consisted of the following:
March 31, December 31,
2004 2003
---- ----
Accrued commissions $ 839,153 $ 669,523
Accrued dividends 202,313 478,599
Other 775,488 680,742
------------ ------------
$ 1,816,954 $ 1,828,864
============ ============
6. Capital Transactions
During the three months ended March 31, 2004, investors exercised warrants
to purchase a total of 157,000 shares of common stock. Total proceeds
received in these transactions was $362,000.
On March 15, 2004 the Company closed a private placement to institutional
and accredited investors. The Company sold 3,782,000 shares of common stock
at $2.30 per share, or a total of approximately $8.7 million. Net proceeds
of the offering after placement fees and expenses were approximately $8.1
million.
In connection with the placement, Acceris Communications Inc., formerly
I-link Incorporated and the holder of 300,000 shares of Series B Convertible
Preferred Stock, converted all of its preferred stock to 1.5 million common
shares. Acceris subsequently sold 750,000 of those common shares to the
investors in the private placement at $2.30 per share.
In January and February 2004, three Directors exercised options to purchase
a total of 255,000 shares of Common Stock. Total proceeds received by the
Company in connection with these exercises was $555,000.
In December 2003, a holder of 100,000 shares of Series B Convertible
Preferred Stock converted all of those shares to 500,000 shares of common
stock. In January 2004, the holder sold those common shares plus 14,560
additional shares, or a total of 514,560 shares, to Buyers United for
$500,000 in a privately negotiated transaction.
7. Major suppliers
For the three-month periods ended March 31, 2004 and 2003, approximately 53
and 66 percent, respectively, of the Company's cost of revenue was generated
from two telecommunication providers. As of March 31, 2004 and December 31,
2003, respectively, the Company owed $3.6 million and $3.0 million to these
providers. The Company has entered into contractual agreements with these
vendors. During 2002 one of these providers filed for bankruptcy protection
under Chapter 11, and the other provider is currently being scrutinized by
the Securities and Exchange Commission over certain accounting practices.
8. Subsequent events
During the first week of April 2004, investors exercised warrants to
purchase an additional 74,500 shares of common stock. Total proceeds
received in these transactions was $186,250.
On April 12, 2004, the Company repaid $2.3 million in promissory notes to
one of its directors. The director subsequently exercised warrants to
purchase 297,500 shares of common stock, and the Company received proceeds
of $595,000.
On April 26, 2004, the Company repaid a $50,000 note payable to another of
its directors.
47
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Buyers United, Inc. and Subsidiary
Salt Lake City, Utah
We have audited the accompanying consolidated balance sheet of Buyers United,
Inc. and Subsidiary as of December 31, 2003 and the related consolidated
statements of operations, stockholders' deficit, and cash flows for each of the
two years in the period ended December 31, 2003. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Oversight Board (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 audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Buyers United, Inc.
and Subsidiary as of December 31, 2003 and the results of their operations and
their cash flows for each of the two years in the period ended December 31, 2003
in conformity with U.S. generally accepted accounting principles.
Crowe Chizek and Company LLC
Oak Brook, Illinois
March 11, 2004, except for Note 14
as to which the date is March 15, 2004
48
BUYERS UNITED, INC.
CONSOLIDATED BALANCE SHEET
December 31, 2003
ASSETS
Current assets:
Cash and cash equivalents $ 3,055,384
Restricted cash 1,569,336
Accounts receivable, net of allowance for uncollectible
accounts of $2,931,000 8,162,483
Other current assets 243,844
-----------------
Total current assets 13,031,047
Property and equipment, net 2,424,642
Intangible assets, net 8,018,682
Other assets 496,787
-----------------
Total assets $ 23,971,158
=================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Line of credit $ 4,093,782
Current portion of long-term debt and capital lease obligations 7,781,484
Accounts payable 11,248,152
Accrued liabilities 1,828,864
-----------------
Total current liabilities 24,952,282
Long-term debt and capital lease obligations 646,126
-----------------
Total liabilities 25,598,408
Stockholders' deficit:
Preferred stock, $0.0001 par value, 15,000,000 shares authorized; Series A
8% cumulative convertible preferred stock; 1,865,000
shares issued and outstanding (liquidation value of $3,730,000) 187
Series B 8% cumulative convertible preferred stock; 721,729
shares issued and outstanding (liquidation value of $7,217,290) 72
Common stock, $0.0001 par value; 100,000,000 shares authorized;
7,604,584 shares issued and outstanding 760
Additional paid-in capital 20,193,148
Warrants and options outstanding 3,928,110
Accumulated deficit (25,749,527)
-----------------
Total stockholders' deficit (1,627,250)
-----------------
Total liabilities and stockholders' deficit $ 23,971,158
=================
See accompanying notes
49
BUYERS UNITED, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
-------------------------------------
2003 2002
---- ----
Revenues $ 63,312,964 $ 30,163,450
Operating expenses:
Costs of revenues 34,597,486 16,295,201
General and administrative 14,830,565 7,365,569
Selling and promotion 10,839,529 4,646,029
-------------------------------------
Total operating expenses 60,267,580 28,306,799
-------------------------------------
Income from operations 3,045,384 1,856,651
Other income (expense):
Interest income 13,513 17,980
Interest expense (1,884,258) (1,544,448)
-------------------------------------
Total other expense, net (1,870,745) (1,526,468)
-------------------------------------
Net income $ 1,174,639 $ 330,183
8% Preferred dividends on Series A and B preferred stock (873,495) (749,725)
-------------------------------------
Net income (loss) applicable to common stockholders $ 301,144 $ (419,542)
=====================================
Net income (loss) per common share:
Basic $ 0.05 $ (0.07)
Diluted 0.04 (0.07)
Weighted average common shares outstanding:
Basic 6,378,047 5,740,811
Diluted 6,847,646 5,740,811
See accompanying notes
50
BUYERS UNITED, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
Preferred Stock Common Stock Additional
--------------------- -------------------- Paid-in
Shares Amount Shares Amount Capital
---------------------------------------------------------
Balance at December 31, 2001 2,433,800 $ 244 5,312,629 $ 531 $ 15,190,855
Conversion of preferred shares to common (15,000) (2) 55,000 6 (4)
Issuance of common shares in connection with notes payable - - 17,998 2 18,796
Issuance of warrants for services and with consulting agreements - - - - -
Amortization of deferred consulting fees - - - - -
Issuance of warrants with notes payable - - - - -
Issuance of common stock for debt guarantee - - 25,000 3 30,747
Imputed interest on notes payable - - - - 28,686
Cancellation of warrants issued for services - - - - -
Preferred stock dividends - - - - -
Issuance of common shares as payment of preferred stock dividends - - 574,635 57 750,296
Net income - - - - -
---------------------------------------------------------
Balance at December 31, 2002 2,418,800 242 5,985,262 599 16,019,376
Conversion of preferred shares to common (116,000) (11) 580,000 58 (47)
Issuance of preferred stock in connection with the I-Link
acquisition 283,929 28 - - 1,613,855
Exercise warrants to purchase Common Stock, net of issuance costs - - 522,500 52 1,395,020
Exercise employee options to purchase Common Stock - - 27,500 3 54,997
Issuance of common shares in connection with notes repayment - - 50,000 5 (5)
Repurchase shares from stockholders - - (2,774) - (4,851)
Amortization of deferred consulting fees - - - - -
Issuance of warrants for services - - - - -
Issuance of common stock for debt guarantee - - 15,000 1 36,298
Imputed interest on notes payable - - - - 5,312
Cancellation of warrants issued for services - - - - 304,690
Preferred stock dividends - - - - -
Issuance of common shares as payment of preferred stock dividends - - 427,096 42 768,503
Net income - - - - -
---------------------------------------------------------
Balance at December 31, 2003 2,586,729 $ 259 7,604,584 $ 760 $ 20,193,148
=========================================================
-continued-
51
BUYERS UNITED, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
Warrants/ Deferred
Options Consulting Accumulated
Outstanding Fees Deficit Total
----------------------------------------------------------
Balance at December 31, 2001 $ 4,383,334 $ (98,406) $ (25,631,129) $(6,154,571)
Conversion of preferred shares to common - - - -
Issuance of common shares in connection with notes payable - - - 18,798
Issuance of warrants for services and with consulting agreements 102,118 - - 102,118
Amortization of deferred consulting fees - 73,232 - 73,232
Issuance of warrants with notes payable 232,259 - - 232,259
Issuance of common stock for debt guarantee - - - 30,750
Imputed interest on notes payable - - - 28,686
Cancellation of warrants issued for services (125,197) - - (125,197)
Preferred stock dividends - - (749,725) (749,725)
Issuance of common shares as payment of preferred stock dividends - - - 750,353
Net income - - 330,183 330,183
----------------------------------------------------------
Balance at December 31, 2002 4,592,514 (25,174) (26,050,671) (5,463,114)
Conversion of preferred shares to common - - - -
Issuance of preferred stock in connection with the I-Link
acquisition - - - 1,613,883
Exercise warrants to purchase Common Stock, net of issuance costs (385,055) - - 1,010,017
Exercise employee options to purchase Common Stock - - - 55,000
Issuance of common shares in connection with notes repayment - - - -
Repurchase shares from stockholders - - - (4,851)
Amortization of deferred consulting fees - 25,174 - 25,174
Issuance of warrants for services 25,341 - - 25,341
Issuance of common stock for debt guarantee - - - 36,299
Imputed interest on notes payable - - - 5,312
Cancellation of warrants issued for services (304,690) - - -
Preferred stock dividends - - (873,495) (873,495)
Issuance of common shares as payment of preferred stock dividends - - - 768,545
Net income - - 1,174,639 1,174,639
----------------------------------------------------------
Balance at December 31, 2003 $ 3,928,110 $ - $ (25,749,527) $(1,627,250)
==========================================================
See accompanying notes
52
BUYERS UNITED, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------
2003 2002
---- ----
Cash flows from operating activities:
Net income $ 1,174,639 $ 330,183
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 3,863,516 1,191,196
Amortization included in interest expense resulting from
issuing stock with notes 5,312 28,686
Amortization of discount on notes payable 414,301 237,444
Amortization of note financing costs 115,182 174,977
Amortization of deferred consulting fees 25,174 73,232
Expense related to the grant of options to purchase common shares - (23,079)
-------------- --------------
Changes in operating assets and liabilities:
Accounts receivable (2,512,269) (3,378,341)
Other assets (697,427) (2,379,009)
Checks in excess of available cash balances - (186,866)
Accounts payable 4,711,897 1,821,236
Accrued liabilities 278,315 432,183
---------------------------------------
Net cash provided by (used in) operating activities 7,378,640 (1,678,158)
---------------------------------------
Cash flows from investing activities:
Increase in other assets (167,360) (194,915)
Purchases of property and equipment (1,574,986) (317,399)
Purchase of customer accounts - (3,000,000)
---------------------------------------
Net cash used in investing activities (1,742,346) (3,512,314)
---------------------------------------
Cash flows from financing activities:
Restricted cash (985,334) 106,310
Net borrowings and payments under line of credit 2,817,530 702,080
Borrowings under notes payable, net of debt issuance costs 2,299,955 7,818,850
Principal payments on notes payable and other long-term obligations (8,767,587) (2,499,508)
Exercise of warrants and employee options, net of offering costs 1,065,018 -
Repurchase of shares from stockholders with less than 100 shares (4,852) -
---------------------------------------
Net cash provided by (used in) financing activities (3,575,270) 6,127,732
---------------------------------------
Net increase in cash and cash equivalents 2,061,024 937,260
Cash at the beginning of the period 994,360 57,100
---------------------------------------
Cash at the end of the period $ 3,055,384 $ 994,360
=======================================
See accompanying notes
53
BUYERS UNITED, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------
2003 2002
---- ----
Supplemental cash flow information:
Cash paid for interest $ 1,208,543 $ 890,490
Supplemental schedule of noncash investing and financing activities:
Issuance of common shares in payment of preferred stock dividend $ 768,574 $ 750,353
Issuance of common shares in payment of deferred financing costs - 18,793
Issuance of common shares for officer's personal guaranty 36,300 30,750
Issuance of warrants with promissory notes - 232,259
Accrual of dividend payable on preferred stock 873,495 749,725
Retire and replace note payable 800,000 -
Acquire customers from Touch America 3,411,421 -
Acquire customers from Glyphics, Inc. 543,558 -
Issuance of preferred stock to acquire VoIP Network assets 1,705,236 -
Convert accrued interest to note payable 435,388 -
Capital expenditures financed with capital lease obligation 100,691 -
See accompanying notes
54
BUYERS UNITED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003
NOTE 1 - DESCRIPTION OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization
Buyers United, Inc. ("the Company") was incorporated on August 23, 1994 in the
state of Utah and was reincorporated in the state of Delaware on April 9, 1999.
During 2003, the Company established a wholly-owned subsidiary in Virginia for
the purpose of conducting business in that state.
Buyers United is an aggregator and provider of telecommunications services. The
Company contracts with a number of third party providers for the right to resell
the various telecommunication services and products they provide, and then
offers all of these various services to its customers. The Company also operates
a dedicated VoIP Network, and advanced customer contact handling/management
software applications that enable it to offer enhanced services to customers.
The variety of services and products the Company offers allows the customer to
buy only those telecommunications services it needs from one source, combine
those services in a customized package, receive one bill for those services, and
make one call to Buyers United if a service problem or billing issue arises.
Summary of Significant Accounting Policies
Principles of Consolidation: The accompanying consolidated financial statements
include the accounts of Buyers United, Inc. and its wholly-owned subsidiary. All
significant intercompany accounts and transactions have been eliminated upon
consolidation.
Use of Estimates in the Preparation of Financial Statements: The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates. Significant
estimates include the allowance for doubtful accounts and attrition rates used
to determine the estimated useful lives of customer lists acquired.
Revenue Recognition: The Company's revenue recognition policy with respect to
reseller agreements is to record gross revenues and receivables from customers
when the Company acts as principal in the transaction; takes title to the
products or services; and has risks and rewards of ownership, such as risk of
loss for collection, delivery, or returns. Revenues from sales of services are
recognized upon providing the services to the customers.
Cash and cash equivalents: All highly liquid assets with an original maturity of
three months or less are considered to be cash equivalents.
Restricted Cash: In accordance with the Company's agreements with RFC Capital
Corp. (Note 5) and with certain vendors, the Company maintains a restricted cash
account for the collection of the Company's receivables. As of December 31,
2003, the Company had $1.6 million of cash that was restricted.
Accounts Receivable and Allowance for Doubtful Accounts: Accounts receivable is
comprised of amounts billed and billable to customers, net of an allowance for
uncollectible amounts. The accounts receivable balance outstanding as of
December 31, 2003 is comprised of the following:
Billed amounts $ 9,863,111
Unbilled amounts 1,230,372
-------------
11,093,483
Less: allowance for uncollectible accounts (2,931,000)
-------------
$ 8,162,483
=============
55
Finance charges are assessed to accounts once the amount owed is past due based
on their specific terms. The allowance for doubtful accounts is estimated by
management and is based on specific information about customer accounts, past
loss experience, and general economic conditions. An account is written off by
management when deemed uncollectible, although collections efforts may continue.
Property and Equipment: Property and equipment are stated at cost. Major
additions and improvements are capitalized, while minor repairs and maintenance
costs are expensed when incurred. In accordance with Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," the Company capitalizes certain costs incurred for the
development of internal use software. These costs include the costs associated
with coding, software configuration, upgrades, and enhancements. Of such costs
the Company capitalized approximately $118,000 and $127,000 during 2003 and
2002, respectively.
Depreciation and amortization are computed using the straight-line method over
the estimated useful lives of the related assets as follows:
Computer and office equipment 2 to 3 years
Internal-use software 2 years
Furniture and fixtures 3 to 7 years
Advertising Costs: The Company advertises its services through traditional
venues such as print media to the general public. Costs associated with these
advertising efforts are expensed as incurred, and were $27,438 and $29,781 for
the years ended December 31, 2003 and 2002, respectively.
Fair Value of Financial Instruments: The carrying amounts reported in the
accompanying consolidated balance sheet for cash, receivables, and accounts
payable approximate fair values because of the immediate or short-term
maturities of these financial instruments. The fair value of the Company's notes
payable and preferred stock also approximate fair value based on current rates
for similar debt and fixed-rate instruments.
Debt Issuance Costs: As an inducement to various investors, shareholders, and
board members to lend monies to the Company, shares of common stock and warrants
to purchase shares of common stock were issued to them. The fair market value of
those shares at the date of issuance has been capitalized as debt issuance costs
and is being amortized over the life of the loans. Amortization of these costs
for the years ended December 31, 2003 and 2002 was $414,298 and $237,446,
respectively, and are included in interest expense.
Stock-Based Compensation: Employee compensation expense via stock option grants
is reported using the intrinsic method. No stock option-based compensation
expense is included in net income (loss) as all options granted had an exercise
price equal to or greater than the market price of the underlying common stock
at the date of grant. The following table illustrates the effect on net income
(loss) and earnings (loss) per share if expense was measured using the fair
value recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation":
2003 2002
---- ----
Net income (loss) applicable to common stockholders:
As reported $ 301,144 $ (419,542)
Pro forma stock option-based compensation (307,747) (748,857)
Pro forma net loss applicable
to common stockholders $ (6,603) $(1,168,399)
Net income (loss) per common share:
As reported:
Basic $ 0.05 $ (0.07)
Diluted 0.04 (0.07)
Pro forma
Basic $ - $ (0.20)
Diluted - (0.20)
The fair value of the options granted during 2003 and 2002 was estimated at
the date of grant using the following weighted average assumptions:
56
2003 2002
---- ----
Risk-free interest rate 2.89% 3.71%
Dividend yield - -
Expected volatility 75% 104%
Weighted average expected life 4.8 years 4.7 years
The weighted average fair values of options granted during the years ended
December 31, 2003 and 2002 was $1.42 and $1.01, respectively. The pro forma
effects of applying SFAS No. 123 are not indicative of future amounts.
Additional awards in future years are anticipated.
Income Taxes: The Company recognizes a liability or asset for the deferred
income tax consequences of all temporary differences between the tax bases of
assets and liabilities and their reported amounts in the financial statements
that will result in taxable or deductible amounts in future years when the
reported amounts of the assets and liabilities are recovered or settled. These
deferred income tax assets or liabilities are measured using the enacted tax
rates that will be in effect when the differences are expected to reverse.
Recognition of deferred tax assets is limited to amounts considered by
management to be more likely than not of realization in future periods.
Net Income (Loss) Per Common Share : Basic net income (loss) per common share
("Basic EPS") excludes dilution and is computed by dividing net income (loss)
applicable to common shareholders by the weighted average number of common
shares outstanding during the year. Diluted net income (loss) per common share
("Diluted EPS") reflects the potential dilution that could occur if stock
options or other common stock equivalents were exercised or converted into
common stock. The computation of Diluted EPS does not assume exercise or
conversion of securities that would have an antidilutive effect on net loss per
common share.
As of December 31, 2003, outstanding options of employees and directors, along
with warrants held by investors which together aggregated 469,599 in accordance
with the Treasury Stock method were included in the computation of EPS.
5,457,760 shares of common stock issuable upon the conversion of preferred stock
were excluded from the computation of diluted EPS as their effect was
antidilutive.
As of December 31, 2002, outstanding options of employees and directors to
purchase 3,592,721 shares of common stock; 4,634,000 shares of common stock
issuable upon the conversion of preferred stock; and 5,529,282 shares of common
stock issuable upon exercise of warrants to purchase common stock were not
included in the computation of Diluted EPS because they would be antidilutive.
Recent Accounting Pronouncements:
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statement 4,
44, and 64, Amendment of FASB Statements 13, and Technical Corrections." SFAS
No. 145 rescinds the provisions of SFAS No. 4 that requires companies to
classify certain gains and losses from debt extinguishments as extraordinary
items and amends the provisions of SFAS No. 13 to require that certain lease
modifications be treated as sale/leaseback transactions. The provisions of SFAS
No. 145 related to classification of debt extinguishments are effective for
fiscal years beginning after May 15, 2002. Commencing January 1, 2003 the
Company will classify debt extinguishments costs within income from operations.
The provisions of SFAS No. 145 related to lease modifications are effective for
transactions occurring after May 15, 2002. The adoption of this statement on
January 2, 2003 did not have a material impact on the Company's financial
position or results of operations.
In December 2002 the FASB issued SFAS No. 148 "Accounting for Stock Based
Compensation - Transition and Disclosure." This statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation" to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. This amendment also changes the
disclosure requirements of SFAS No. 123 to require more prominent disclosures in
both annual and interim financial statements about the methods of accounting for
stock-based employee compensation and the effects of the method used on reported
amounts. SFAS No. 148 is effective for fiscal years ending after December 15,
2002. The Company has opted to continue accounting for stock options under the
intrinsic value method prescribed in APB Opinion No. 25 for the years ended
December 31, 2003 and 2002. In addition, the Company has complied with the
prominent disclosure requirements of SFAS No. 148.
57
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS No.
150"). SFAS No. 150 modifies the accounting for certain financial instruments
that, under previous guidance, issuers could account for as equity. SFAS No. 150
requires that those instruments be classified as liabilities. SFAS No. 150 is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period that
began after June 15, 2003. It is to be implemented by reporting the cumulative
effect of a change in an accounting principle for financial instruments created
before the issuance date of SFAS No. 150 and still existing at the beginning of
the interim period of adoption. Restatement is not permitted. The Company's
adoption of this Statement on July 1, 2003 did not have a material impact on its
consolidated results of operations or financial position.
NOTE 2 - ACQUISITIONS
In October 2003, Buyers United acquired the exclusive right to sell and manage
the enhanced telecommunications functions of MyACD, Inc. ("MyACD"), with a
one-year option to purchase it at a predetermined price. During the term of the
agreement, Buyers United has the sole right to manage sales, service and billing
of MyACD services. Under the agreement MyACD will continue to provide enhanced
service development and configuration and Buyers United will reimburse MyACD for
actual costs related to these activities.
During August 2003, Buyers United purchased approximately 12,000 long distance
customers from Glyphics Communications, Inc. for $543,558.
On December 20, 2002, Buyers United entered into an agreement with Touch
America, Inc., a subsidiary of Touch America Holdings, Inc., to purchase a
substantial number of its switched voice telecommunication customers, including
the carrier identification code used to service those customers. In June 2003,
the Company amended the purchase agreement to acquire additional switched voice
and dedicated telecommunications customers and correct discrepancies in the list
of customers originally purchased in December 2002. Buyers United did not
purchase any accounts receivable, equipment, or other assets of Touch America.
The total purchase price was $6.5 million. Buyers United made an initial payment
of $3 million to Touch America in December 2002 and has made additional cash
payments totaling $3.4 million through March 4, 2004. The balance of $93,988 is
expected to be paid in April 2004.
On December 6, 2002, Buyers United entered into the Asset Purchase Agreement and
Software License Agreement to purchase assets of I-Link, Inc., and its
subsidiary, I-Link Communications, Inc., and license in perpetuity software
developed by I-Link for the operation of a Voice over Internet Protocol ("VoIP")
Network. Customer billings and related expenses incurred pursuant to a related
Management Agreement between the parties were included in Buyers United's
general and administrative expenses beginning December 6, 2002. The transaction
closed effective May 1, 2003, at which time the Company began to recognize
revenue earned and expenses incurred.
The assets acquired include dedicated equipment required for operating the VoIP
Network, customers of I-Link serviced through the network, carrier
identifications codes, and certain trademarks. In consideration for the assets
and software license, Buyers United issued to I-Link 246,430 shares of Series B
Convertible Preferred Stock with a fair market value of $1.4 million, assumed
certain liabilities, and agreed to issue an additional 53,570 shares of Series B
Convertible Preferred Stock in equal monthly installments over a term of 10
months commencing June 1, 2003, subject to satisfaction of certain conditions
pertaining to provisioning of one of the former I-Link customers acquired in the
transaction.
In connection with the closing, the parties together with Counsel Corporation,
an Ontario corporation, and Counsel Communications LLC, a Delaware limited
liability company, both affiliates of I-Link, entered into a Reimbursement
Agreement pursuant to which Counsel Corporation, Counsel Communications, and
I-Link agreed to reimburse Buyers United for any loss sustained as a result of
any claims asserted against the assets acquired from I-Link by certain creditors
of I-Link. Out of the shares it received in the transaction I-Link deposited in
escrow 40,000 shares that may be applied to reimburse any such loss. This is in
addition to 25,000 shares I-Link received in the transaction that has been
deposited in escrow under the Asset Purchase Agreement to satisfy any claims for
indemnification under the Asset Purchase Agreement. During 2004, these remaining
65,000 shares were delivered to Counsel Corporation.
58
The following table presents a summary of the estimated fair values of the
assets acquired and liabilities assumed as of December 31, 2003:
Computer and telecommunications switching equipment $ 754,966
Customer list 553,898
License on technology and patents 1,182,933
Carrier identification code 135,933
Deposit with a vendor 110,000
------------
Total assets acquired 2,737,730
------------
Accounts payable and accrued liabilities 737,829
Acquisition costs 294,665
------------
Total liabilities assumed 1,032,494
------------
Net assets acquired $ 1,705,236
============
The customer list and licensed technology will be amortized over a period of
four years.
The following unaudited pro forma financial information presents results as if
the acquisition had occurred at the beginning of the respective periods:
Year ended
December 31,
2003 2002
---- ----
Net revenue $65,498,766 $37,965,060
Net income (loss) applicable to
common stockholders $ 19,175 $(5,806,566)
Basic and diluted net income (loss) per share $ - $ (1.01)
These pro forma results have been prepared for comparative purposes only and
include certain adjustments such as additional amortization expense as a result
of identifiable tangible and intangible assets arising from the acquisition. The
pro forma results are not necessarily indicative either of the results of
operations that actually would have resulted had the acquisition been in effect
at the beginning of the respective periods, or of results to be achieved in the
future.
NOTE 3 - PROPERTY AND EQUIPMENT
At December 31, 2003, property and equipment consisted of the following:
Computer and office equipment $ 3,724,164
Internal-use software 268,723
Furniture and fixtures 302,027
-------------
4,294,914
Accumulated depreciation and amortization (1,870,272)
-------------
$ 2,424,642
=============
NOTE 4 - INTANGIBLE ASSETS
At December 31, 2003, intangible assets consisted of the following:
Gross Accumulated Intangible
asset amortization assets, net
------------- ------------ -----------
Customer lists $ 10,760,307 $ 3,840,679 $ 6,919,628
Technology and patents 1,318,865 219,811 1,099,054
------------- ----------- ------------
$ 12,079,172 $ 4,060,490 $ 8,018,682
============= =========== ============
59
The Company participated in a direct response marketing campaign with
LowerMyBills.com, Inc. (LMB), a web-based comparison shopping service. The fees
associated with this advertising campaign were deferred and aggregated $2.8
million until June 2003, when the Company ceased participating in the program.
Amortization expense for these customers in 2003 and 2002, was $1.2 million and
$761,091, respectively.
The Company also acquired new customer lists related to I-Link, Touch America,
and Glyphics in 2003, which are predominantly corporate customers. In addition,
the Company acquired technology and licenses related to I-Link in 2003.
Amortization expense during 2003 for the additional customers was $1.9 million,
and was $219,811 for the technology and licenses.
The Company estimates the useful lives of its acquired customer lists based upon
attrition rates experienced by the Company. Historically, management estimated
the useful lives between 24 to 36 months based upon the type of customer and
service provided. Based upon recent attrition information which showed that
customers were averaging longer lives, the Company changed the estimated useful
lives for its customer lists prospectively in the fourth quarter of 2003. LMB
customer lives were increased from 24 to 36 months. The impact of this change
was a $204,500 decrease in amortization expense in the fourth quarter of 2003.
The customer lives of Touch America, I-Link and Glyphics were changed from 30 or
36 months to 48 months. The impact of this change was a $306,053 decrease in
amortization expense in the fourth quarter of 2003.
Amortization expense for all intangible assets during the four-year period
ending December 31, 2007 is estimated to be $2.7 million, $2.5 million, $2.2
million, and $600,000, respectively.
NOTE 5 - LINE OF CREDIT
Buyers United has a line of credit agreement with RFC Capital Corporation that
expires in January 2006. The available borrowing limit is $5 million. Interest
accrues at prime plus three percent, which was 7.00% as of December 31, 2003.
During 2002, the interest rate on the line was prime plus six percent, which was
10.25% as of December 31, 2002. The facility allows the Company to obtain
financing on its eligible accounts receivable, including unbilled receivables
and regular monthly billings. The facility is collateralized by the underlying
receivables. On December 31, 2003, Buyers United had financed the maximum amount
available based on eligible accounts receivable at that time. This amount, less
draws by RFC applied against the outstanding amount, aggregated $4.1 million.
The facility requires Buyers United to maintain a restricted cash account for
the collection of the receivables. As of December 31, 2003, Buyers United had
$1.2 million of restricted cash associated with the RFC arrangement.
NOTE 6 - ACCRUED LIABILITIES
At December 31, 2003, accrued liabilities consisted of the following:
Accrued commissions $ 669,523
Accrued dividends 478,599
Other 680,742
------------
$ 1,828,864
============
NOTE 7 - LONG-TERM DEBT AND NOTES PAYABLE
Long-term debt consists of the following:
Unsecured notes payable to the Chairman of the Board,
bearing interest at 12 percent, payable monthly.
Principal and unpaid interest are due and payable in
July 2004, except for $112,500 which matures in December
2004, and $348,825 which matures in July 2005. $ 2,726,325
Unsecured notes payable to two Directors bearing
interest at 12 percent, payable monthly. Maturity dates
vary, from July 2004 through January 2005. 800,000
60
Unsecured note payable to a relative of a Director,
bearing interest at 12 percent payable monthly.
Principal and unpaid interest due in January 2005. 100,000
Promissory note payable to an individual bearing
interest at 12 percent, payable monthly. Secured by
equipment. Principal and unpaid interest due in July
2004. 293,333
Promissory notes payable to two individuals bearing
interest at 12 percent, payable monthly. Secured by
equipment. Principal and unpaid interest due in the
summer of 2006. 191,954
Unsecured promissory notes bearing interest at ten
percent and 12 percent, payable monthly. Principal
payments due monthly, based on 20 percent to 40 percent
of billings collected from specifically-designated
customers referred from LowerMyBills.com, Inc. ("LMB").
The majority of these notes have no maturity date. The
Company believes that all of the principal will be
repaid during 2004, based on expected cash collections
from these customers. 475,223
Unsecured promissory notes bearing interest at ten
percent, payable monthly. Principal payments due
monthly, based on ten percent of billings collected from
customers acquired from Touch America, Inc. These notes
have no maturity date. The Company believes that all
principal will be repaid in 2005, based on expected cash
collections from these customers. 2,358,412
Unsecured promissory note bearing interest at 10
percent, payable monthly. Principal payments due
monthly, based on 30 percent of billings collected from
customers recently acquired from Glyphics, Inc. The note
has no maturity date. The Company believes that all
principal will be repaid by the end of 2004, based on
expected cash collections from these customers. 631,211
Note payable to Touch America, Inc., with interest
imputed at four percent, payable monthly. Principal
payments due monthly, based on 7.2 percent of billings
collected from customers acquired from Touch America,
Inc. The obligation has no maturity date. The Company
expects that all principal will be repaid by April 2004,
based on expected cash collections from these customers. 473,437
Other 295,238
Capital leases 82,477
-----------
8,427,610
Less current portion (7,781,484)
-----------
$ 646,126
===========
Long-term debt maturities are as follows:
2004 $ 7,781,484
2005 623,719
2006 22,407
-----------
8,427,610
Less current maturities (7,781,484)
-----------
$ 646,126
===========
61
On February 28, 2003, the Company retired its $1.1 million note payable by
paying $250,000 in cash and issuing a new promissory note for $800,000. In
addition, the Company issued 50,000 shares of common stock in connection with
the original agreement. At December 31, 2003, the amount remaining due, less
issuance costs, was $631,211 (see above).
In connection with some of the LMB-related unsecured promissory notes, two-year
warrants to purchase 562,950 shares of common stock at $2.50 per share were
issued to the noteholders. Warrants for an additional 94,950 shares have also
been issued to the sales agents. The estimated fair value of the warrants of
$264,717, based on using the Black-Scholes pricing model, was allocated to the
warrants and recorded as a discount to the carrying value of the notes. The
Company paid approximately $232,000 in commissions to sales agents. The Company
paid approximately $152,000 in commissions to sales agents in connection with
the Touch America-related unsecured promissory notes. All these commission costs
are also included in the discounts to the carrying value of the notes. The
discount is being amortized to interest expense over the respective notes'
estimated payment terms.
NOTE 8 - LEASES
Buyers United leases executive office space in Bluffdale, Utah, a suburb of Salt
Lake City. The offices consist of approximately 30,000 square feet. The current
monthly lease rate is $32,307. The lease for office space expires in January
2007, but the Company has an option to renew the lease for an additional three
to five years. Through November 2004, Buyers United is leasing 14,339 square
feet of space at 13751 S. Wadsworth Park Drive, Draper, Utah, at a monthly cost
of $16,728.
The Company also has one capital lease for computer software. The following is a
schedule of future minimum payments under the leases as of December 31, 2003:
Capital Operating
Year ending December 31, leases leases
2004 ......................................... $ 34,690 $ 571,692
2005 ......................................... 34,690 397,373
2006 ......................................... 23,128 407,307
2007 ......................................... - 417,490
Total future minimum lease payments ...... 92,508 $ 1,793,862
===========
Less amount representing interest ............ (10,031)
-----------
Total obligations under capital leases ... 82,477
Less current portion ......................... (28,752)
-----------
Capital lease obligations, net of
current portion $ 53,725
===========
Rent expense was approximately $519,500 and $348,300 for the years ended
December 31, 2003 and 2002, respectively.
NOTE 9 - INCOME TAXES
The components of the Company's net deferred income tax assets and liabilities
are as follows:
Deferred income tax assets:
Net operating loss carryforwards $ 5,001,000
Reserves and accrued liabilities 1,275,000
-------------
Total deferred income tax assets 6,276,000
Valuation allowance (5,897,000)
-------------
Net deferred income tax asset 379,000
-------------
Deferred income tax liabilities:
Tax depreciation in excess of book depreciation (379,000)
-------------
Net deferred income tax liability (379,000)
-------------
Net deferred income taxes $ -
=============
62
As of December 31, 2003, the Company had net operating loss carryforwards for
federal income tax reporting purposes of approximately $13,336,000. The tax net
operating loss carryforwards will expire beginning in 2012.
Inasmuch as the Company's history includes accumulated net operating losses, it
is uncertain as to whether the Company's deferred tax asset can be fully
realized. Accordingly, a valuation allowance has been recorded to reduce the
deferred income tax assets. The net change in the valuation allowance for
deferred tax assets during the year ended December 31, 2003 was a decrease of
$416,000. During 2003 and 2002 no income tax expense was recorded due the
reduction of the valuation allowance.
NOTE 10 - CAPITAL TRANSACTIONS
Preferred Stock: The Board of Directors is authorized to classify any shares of
the Company's authorized but unissued preferred stock in one or more series.
With respect to each series, the Board of Directors is authorized to determine
the number of shares that constitutes such series; the rate of dividend, if any,
payable on shares of such series; whether the shares of such series shall be
cumulative, non-cumulative, or partially cumulative as to dividends and the
dates from which any cumulative dividends are to accumulate; whether the shares
of such series may be redeemed, and, if so, the price or prices at which and the
terms and conditions on which shares of such series may be redeemed; the amount
payable upon shares of such series in the event of the voluntary or involuntary
dissolution, liquidation, or winding up of the affairs of the Company; the
sinking fund provisions, if any, for the redemption of shares of such series;
the voting rights, if any, of the shares of such series; the terms and
conditions, if any, on which shares of such series may be converted into shares
of capital stock of the Company of any other class or series; whether the shares
of such series are to be preferred over shares of capital stock of the Company
of any other class or series as to dividends or upon the voluntary or
involuntary dissolution, liquidation, or termination of the affairs of the
Company or otherwise; and any other characteristics, preferences, limitations,
rights, privileges, immunities, or terms.
Series A 8 percent Cumulative Convertible Preferred Stock: During 1999, the
Board of Directors authorized the issuance of 2,000,000 shares of Series A 8
percent Cumulative Convertible Preferred Stock ("Series A Preferred Stock") at
an offering price of $2.00 per share. Gross proceeds of $4 million were raised
upon sale of the shares.
The Series A Preferred Stock is convertible to common stock at any time at the
election of the holder and, under limited circumstances, at the election of the
Company. The conversion rate is one for one, subject to adjustment in the event
of a recapitalization, reorganization, or other corporate restructuring or in
the event that the Company shall sell or otherwise issue securities at a price
below $2.00 per share or the then adjusted conversion price. The Series A
Preferred Stock can be redeemed at the Company's election at any time commencing
January 1, 2005 at a redemption price of $2.00 per share plus all accrued
dividends as of the redemption date. During 2002 certain stockholders converted
5,000 Series A preferred shares into common shares.
Series B 8 percent Cumulative Convertible Preferred Stock: In September 2000,
the Board of Directors authorized the issuance of 1,234,500 shares of Series B
8% Cumulative Convertible Preferred Stock ("Series B Preferred Stock") and
related warrants to purchase common shares at an offering price of $10.00 per
unit. Each unit consists of one share of Series B Preferred Stock and five
warrants to purchase one share of common stock at an exercise price of $2.50 per
share. During 2000, various investors made loans to the Company and subsequently
elected to exchange their promissory notes for units. In addition to the
converted loans of $2.5 million, the Company raised $2 million through the
issuance of units through December 31, 2000 and $1.1 million through the
issuance of units in 2001.
In connection with the unit offering, the Company agreed to pay the Placement
Agent a sales commission and expense allowance aggregating 13 percent of the
gross proceeds from the sale of the Series B Preferred Stock, in addition to ten
percent of the gross proceeds of certain related bridge financing. The Company
also incurred approximately $23,000 of direct expenses in connection with the
offering. As additional consideration, the Company agreed to issue to the
Placement Agent warrants to purchase 319,300 shares of the Company's common
stock at an exercise price of $2.50 per share.
As part of the Series B Preferred Stock offering, the Company issued 2,269,000
warrants to purchase common stock at $2.50 per share. The Company allocated the
net proceeds from the offering of $4.2 million between the Series B Preferred
Stock and the warrants based on estimated relative fair values. The Series B
Preferred Stock was recorded at $2.4 million, and the warrants were recorded at
$1.8 million. The estimated fair value of the warrants was determined using the
Black-Scholes pricing model. The Series B Preferred Stock is convertible to
63
common stock at any time at the election of the holder and, under limited
circumstances, at the election of the Company. The conversion rate is five for
one, subject to adjustment in the event of a recapitalization, reorganization,
or other corporate restructuring or in the event that the Company shall sell or
otherwise issue securities at a price below $2.00 per share or the then adjusted
conversion price.
During the three months ended March 31, 2001, the Company issued an additional
110,000 shares of preferred stock and 550,000 warrants to purchase common stock.
The Company allocated the net proceeds from the offering of $1.1 million between
the Series B Preferred Stock and the warrants based on estimated relative fair
values. Accordingly, the stock was recorded at $794,822, and the warrants were
recorded at $302,401. In connection with these additional Series B shares, the
intrinsic value of the beneficial conversion feature of $20,498 was reflected in
the accompanying 2001 consolidated financial statements as a preferred stock
dividend and as an increase to additional paid in capital. The Series B
Preferred Stock Offering closed on April 13, 2001.
In May 2002 the Board of Directors approved a plan to modify the exercise price
on certain Preferred Stock and promissory note-related warrants from $2.50 to
$2.00 per share, extend the expiration date of certain warrants from December
31, 2002 to December 31, 2004, and amend the redemption provisions of certain
warrants so that the warrants could be called for redemption when the market
price for the Company's common stock is $4.00 per share, rather than $6.00 per
share.
On December 6, 2002, Buyers United entered into the Asset Purchase Agreement and
Software License Agreement to purchase certain assets and assume certain
liabilities of I-Link, Inc., and its subsidiary, I-Link Communications, Inc. In
consideration, Buyers United issued to I-Link 246,430 shares of Series B
Convertible Preferred Stock with a fair market value of $1.4 million, and agreed
to issue an additional 53,570 shares of Series B Convertible Preferred Stock in
equal monthly installments over a term of 10 months commencing June 1, 2003. The
final installment was issued March 1, 2004.
During 2003, six of the stockholders converted a total of 116,000 Series B
preferred shares into 580,000 common shares. During 2002, one of the
stockholders converted 10,000 Series B preferred shares into 50,000 common
shares.
Both Series A and B Preferred Stock still outstanding can be redeemed at the
Company's election at any time commencing January 1, 2005, at the applicable
redemption price plus all accrued dividends as of the redemption date.
Cumulative dividends accrue on both Series A and B Preferred Stock at the rate
of 8% per annum from the date of original issue and are payable semi-annually on
June 30 and December 31 of each year out of funds legally available for the
payment of dividends. Dividends are payable in cash or common stock at the
election of the Company. If paid in common stock, the number of shares issued
will be based on the average of the closing bid prices for the common stock over
the five trading days immediately prior to the dividend payment date. If the
Company fails to pay any dividend within 60 days of its due date, the conversion
price (see below) is adjusted downward by $0.25 per share for each occurrence.
During the years ended December 31, 2003 and 2002, the Company declared
dividends aggregating $873,495 and $749,725, respectively, and to satisfy
payment obligations, issued a total of 427,096 and 574,635 shares of common
stock, respectively. As of December 31, 2003, the Company had accrued dividends
payable in the amount of $478,599. In February 2004, the Company settled the
dividend payable by issuing 171,055 shares of common stock.
The Series A and B Preferred Stock has no voting rights, except as required by
the General Corporation Laws of Delaware that require class votes on certain
corporate matters and matters affecting the rights of the holders of the
Preferred Stock. The Preferred Stock is senior in right of payment in the event
of liquidation and with respect to dividends to the common stock and all other
subsequent preferred stock issuances that may be authorized. The Series A
Preferred Stock has a liquidation preference of $2.00 per share and the Series B
Preferred Stock has a liquidation preference of $10.00 per share.
Issuances of Common Stock: During January 2002 the Company issued 17,998 shares
of common stock in connection with the issuance of $179,998 of promissory notes,
at an aggregated fair market value of $18,798.
During February 2002 the Company issued 25,000 shares of stock to one of its
directors for providing a credit guaranty with respect to business expansion
activities. The fair market value of shares issuances was $30,750.
64
In March 2001, the Company entered into three-year marketing contracts with one
of its Series B Preferred stockholders. Under the terms of the contracts,
100,000 shares of common stock were issued with a fair market value of $125,000.
This amount was recorded on the balance sheet as a deferred consulting fee and
included in operating expenses on a straight-line basis over the life of the
contracts. During 2001, $39,931 was recorded in promotion expenses as a result
of this amortization. Consideration granted under the contracts' terms also
included options to purchase up to 150,000 additional shares of common stock at
$2.50 per share. These options vest gradually over the term of the contract.
These options are accounted for as variable plan options since the issuance of
these options was under the premise that the grantee will be providing current
and future services for the Company. Accordingly, using the Black-Scholes option
pricing model, $29,581 in consulting expense was recorded to reflect the vesting
of these options through December 31, 2001. During 2002 an additional $48,060 of
deferred consulting fees were amortized and included in promotion expenses, and
another $95,615 in consulting expense was recorded to reflect the vesting of
additional options. However, at the end of 2002 the Company and the stockholder
agreed to cancel one of the marketing contracts and to rescind the as-yet
unearned options. Accordingly, the Company included in promotion expenses an
additional $25,174 of remaining unamortized deferred consulting fees, and
recorded income of $125,197 to reflect the cancellation of the unearned options.
In January 2003 the Company issued 15,000 shares of stock to one of its
directors for providing a credit guaranty to one of its wholesale
telecommunication service providers. The fair market value of the stock was
$36,300.
During June 2003, the Company initiated a program to repurchase outstanding
common stock from shareholders of record with total holdings of 100 or fewer
shares. The offering price per share was $1.75. The program ended in September
2003 after the Company had repurchased 2,774 shares.
Warrants to Purchase Common Shares: As mentioned above, the Company issued
warrants in connection with its Series B preferred stock offering and in
connection with certain marketing contracts.
In connection with some of the LMB-related unsecured promissory notes, two-year
warrants to purchase a total 562,950 shares of common stock at $2.50 per share
were issued to the noteholders during the two years ended December 31, 2002.
Warrants for an additional 97,950 shares were also issued to the sales agents.
The estimated fair value of the warrants of $264,717, based on using the
Black-Scholes pricing model, was allocated to the warrants and recorded as a
discount to the carrying value of the notes. The discount is being amortized to
interest expense over the estimated term of the notes.
In November 2003 the Company issued 25,000 warrants to a consulting company. The
estimated fair value of the warrants of $25,341, based on using the
Black-Scholes pricing model, will be amortized over the life of the contract
into general and administrative expense.
During 2003, investors exercised warrants to purchase 522,500 shares of Common
Stock, in exchange for proceeds which aggregated $1,043,750.
All of the warrants were exercisable at December 31, 2003. The following tables
summarize the warrant activity for 2003 and 2002: Weighted Average Price
Exercise Warrants Range Price
Balance at December 31, 2001 5,345,732 $1.25 - $5.13 $2.44
Cancelled or expired (250,000) $2.50 - $2.85 $2.64
Issued 433,550 $2.00 - $2.50 $2.01
----------
Balance at December 31, 2002 5,529,282 $1.25 - $2.95 $2.00
Cancelled or expired (181,750) $2.00 - $2.95 $2.49
Exercised (522,500) $1.25 - $2.50 $2.00
Issued 25,000 $2.50 $2.50
----------
Balance at December 31, 2003 4,850,032 $1.25 - $2.50 $2.05
==========
65
Stock Options:
--------------
Long-Term Stock Incentive Plan: Effective March 11, 1999, the Company
established the Buyers United International, Inc. Long-Term Stock Incentive Plan
("the Stock Plan"). The Stock Plan provides for a maximum of 1,200,000 shares of
common stock of the Company to be awarded to participants and their
beneficiaries. A Committee, as determined by the Board of Directors, determines
and designates the eligible participants and awards to be granted under the
Stock Plan. The Committee may grant incentive stock options; non-qualified
options; stock appreciation rights ("SAR"); and on a limited basis, stock
awards. The terms and exercise prices of options and SARs will be established by
the Committee; except that the exercise prices cannot be less than 100 percent
of the fair market value of a share of common stock on the date of grant. As of
December 31, 2003, incentive stock options to purchase a total of 893,653 shares
were outstanding.
Other Options: The Company's Board of Directors has from time to time also
authorized the grant of stock options to directors, officers, key employees, and
consultants as compensation and in connection with obtaining financing.
In virtually all cases, employee options vest over a period of from one to three
years, and expire from four to five years after the date the options were
granted. The following tables summarize the all stock option activity for 2003
and 2002:
Weighted
Average
Price Exercise
Options Range Price
------- ----- -----
Balance at December 31, 2001 2,818,585 $2.00 - $9.00 $2.69
Granted 902,913 $2.00 - $2.50 $2.31
Cancelled or expired (128,777) $2.00 - $9.00 $3.11
-----------
Balance at December 31, 2002 3,592,721 $2.00 - $5.39 $2.58
Granted 683,500 $2.00 - $2.64 $2.33
Exercised (27,500) 2.00 $2.00
Cancelled or expired (816,944) $2.00 - $4.00 $2.20
-----------
Balance at December 31, 2003 3,431,777 $2.00 - $5.39 $2.62
===========
A summary of the options outstanding and options exercisable at December 31,
2003 is as follows:
Options
Options Outstanding Exercisable
------------------------------------------------------ -------------------------
Average Weighted Options Weighted
Range of Remaining Average Exercisable at Average
Exercise Options Contractual Exercise December 31, Exercise
Prices Outstanding Life Price 2003 Price
-------- ----------- ----------- -------- -------------- --------
$2.00 - $3.99 3,207,926 3.6 years $ 2.45 2,512,261 $ 2.49
$4.00 - $5.39 223,851 2.3 years 5.13 223,851 5.13
---------- ----------
3,431,777 3.5 years $ 2.62 2,736,112 $ 2.70
========== ==========
Registration Statement on Form SB-2: On September 10, 2003, the Company filed a
registration statement on Form SB-2 with the Securities and Exchange Commission
to register for resale up to 8,779,333 shares of Common Stock that may be sold
from time to time by certain selling security holders listed in the registration
statement. At December 31, 2003 the selling security holders owned:
o Warrants to purchase 99,375 shares at a price of $1.25 per share
o Warrants to purchase 3,966,856 shares at a price of $2.00 per share
o Warrants to purchase 528,450 shares at a price of $2.50 per share
o Options to purchase 2,086,652 shares at prices ranging from $2.00 to
$5.392 per share
o Convertible notes in the amount of $1,162,500 convertible at $2.00 per
share
o Convertible notes in the amount of $1,775,000 convertible at $2.50 per
share
66
Buyers United will receive the proceeds from exercise of the warrants and
options and will benefit from extinguishment of the debt represented by the
convertible notes, but will not receive any proceeds or benefit from the resale
of the shares by the selling security holders.
In March 2004 the registration statement was temporarily suspended until the
Company can file an amendment updating the registration statement with its 2003
audited financial statements and other information.
NOTE 11 - RELATED PARTY TRANSACTIONS
During 2003 and 2002, certain board members and stockholders performed various
services to the Company. These services included, but were not limited to,
consulting, marketing and capital and debt raising activities. The Company
incurred $74,750 and $109,259 in fees associated with these services for the
years ended December 31, 2003 and 2002, respectively. Amounts outstanding
related to these services were $12,800 and $14,300 at December 31, 2003, and
2002, respectively. There are also several debt arrangements more fully
described in Note 7. Interest expense on obligations owed to related parties
during 2003 and 2002, respectively, was $414,523 and $453,361.
NOTE 12 - MAJOR SUPPLIERS
Approximately 70% and 80% of the Company's cost of revenue for the years ended
December 31, 2003 and 2002, respectively, was generated from two
telecommunication providers. As of December 31, 2003, the Company owed
approximately $3 million to these two providers. The Company has entered into
contractual agreements with these vendors. During 2002 one of these providers
had filed for bankruptcy protection under Chapter 11, and the other provider is
currently being scrutinized by the Securities and Exchange Commission over
certain accounting matters. Although the Company has not experienced a
disruption of service and feels it could replace either of these sources with
other wholesale telecommunication service providers, the effect on the Company's
operations of potentially losing either or both of these service providers is
unknown.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
In June 2001, Buyers United entered into a joint sales agreement with Infotopia,
Inc., a direct response marketer. In connection with the agreement, Infotopia
loaned $500,000 to Buyers United. Subsequent to entering into the sales
agreement, the two companies decided not to pursue further any joint activity.
In December 2001, Buyers United negotiated a settlement of the $500,000 loan in
which Buyers United paid $120,000 and issued 35,000 shares of common stock in
exchange for canceling the outstanding obligation plus $25,921 in accrued
interest. The stock had a fair market value of $22,401. Accordingly, based on
these amounts, the Company recorded a gain on the early extinguishments of the
debt in the amount of $383,520. However, unbeknownst to the Company, during 2001
Infotopia allegedly entered into a General Security Agreement with Sea Spray
Holdings, Ltd., which purportedly included the loan obligation. Sea Spray
asserted that it had a perfected security interest in the obligation and
demanded payment as successor-in-interest to Infotopia. The Company denied the
claim and filed an arbitration proceeding to resolve the issue. Sea Spray
attempted to pursue its claim in New York state court, which the Company removed
to federal court in New York, and the federal court dismissed the action
pursuant to an order to the effect Sea Spray must pursue its claims in the
arbitration proceeding. An arbitration hearing was held in December 2003, at
which Sea Spray failed to make any appearance or submission after receiving all
required notice. The arbitrator entered a default in favor of Buyers United and
its award further found in favor of Buyers United as a matter of the evidence
presented and as a matter of law. The Company believes this matter has been
resolved fully in its favor and that is has no obligation or liability to Sea
Spray.
Buyers United is the subject of certain other legal matters, which it considers
incidental to its business activities. It is the opinion of management, after
discussion with legal counsel, that the ultimate disposition of these other
matters will not have a material impact on the financial position, liquidity or
results of operations of Buyers United.
In connection with the MyACD agreements, MyACD will continue to provide enhanced
service development and configuration, and Buyers United will reimburse MyACD
for actual costs related to these activities.
67
NOTE 14 - SUBSEQUENT EVENTS
In January and February 2004, three Directors had exercised options to purchase
a total of 255,000 shares of Common Stock. Total proceeds received by the
Company in connection with these exercises was $555,000.
During the first three months of 2004, investors have exercised warrants to
purchase a total of 71,000 shares of Common Stock. Total proceeds received in
these transactions was $146,000.
In December 2003, a holder of 100,000 shares of Series B Convertible Preferred
Stock converted all of those shares to 500,000 shares of common stock. In
January 2004, the holder sold those common shares plus 14,560 additional shares,
or a total of 514,560 shares, to Buyers United for $500,000 in a privately
negotiated transaction.
Buyers United entered into an agreement to purchase 37 dedicated long distance
customers from Source Communications, LLC for $750,000 in February 2004. Closing
of the acquisition was subject to complying with applicable federal and state
regulation pertaining to transfer of the customers. All of the regulatory
requirements were satisfied and the acquisition of the customers is completed
On March 15, 2004 the Company closed a private placement to institutional and
accredited investors. The Company sold 3,782,000 shares of common stock at $2.30
per share, or a total of approximately $8.7 million. Net proceeds of the
offering after placement fees and expenses were approximately $8.1 million. The
net proceeds of the private placement are intended to be used for various
corporate purposes, including sales and marketing related programs, to fund
further development of our VoIP Network, reduction of debt, and for working
capital and other general corporate purposes.
In connection with the placement, Acceris Communications Inc., formerly I-link
Incorporated and the holder of 300,000 shares of Series B Convertible Preferred
Stock, converted all of its preferred stock to 1.5 million common shares.
Acceris subsequently sold 750,000 of those common shares to the investors in the
private placement at $2.30 per share. As a result of the conversion and sale,
Acceris Communications now holds 808,546 shares of the Company's common stock,
or approximately six percent of the 13 million shares of common stock
outstanding following completion of the private placement.
The private placement was made only to institutional and accredited investors in
a transaction exempt from the registration requirements of the Securities Act of
1933, as amended (the "Securities Act"). The shares of common stock sold have
not been registered under the Securities Act, or any state securities laws, and
unless so registered, may not be offered or sold in the United States absent
registration or an applicable exemption from the registration requirements of
the Securities Act and applicable state securities laws. The Company has agreed
to file a registration statement under the Securities Act for resale of the
common stock purchased by the investors in the private placement, the 808,546
shares of common stock held by Acceris, and 164,125 shares of common stock
issuable under a warrant granted to the placement agent.
68
TABLE OF CONTENTS
Prospectus Summary 2
Risk Factors 3
Information About Buyers United 7
Use of Proceeds 8
Market for Common Stock 8
Dividend Policy 8
Capitalization 9
Management's Discussion and
Analysis of Operating Results BUYERS UNITED, INC.
and Financial Condition 9
Business 14 8,779,333 Common Shares
Legal Proceedings 24 $0.0001 Par Value
Management 24
Compensation 27
Principal Stockholders 29
Certain Relationships and
Related Transactions 31
Description of Capital Stock 33
Plan of Distribution 36 -----------------------------------
Selling Security Holders 37 REOFFER PROSPECTUS
Legal Matters 40 -----------------------------------
Experts 40
Additional Information 40
Index to Financial Statements 41
No person has been authorized to give
any information or to make any
representations other than those
contained in this prospectus and, if
given or made, such information or
representations must not be relied
upon as having been authorized by us.
This prospectus does not constitute an
offer to sell or a solicitation of an
offer to buy any of the securities
offered to whom it is unlawful to make
such offer in any jurisdiction. ___________________ 2004
Neither the delivery of this
prospectus nor any sale made shall,
under any circumstances, create any
implication that information contained
in this prospectus is correct as of
any time subsequent to the date of
this prospectus or that there has been
no change in the affairs of Buyers
United since such date.
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Buyers United's Charter provides that, to the fullest extent that
limitations on the liability of directors and officers are permitted by the
Delaware General Corporation Law (the "DGCL"), no director or officer of Buyers
United shall have any liability to Buyers United or its stockholders for
monetary damages. The DGCL provides that a corporation's charter may include a
provision which restricts or limits the liability of its directors or officers
to the corporation or its stockholders for money damages except: (1) to the
extent that it is provided that the person actually received an improper benefit
or profit in money, property or services, for the amount of the benefit or
profit in money, property or services actually received, or (2) to the extent
that a judgment or other final adjudication adverse to the person is entered in
a proceeding based on a finding in the proceeding that the person's action, or
failure to act, was the result of active and deliberate dishonesty and was
material to the cause of action adjudicated in the proceeding. Buyers United's
Charter and Bylaws provide that Buyers United [shall] indemnify and advance
expenses to its currently acting and its former directors to the fullest extent
permitted by the DGCL and that Buyers United shall indemnify and advance
expenses to its officers to the same extent as its directors and to such further
extent as is consistent with law.
The Charter and Bylaws provide that Buyers United will indemnify its
directors and officers and may indemnify employees or agents of Buyers United to
the fullest extent permitted by law against liabilities and expenses incurred in
connection with litigation in which they may be involved because of their
offices with Buyers United. However, nothing in the Charter or Bylaws of Buyers
United protects or indemnifies a director, officer, employee or agent against
any liability to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office. To the extent that a director has been
successful in defense of any proceeding, the DGCL provides that he shall be
indemnified against reasonable expenses incurred in connection therewith.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses in connection with this
registration statement. We will pay all expenses of the offering. All of such
expenses are estimates, other than the filing fees payable to the Securities and
Exchange Commission and NASD.
Securities and Exchange Commission Filing Fee $ 1,815
NASD Filing Fee 2,740
Printing Fees and Expenses 25,000
Legal Fees and Expenses 100,000
Accounting Fees and Expenses 80,000
Blue Sky Fees and Expenses 50,000
Trustee's and Registrar's Fees -0-
Miscellaneous 50,445
TOTAL $ 310,000
I
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
During the last half of 2001, preferred stock dividends amounted to
$378,316, consisting of $150,942 on outstanding shares of Series A Preferred
Stock, and $227,374 on outstanding shares of Series B Preferred Stock. These
dividends were paid through the issuance of 374,534 shares of common stock to
the holders of the preferred stock in February 2002.
On January 15, 2002, Paul Jarman, G. Douglas Smith, and Kenneth D.
Krogue made unsecured loans to Buyers United in the total principal amount of
$79,998, due July 15, 2003 and bearing interest at the rate of 12 percent per
annum. In consideration for making the loans, Buyers United agreed to issue a
total of 7,998 shares to these individuals valued at $8,798 based on the market
price on the date of issuance. The shares were issued in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act of
1933.
From January 2001 through February 2003, Theodore Stern, an officer and
director, made a number of loans to Buyers United and provided his personal
guarantee on four separate obligations of Buyers United. We issued shares of
common stock to Mr. Stern in consideration for providing the financing and
credit enhancements. See the discussion in the prospectus above under the
caption "Certain Relationships and Related Transactions" for a description of
these transactions. As a result of the transactions, Mr. Stern holds notes from
Buyers United in the principal amount of $2,908,349 and received a total of
515,500 shares of common stock valued, on the basis of market price, at
$474,349. The shares were issued in reliance on the exemption from registration
provided by Section 4(2) of the Securities Act of 1933.
During October and November 2001, Buyers United sold promissory notes
in the total principal amount of $825,000 to 10 accredited investors in reliance
on the exemptions from registration set forth in Section 4(2) of the Securities
Act of 1933. Based on information provided by the investors, Buyers United
believes each investor is an accredited investor and each investor had access to
information that would enable it to make an informed decision regarding an
investment in Buyers United. The funds were obtained to fund acquisition of new
customer referrals from an unaffiliated comparison-shopping service and for
working capital. In addition, each note holder received a two-year warrant to
purchase shares of common stock at an exercise price of $2.50 per share. The
amount of warrants issued equaled 26% of the note proceeds. vFinance
Investments, Inc., acted as agent for the Company in the placement of the notes,
and was paid commissions equaling 5% of the loan proceeds and two-year common
stock purchase warrants equaling 3% of the loan proceeds.
In February 2002, Buyers United sold promissory notes in the total
principal amount of $350,000 to two accredited investors in reliance on the
exemptions from registration set forth in Section 4(2) of the Securities Act of
1933 and Rule 506 of regulation D. Based on information provided by the
investors, Buyers United believes each investor is an accredited investor and
each investor had access to information that would enable it to make an informed
decision regarding an investment in Buyers United. The funds were obtained to
fund for working capital. In addition, each note holder received a two-year
warrant to purchase shares of common stock at an exercise price of $2.50 per
share. The amount of warrants issued equaled 19% of the note proceeds. vFinance
Investments, Inc., acted as agent for the Company in the placement of the notes,
and was paid commissions equaling 3.6% of the loan proceeds and two-year common
stock purchase warrants equaling 2% of the loan proceeds.
During April and May 2002, Buyers United sold promissory notes in the
total principal amount of $1,915,000 to 19 accredited investors in reliance on
the exemptions from registration set forth in Section 4(2) of the Securities Act
of 1933 and Rule 506 of regulation D. Based on information provided by the
II
investors, Buyers United believes each investor is an accredited investor and
each investor had access to information that would enable it to make an informed
decision regarding an investment in Buyers United. The funds were obtained to
fund acquisition of new customer referrals from an unaffiliated
comparison-shopping service and for working capital. In addition, each note
holder received a two-year warrant to purchase shares of common stock at an
exercise price of $2.50 per share. The amount of warrants issued equaled 10% of
the note proceeds. vFinance Investments, Inc., acted as agent for the Company in
the placement of the notes, and was paid commissions equaling 5% of the loan
proceeds, an additional 2% of revenues collected monthly from the new customers,
and two-year common stock purchase warrants equaling 3% of the loan proceeds.
During the first half of 2002, preferred stock dividends amounted to
$372,037, consisting of $148,370 on outstanding shares of Series A Preferred
Stock, and $223,667 on outstanding shares of Series B Preferred Stock. These
dividends were paid through the issuance of 200,101 shares of common stock to
the holders of the preferred stock in August 2002.
In December 2002, Buyers United issued an unsecured promissory note for
$250,000 to an investor for the purpose of continuing to fund referral fees paid
to an unrelated Internet marketing company. The note bears interest at 12%,
payable monthly. vFinance Investments, Inc. acted as agent for us in the
placement of the note and was paid commissions of five percent of the loan
proceeds, plus 7,500 warrants to purchase one share of common stock. The
investor is a previous investor in the debt and equity securities of Buyers
United and Buyers United believes the investor to be accredited within the
meaning of Rule 501 of Regulation D, so the note was issued in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act of
1933.
In December of 2002 Buyers United sold promissory notes in the total
principal amount of $3,187,500 to 36 accredited investors in reliance on the
exemptions from registration set forth in Section 4(2) of the Securities Act of
1933 and Rule 506 of regulation D. Based on information provided by the
investors, Buyers United believes each investor is an accredited investor and
each investor had access to information that would enable it to make an informed
decision regarding an investment in Buyers United. The funds were obtained to
fund acquisition of new customer accounts from Touch America and for working
capital. vFinance Investments, Inc., acted as agent for the Company in the
placement of the notes, and was paid commissions equaling 5% of the loan
proceeds and an additional 1.8% of revenues collected monthly from the new
customers.
In February 2003 Buyers United retired a note payable to George
Brimhall in the principal amount of $1,050,000 by paying to Mr. Brimhall
$250,000 in cash, issuing to him a new promissory note in the principal amount
of $800,000, and issuing to him 50,000 shares of common stock. The new note for
$800,000 is unsecured and bears interest at the rate of 10% per annum payable
monthly. Principal is also payable monthly based on 20% of billings collected
during each monthly billing period from designated customers. The investor is a
previous investor in the debt and equity securities of Buyers United and Buyers
United believes the investor to be accredited within the meaning of Rule 501 of
Regulation D, so the note was issued in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933.
During the last half of 2002, preferred stock dividends amounted to
$377,688, consisting of $150,797 on outstanding shares of Series A Preferred
Stock, and $226,891 on outstanding shares of Series B Preferred Stock. These
dividends were paid through the issuance of 199,951 shares of common stock to
the holders of the preferred stock in February 2003.
III
In June of 2003 Buyers United sold promissory notes in the total
principal amount of $1,400,000 to 23 accredited investors in reliance on the
exemptions from registration set forth in Section 4(2) of the Securities Act of
1933 and Rule 506 of regulation D. Based on information provided by the
investors, Buyers United believes each investor is an accredited investor and
each investor had access to information that would enable it to make an informed
decision regarding an investment in Buyers United. The funds were obtained to
fund acquisition of new customer accounts from Touch America and for working
capital. vFinance Investments, Inc., acted as agent for the Company in the
placement of the notes, and was paid commissions equaling 5% of the loan
proceeds and an additional 1.5% of revenues collected monthly from the new
customers.
During the first half of 2003, preferred stock dividends amounted to
$397,088, consisting of $147,973 on outstanding shares of Series A Preferred
Stock, and $249,115 on outstanding shares of Series B Preferred Stock. These
dividends were paid through the issuance of 227,145 shares of common stock to
the holders of the preferred stock in August 2003.
In May and June 2003, Buyers United issued an promissory notes in the
aggregate amount of $500,000 to three investors for the purpose of acquiring
certain equipment. The note bears interest at 12%, payable monthly and are
secured by the equipment acquired. The promissory notes are convertible to
common stock of Buyers United at the rate of $2.00 of principal per share.
vFinance Investments, Inc. was paid commissions of $15,000 on the placement of
$300,000 of the notes, and U.S. Capital Partners, Inc. was paid commissions of
$10,000 on the placement of $200,000 of the notes. The investors are previous
investors in the debt and equity securities of Buyers United and Buyers United
believes the investors to be accredited within the meaning of Rule 501 of
Regulation D, so the notes was issued in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933.
In March 2004 Buyers United sold 3,782,000 shares of common stock at
$2.30 per share, or a total of approximately $8.7 million, in a private
placement to institutional and accredited investors in reliance on the
exemptions from registration set forth in Section 4(2) of the Securities Act of
1933 and Rule 506 of Regulation D. Net proceeds of the offering after placement
fees and expenses were approximately $8.1 million. Buyers United registered the
shares sold in the private placement under the Securities Act of 1933 for resale
by the investors in the offering. Roth Capital Partners, LP acted as the
placement agent for the offering and received a commission of $488,423 and a
warrant to purchase up to 164,125 shares of our common stock at an exercise
price of $2.76 per share, which is exercisable during the period beginning
September 15, 2004 and ending March 15, 2007.
ITEM 27. EXHIBITS.
The following documents are included as exhibits to this registration
statement.
Exhibit Title of Document Location
No.
3.1 Certificate of Incorporation (1)
3.2 Certificate of Designation of Preferred Stock (1)
3.3 Series B Preferred Stock Designation (2)
3.4 By-Laws (1)
IV
4.1 Form of Registration Rights Agreement (2)
4.2 Form of Warrant issued to bridge lenders in 2000 (2)
4.3 Form of Warrant issued as part of units with Series B (2)
Preferred Stock
4.4 Form of Warrant issued to Note Purchasers in Oct/Nov 2001 (3)
4.5 Form of Warrant issued to Note Purchasers in Apr/May 2002 (3)
4.6 Form of Stock Option Agreement used prior to June 1999 (3)
4.7 Form of Stock Option Agreement used after June 1999 (3)
4.8 Promissory Note issued to Ina Fabbri dated May 28, 2003 (3)
4.9 Promissory Note issued to Rosalind Markel dated June 10, 2003 (3)
4.10 Form of Warrant issued to vFinance Investments as compensation (3)
for private placements in 2002, as assigned to its affiliates
and employees
4.11 Form of Convertible Notes issued to Edward Dallin Bagley on (3)
November 1 and December 1, 2002
4.12 Form of Convertible Notes issued to Edward Dallin Bagley, (3)
E. Bryan Bagley, and Theodore Stern on December 20, 2002 and
January 1, 2003
4.13 Form of Convertible Notes issued to Theodore Stern in (3)
December 20, 2001 and January 2002
4.14 Warrant Issued to Wall Street Group, Inc., as amended (3)
5.1 Opinion on Legality See Exhibit
23.1
10.1 Asset Purchase Agreement dated December 6, 2002, with I-Link (4)
Communications, Inc. and I-Link Incorporated, without exhibits
10.2 Asset Purchase Agreement dated December 20, 2002 with Touch (4)
America, Inc., without exhibits
10.3 Amendment No. 1 to the Asset Purchase Agreement dated (5)
December 20, 2002 that was made June 6, 2003 by Buyers
United and Touch America
10.4 Promissory Note issued to Mulkey II Limited Partnership (3)
dated May 19, 2003
V
10.5 Reconciliation Agreement dated March 9, 2004 with Acceris (6)
Communications and I-Link Communications
10.6 Cooperation and Management Agreement between Buyers United (7)
and MyACD, Inc., dated October 1, 2003, excludidng:
Schedule I - Buyers United Existing Customers;
Schedule II - MyACD Customers; Schedule III -
Enhanced Services Marketing Budget; Schedule IV -
Monthly Budget Payments; and Schedule V - Revised
Wholesale Services Agreement Pricing
10.7 Purchase Option Agreement between Buyers United, Michael L. Shelton (7)
and David O. Peterson dated October 1, 2003, excluding:
Exhibit A - Form of Term Note; Exhibit B - Form of
Security and Pledge Agreement; Exhibit C - Form of
Term Note; Exhibit D - Form of Security and Pledge
Agreement; Exhibit E - Form of Employment
Agreement; Exhibit F - Form of Stock Option Grant;
and Exhibit G - Form of Employment Agreement
10.8 Form of Securities Purchase Agreement dated March 10, 2004 (7)
10.9 Form of Registration Rights Agreement dated March 10, 2004 (7)
23.1 Opinion and Consent of Parsons Behle & Latimer, This Filing
A Professional Law Corporation
23.2 Consent of Crowe Chizek and Company LLC This Filing
24.1 Power of Attorney (3)
----------------------
(1) These exhibits are incorporated herein by this reference to the Registration
Statement on Form 10-SB filed by Buyers United with the Securities and Exchange
Commission on August 3, 1999.
(2) These exhibits are incorporated herein by this reference to the annual
report on Form 10-KSB for the year ended December 31, 2000 filed April 10, 2001.
(3) These exhibits are incorporated herein by this reference to the initial
filing of this registration statement on Form SB-2 made with the Securities and
Exchange Commission on September 9, 2003.
(4) These exhibits are incorporated herein by this reference to the annual
report on Form 10-KSB for the year ended December 31, 2002 filed April 14, 2003.
(5) This exhibit is incorporated herein by this reference to the quarterly
report on Form 10-QSB for the quarter ended June 30, 2003 filed August 14, 2003.
(6) These documents were filed as exhibits to the current report on Form 8-K
filed by Buyers United with the Securities and Exchange Commission on March 17,
2004, and are incorporated herein by this reference.
VI
(7) These documents were filed as exhibits to the quarterly report on Form
10-QSB for September 30, 2003 filed by Buyers United with the Securities and
Exchange Commission on November 14, 2003, and are incorporated herein by this
reference.
ITEM 28. UNDERTAKINGS
A. The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10 (a) (3) of
the Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information set forth in the Registration Statement, and
notwithstanding the forgoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the
low or high end of the estimated maximum offering range may be
reflected in the form of prospects filed with the Commission pursuant
to Rule 424(b) if, in the aggregate, the changes in the volume and
price represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table
in the effective registration statement; and
(iii) Include any additional or changed material information
with respect to the plan of distribution.
2. That for the purpose of determining any liability under the
Securities Act, each post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
3. To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
B. Insofar as indemnification for liabilities under the Securities Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in a successful defense of any action, suit or proceeding) is asserted by a
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issuer.
VII
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this registration statement or amendment to be signed
on its behalf by the undersigned, thereunto duly authorized, in Bluffdale, Utah,
on May 28, 2004.
BUYERS UNITED, INC.
By /s/ Theodore Stern, Chief Executive Officer
(Principal Executive Officer)
By /s/ David R. Grow, Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment has been signed below by the following
persons in the capacities and on the dates indicated.
/s/ Theodore Stern, Director Date: May 28, 2004
/s/ Gary Smith, Director Date: May 28, 2004
/s/ Edward Dallin Bagley, Director Date: May 28, 2004
/s/ Steve Barnett, Director Date: May 28, 2004
/s/ Paul Jarman, Director Date: May 28, 2004
VIII