U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-SB/A
Amendment No. 2
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUER
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
BUI, INC.
(Name of Small Business Issuer in its charter)
Delaware 87-0528557
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
66 E. Wadsworth Park Drive, Suite 101, Draper, Utah 84020
(Address of Principal Executive Offices and Zip Code)
Issuer's Telephone Number: (801) 523-8929
Securities to be registered under Section 12(b) of the Act:
Securities to be registered under Section 12(g) of the Act:
Common Stock, Par Value $0.0001
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TABLE OF CONTENTS
ITEM NUMBER AND CAPTION Page
Part I
1. Description of Business 3
2. Management's Discussion and Analysis or Plan of Operations 8
3. Description of Properties 13
4. Security Ownership of Certain Beneficial Owners and Management 13
5. Directors, Executive Officers, Promoters and Control Persons 15
6. Executive Compensation 16
7. Certain Relationships and Related Transactions 18
8. Description of Securities 19
Part II
1. Market Price of and Dividends on the Registrant's
Common Equity and Related Stockholder Matters 22
2. Legal Proceedings 22
3. Changes in and Disagreements with Accountants 22
4. Recent Sales of Unregistered Securities 22
5. Indemnification of Directors and Officers 24
Part F/S Financial Statements 25
Part III
1. Index to Exhibits 25
2. Description of Exhibits 25
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
BUI, Inc., is a Delaware corporation engaged in the business
of selling to consumers and small businesses services and
products under the name "Buyers United." The marketing strategy
of Buyers United is based on a membership concept under which
members of Buyers United are entitled to receive the services and
products offered at lower prices than can be obtained elsewhere.
Buyers United uses the purchase power of its membership to
negotiate lower prices from producers and resellers of the
services and products. Lower pricing allows Buyers United to
attract and retain members, and makes it possible for Buyers
United to offer rebate incentive programs to its members for
referring to Buyers United new prospective members.
Buyers United focuses on providing services and products
that it believes are perceived by consumers and businesses as
essential or are compatible with their normal annual
expenditures. Buyers United is researching additional services
and products to offer its members.
Buyers United has over 9,000 members located in 48 states.
Its target market includes networking professionals, small
businesses, and middle-class families with an annual household
income between $36,000 and $80,000, as these are the most likely
to respond actively to the savings opportunity offered by Buyers
United. Members reside mostly in high population centers and
they tend to spend more than the average on long distance
services. Approximately one-third of the present membership
consists of small businesses and entrepreneurs who operate home-
based businesses.
Buyers United was formed as a Utah corporation under the
name "Linguistix, Inc.", in 1995 as a subsidiary of Twin Creek
Exploration Co., Inc. ("Twin Creek"). It received certain assets
of Twin Creek for its stock and was spun-off to the stockholders
of Twin Creek in connection with a business reorganization
between Twin Creek and an unrelated corporation. Efforts to
exploit the assets held by Buyers United after the spin-off were
unsuccessful, and the assets were sold or written off in 1997.
In November 1997, Buyers United acquired WealthNet Incorporated,
a Utah corporation, through an exchange of 1,852,589 shares of
Buyers United common stock, or approximately 92% of the
outstanding shares, for all of the capital stock of WealthNet
Incorporated. The transaction was accounted for as a reverse
purchase acquisition, in which WealthNet Incorporated was treated
as the acquiring company and Buyers United as the acquired
Company. Buyers United adopted the name, "Buyers United
International, Inc.," and WealthNet changed its name to "Buyers
United, Inc." Since that acquisition, Buyers United has pursued
the business described herein, which was started with the
inception of WealthNet in January 1996. In March 1999, Buyers
United changed its corporate domicile from Utah to Delaware
through a merger with a Delaware corporation formed for that
purpose. In connection with the change in domicile, Buyers
United changed its name to BUI, Inc., and effected a 1-for-4
reverse split in the issued and outstanding common stock of
Buyers United.
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Buyers United's offices are located at 66 E. Wadsworth Park
Drive, Suite 101, Draper, Utah 84020, where its telephone number
is (801) 523-8929.
Marketing strategy
Selection of services and products
Buyers United intends to offer services and products that
are considered "essential"; part of the monthly or annual budget
of individuals, families, and small businesses. Buyers United
believes consumers prefer to save money where they spend it most;
on services and products they must consume or use each month and
year. By becoming a member, a consumer or small business simply
makes a choice on where to purchase essential services and
products, not on whether to spend money on items outside its
normal budget.
In selecting service and product providers, Buyers United
focuses on the quality of the service or product. It believes
that offering a service or product at a low cost, alone, is not
enough. The service or product must meet consumer expectations
of performance and quality. After locating a suitable service or
product, Buyers United negotiates for lower pricing based on the
purchase power of its members. The combination of good quality
and low cost will attract and retain members for Buyers United.
Since its inception in January 1996, Buyers United
focused on selling long distance service because consumers and
businesses use long distance every month and look for ways to
save money on this service. This focus has enabled Buyers United
to build the size of its membership base. Buyers United also
provides teleconferencing service and is in the process of
establishing local telephone service for its members in the Salt
Lake City metropolitan area. With the recent explosion in
Internet commerce, especially among small businesses, Buyers
United is now offering low cost Internet access to its members.
By expanding its service and product offerings, Buyers United
believes that membership will be attractive to a larger number of
prospective members and existing members will have added
incentive for staying with Buyers United.
Member referral strategy
Management believes that member-generated, "word-of-mouth"
referral sales is a fast and cost-effective way for Buyers United
to increase its membership and its sales. It has focused on this
marketing approach since its inception.
Buyers United believes consumers are willing to share with
their personal acquaintances a satisfying and rewarding
experience with its services and products, and the recommendation
of a personal acquaintance is credible. As an inducement to
share this experience, Buyers United has adopted an incentive
program for members called "Piece of the Pie", which allows them
to benefit from identifying new prospective members for Buyers
United.
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Under the "Piece of the Pie" incentive program, members
who have successfully referred others to Buyers United receive a
monthly rebate on the services and products they purchase from
Buyers United. Every month, Buyers United rebates 10% of Usage
Revenue to members. Collected Usage Revenue is defined as the
usage portion of a bill that is paid in full within 45 days of
the statement date. This rebate pool is referred to as the
"Pie." The "Pie" is disbursed proportionally every month to
qualifying members according to the amount of usage generated by
their referrals. The "Piece of the Pie" rebate allocated to a
member in a given month is applied first to payment of the
Member's bill in the next month, and any excess is paid by check
to the member with the next billing statement.
A member is not required to refer any new members to Buyers
United in order to purchase services and products from Buyers
United on the same terms as all other members. The services and
products offered meet the needs of many members, who simply want
to save money on services and products. The "Piece of the Pie"
incentive program allows the entrepreneur-minded member to obtain
additional benefits through rebates.
Buyers United believes the "Piece of the Pie" incentive
program has the added value of creating member loyalty. Members
receiving rebates on services and products purchased from Buyers
United will be reluctant to give up those rebates by switching to
a different provider. The rebate benefit also makes it more
difficult for other service providers to compete with Buyers
United on the basis of price.
A member who refers a new prospective member does not make a
sale for Buyers United. All new members are signed by Buyers
United from the referrals it receives. Members are not
employees, independent contractors, or agents of Buyers United,
and have no authority to sign new members.
Member service
Buyers United maintains a staff of service representatives
for its members, which is designated as the "Legendary Member
Service" group. Management believes that member support and
assistance is important to growing and maintaining its member
base, because member service is an important part of the overall
consumer experience with the services and products offered by
Buyers United. Buyers United's goal is to exceed members'
service expectations, so that they remain with Buyers United and
are more willing to tell new prospective members of their
positive experiences.
Members are urged to contact Buyers United through its toll
free number with any questions or concerns. The Legendary Member
Service group addresses member questions and complaints, assists
members with the "Piece of the Pie" incentive program, provide
information on services and products, and works with members on
billing questions and timely payment.
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Infomercial proposal
Buyers United is investigating the development of a one-half
hour television program, which it would broadcast to market the
benefits of membership. At present, Buyers United is negotiating
production agreements for the infomercial with a view to testing
the program in the first quarter of 2000.
Services and products
Buyers United offers long distance phone service and
related products, including travel cards, pre-paid debit cards,
800/888 service, and teleconferencing. Long distance and related
services are provided by IXC Communications, Inc., an unrelated
wholesale long distance carrier based in Austin, Texas, which
owns and operates its own fiber optic network. Under its
contract with IXC, Buyers United is able to offer domestic long
distance service to its members at a rate of 7.9 cents per minute
and overseas long distance at discounted rates. The long
distance rate to Buyers United for domestic charges is fixed by
agreement. The long distance rate for overseas calls may be
adjusted by IXC on seven days advance notice to Buyers United.
All long distance charges are billed to Buyers United and due
within 30 days. Buyers United, in turn, bills its members for
their long distance calls. The contract is for a term of three
years ending in April 2002. Buyers United is in the process of
negotiating contracts with other long distance service providers,
which will enable Buyers United to take advantage of least cost
pricing for long distance calls.
Management intends to initiate a plan to resell long
distance service that utilizes "voice-over-data" based on
Internet Protocol technology. It is expected the plan will be
rolled out in Utah during the later part of 1999, where a package
of in-state, out-of-state, and toll-free long distance will be
offered to members at a flat rate of just 5.9 cents per minute.
The final terms of the contract between Buyers United and the
provider of this service are yet to be finalized.
Buyers United launched an Internet service program in
January 1999. Internet services include unlimited local dial-up
access at approximately 2,100 locations across the country, free
filtering services, unlimited e-mail, web hosting for businesses,
and activity reporting. Management plans to add online billing
capability for bundled goods and services, discount consolidating
with existing web sites, and manufacturer-direct web commerce
opportunities. The Internet access program is provided by SISNA,
Inc., based in Salt Lake City, Utah, under a three-year contract
expiring in October 2001. The basic Internet service is offered
to members at $16.95 per month for unlimited access.
Buyers United has no plans to acquire a long distance
network or establish its own infrastructure for other services
and products it offers. As a result, Buyers United depends on
developing and maintaining relationships with third party
providers of the services and products it offers. Buyers United
relies on the purchasing power of its members to negotiate the
terms of its arrangements with providers. An additional benefit
to providers is that Buyers United handles all billing and
collection for the services and products purchased by its
members, so that the provider avoids this cost of business.
Buyers United believes that it is on good terms with its
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current providers. In the event its relationship with a provider
terminates for any reason, management believes it could obtain
the same services or products from other providers on terms
similar to existing contracts.
Competition
The consumer buying organization industry is highly
competitive. Many of the competitors of Buyers United 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, AT&T, MCI,
Sprint and WorldCom. AT&T, MCI, Sprint and WorldCom are
significantly larger than Buyers United and have substantially
greater resources. Buyers United also competes with other
national and regional long distance carriers, which employ
various means to attract new subscribers, including television
and other advertising campaigns, telemarketing programs, network
marketing, cash payments and other incentives to new subscribers.
The ability of Buyers United to compete effectively will depend
on its ability to provide high quality services at competitive
prices.
Governmental Regulations
Buyers United's relationship marketing system may be
affected by government regulation, including, state regulation of
marketing practices and federal and state regulation of the offer
and sale of business franchises, business opportunities, and
securities. Although Buyers United believes that its
relationship marketing system is in compliance with all currently
applicable regulations, there can be no assurance that it will
remain in compliance in the future as a result of new
interpretations of existing regulations or adoption of new
regulations.
Long distance telecommunications carriers currently are
subject to extensive federal and state government regulation,
including, regulation of both domestic and international tariffs
for their services, and certification or registration
requirements. Buyers United is indirectly subject to these
regulations because it offers long distance service provided by
others. Of particular relevance to Buyers United is federal and
state regulation of "slamming", which is the practice of changing
long distance service of a consumer without proper authorization.
To avoid violation of regulations in this area, Buyers United is
required to obtain from its members written authorization to
change long distance service that meets certain requirements.
Buyers United believes it is in compliance with federal and state
regulation of changing long distance service.
Employees
As of June 30, 1999, Buyers United employed a total of 25
persons, including four executives and 13 in member services and
marketing. None of the its employees is represented by a labor
union. Buyers United has experienced no work stoppages and
believes that its relations with its employees are good.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
Overview
Buyers United is engaged in the business of selling to
consumers and small businesses services and products. The
marketing strategy of Buyers United is based on a membership
concept under which members of Buyers United are entitled to
receive the services and products offered at lower prices than
can be obtained elsewhere. Buyers United uses the purchase power
of its membership to negotiate lower prices from producers and
resellers of the services and products. Lower pricing allows
Buyers United to attract and retain members, and makes it
possible for Buyers United to offer rebate incentive programs to
its members for referring to Buyers United new prospective
members. Buyers United's goal is to build a national consumer
membership organization. Its strategy for achieving this goal is
to focus on its member referral and rebate program, expand
service and product offerings, and develop and promote an
infomercial to attract new members through television.
Buyers United focuses on providing services and products
that it believes are perceived by consumers and businesses as
essential or are compatible with their normal annual
expenditures. Since its inception in January 1996, Buyers United
focused on selling long distance service. This focus has enabled
Buyers United to build the size of its membership base. Buyers
United also provides teleconferencing service and is in the
process of establishing local telephone service for its members
in the Salt Lake City metropolitan area. With the recent
explosion in Internet commerce, especially among small
businesses, Buyers United is now offering low cost Internet
access to its members. By expanding its service and product
offerings, Buyers United believes that membership will be
attractive to a larger number of prospective members and existing
members will have added incentive for staying with Buyers
United.
Buyers United has over 9,000 members located in 48 states.
Its target market includes networking professionals, small
businesses, and middle-class families with an annual household
income between $36,000 and $80,000, as these are the most likely
to respond actively to the savings opportunity offered by Buyers
United. Members reside mostly in high population centers and
they tend to spend more than the average on long distance
services. Approximately one-third of the present membership
consists of small businesses and entrepreneurs who operate home-
based businesses.
Internal business development over the past two years has
resulted in substantial growth. Total revenues after cost of
revenues in 1998 were $1,946,394, as compared to $811,644 in
1997. Total revenues after cost of revenues for the first six
months of 1999 were $957,477, as compared to $432,487 for the
same period in 1998. Total revenues after cost of revenues for
the second quarter of 1999 were $501,689, as compared to $319,755
for the same period in 1998.
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Results of Operations
Three Months Ended June 30, 1999 and 1998
Revenues decreased $376,067 to $1,249,046 for the quarter
ended June 30, 1999, from $1,625,113 for the same period in 1998.
Cost of revenues for the same period decreased $558,001 from
$1,305,358 in 1998 to $747,357 in 1999. The decrease in revenues
is largely attributable to a decrease of approximately 20% in the
long distance rates being charged to customers. The decrease in
costs of revenue is due largely to a significant decrease during
1999 in the wholesale rates that Buyers United pays for long
distance.
Operating expenses, exclusive of cost of revenues, were
$603,960 in the second quarter of 1999 as compared to $561,362
for the same period of 1998. This increase in expenses is
attributable to the addition of a sales staff and more
administrative personnel to support the expected growth over the
coming months.
Loss from operations decreased $139,336 to a loss from
operations of $102,271 for the quarter ended June 30, 1999,
compared to a loss from operations of $241,607 for the same
period in 1998. .
Total other expense decreased from $42,069 in the second
quarter of 1998 to $30,540 for the same period in 1999. This
reduction is a result of a decrease in interest expense on debt
financing.
As a result of the above factors, net loss decreased from
$283,676 for second quarter of 1998 to $135,551 for the three-
month period ended June 30, 1999 and diluted net loss per common
share decreased from $0.13 in the 1998 period to $0.04 in the
1999 period.
Six Months Ended June 30, 1999 and 1998
Revenues increased $552,029 or 27% to $2,570,779 for the six
months ended June 30, 1999, from $2,018,750 for the same period
in 1998. Cost of revenues increased from $1,586,263 in the first
six months of 1998 to $1,613,302 in the first six months of 1999.
The increases in revenues and cost of revenues are attributable
to a change in the Company's supplier of long distance service.
In early 1998, the Company changed from a commission based
agreement with I-Link, in which Buyers United earned commissions
based on revenues collected by I-Link from Buyers United's
members, to a tarriffed carrier purchasing wholesale from IXC and
reselling the services. As a tarriffed carrier, Buyers United
records revenue from reselling long distance service to its
members and records as cost of revenues the wholesale cost of
acquiring the long distance service from IXC. The net margin
generated as a tarriffed carrier supplied by IXC is higher than
the commissions received under the I-Link arrangement.
Operating expenses exclusive of cost of services were
$1,218,858 in the first six months of 1999 as compared to
$1,194,634 for the first six months of 1998. The slight increase
in expenses is attributable to the addition of a sales staff and
more administrative personnel to
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support the expected growth over
the coming months offset by certain reductions in work force,
which Buyers United was able to implement as a result of changing
long distance providers to a provider with better and more
efficient service and the development of more efficient internal
systems for providing customer service.
Loss from operations decreased $500,766 to a loss from
operations of $261,381 for the six months ended June 30, 1999,
compared to a loss from operations of $762,147 for the same
period in 1998. This substantial improvement is a result of
increased revenues in 1999 from Buyers United's growing
membership base and the increase in net margins described above.
Other expense, net decreased from $231,721 in the first six
months of 1998 to $64,025 for the same period in 1999. This
reduction is a result of a decrease in interest expense on debt
financing from $113,178 in 1998 to $65,544 in 1999 as well as a
loan guarantee expense of $118,659 in 1998 that was not present
in 1999.
As a result of the above factors, net loss decreased from
$993,868, or $0.48 per diluted common share, for the first six
months of 1998 to $328,146, or $0.11 per diluted common share,
for the six-month period ended June 30, 1999.
Years Ended December 31, 1998 and 1997
Revenue, after cost of revenues, increased $1,134,767 to
$1,946,411 for the year ended December 31, 1998, from $811,644
for the year ended December 31, 1997. Cost of revenues in 1997
were $51,108 as compared to $3,140,950 in 1998. The increases in
revenue and cost of revenues are attributable to an overall
increase in the Company's membership base and the difference in
the terms of the service contract utilized by Buyers United with
the long distance service provider that preceded IXC. Whereas
during 1998 Buyers United sold and serviced long distance that it
purchased wholesale, under the former arrangement through 1997,
Buyers United acted as an agent to enroll customers to be
serviced by the former long distance provider's organization.
Under the current arrangement, Buyers United records the amount
billed to their customers as revenue and the costs to purchase
the long distance as a cost of revenue, whereas under the former
arrangement Buyers United simply received and recorded a
commission for their enrollment services.
Operating expenses, exclusive of cost of revenues, were
$3,024,294 in 1998 as compared to $2,982,956 in 1997. In 1997,
Buyers United established the basic operating systems and
facilities for its business, which needed to be in place to
support future growth in membership. Consequently, membership
growth in 1998 and the resulting increase in revenues were
achieved without any meaningful increase in operating expenses.
Buyers United expects that its operating expenses exclusive of
cost of services as a percentage of revenues will continue to
decrease in 1999 as membership grows.
Loss from operations decreased $1,093,429 to a loss from
operations of $1,077,883 for the year ended December 31, 1998,
compared to a loss from operations of $2,171,312 for the year
ended December 31, 1997. This substantial improvement is a
result of increased revenues
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in 1998 from Buyers United's growing
membership base without an increase in its operating expenses
before cost of revenues from 1997 to 1998.
Total other expense, net decreased from $522,090 in 1997
to $388,699 for 1998. This reduction is a result of a decrease
in interest expense on debt financing.
As a result of the above factors, net loss decreased from
$2,693,402 for the year ended December 31, 1997, to $1,466,582
for the year ended December 31, 1998.
Operations were not significantly impacted by inflation
during the years ended December 31, 1998 and 1997, and it is not
anticipated that inflation will have any significant impact on
results of operations for at least the next year.
Liquidity and Capital Resources
Net cash used in operating activities was $541,173 during
the six-month period ended June 30, 1999. This is primarily due
to a net loss of $328,146, during the period. It is anticipated
net cash used in operating activities will improve during the
remainder of 1999, as revenues increase from the addition of new
members. In the first six months of 1998, net cash used in
operating activities was $944,243 due a net loss of $993,294 for
the period.
Total cash generated from financing activities was
$1,993,191 for the six-month period ended June 30, 1999, compared
to $1,124,322 generated from financing activities in the first
six months of 1998. Cash from financing activities in the first
six months of 1999 and 1998 resulted primarily from sales of
common and preferred stock for cash.
Net cash used in operating activities was $1,275,988 in
1998. This is primarily due to a net loss of $1,466,582 and a
substantial increase in accounts receivable of $617,421 resulting
from the commencement of billing and collection from members by
Buyers United at the beginning of 1998, which were offset by
issuance of common stock to pay for services and credit
extensions in the amount of $304,774, and increases in accounts
payable and accrued liabilities to a total of $519,153. It is
anticipated net cash used in operating activities will improve in
1999, as revenues increase from the addition of new members. In
1997 net cash used in operating activities was $1,293,199
primarily due a net loss of $2,693,402.
Total cash generated from financing activities was
$1,327,213 for 1998, compared to $1,162,635 generated from
financing activities in fiscal 1997. Cash from financing
activities in 1998 was primarily related to the net proceeds from
sales of stock for cash. Cash from financing activities in 1997
was primarily related to debt financing in the amount of $793,000
and sales of stock for cash in the amount of $514,825.
At June 30, 1999, Buyers United had working capital of
$862,509, and at December 31, 1998, it had a working capital
deficit of $811,850. In July 1999, the Company completed an
equity financing resulting in net proceeds of $3,480,000, which
will be used for marketing and working capital. Management
anticipates that working capital will continue to improve in 1999
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if the Company's performance continues at present levels.
Management estimates that cash flow from operations in 1999 as
well as funds generated by the recent financing will be
sufficient for meeting payment obligations and working capital
needs for the next 12 months.
Year 2000 Compliance
Buyers United's internal computer information system is Year
2000 compliant, since its database does not store dates as plain
text. The dates are converted into an internal date format that
does not rely on the year to determine the century. Any new
software purchases will conform to the same type of internal date
storage specifications, which should eliminate any internal Year
2000 issues. As Buyers United has determined it has no internal
Year 2000 issues, it has not developed a contingency plan.
Year 2000 issues and any potential business
interruptions, costs, damages or losses related thereto are
primarily dependent upon the Year 2000 compliance of third
parties. Buyers United's suppliers that provide mission-critical
services are primarily large companies, such as local and long
distance telephone service providers. Buyers United has no
reason to believe that these suppliers will not be Year 2000
compliant. However, Buyers United is in the process of reviewing
its third party relationships and requesting written confirmation
that they are year 2000 compliant and assessing what impact any
problems with Year 2000 compliance will have on its current
business. At this time Buyers United has contacted 100 percent
of its critical vendors and have received conformation from 80%
that they are year 2000 compliant, with the other 20% stating
that they will be compliant by year 2000. Buyers United has
looked at alternate vendors to perform certain processes where
necessary, but to date has no contingency plan should any
significant problems arise with its suppliers.
The costs associated with Year 2000 compliance have been
nominal and Buyers United believes that the remaining costs will
be minimal and will not have a material adverse effect on its
financial condition or results of operations.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1985
provides a safe harbor for forward-looking statements made by
Buyers United, except where such statements are made in
connection with an initial public offering. All statements,
other than statements of historical fact, which address
activities, actions, goals, prospects, or new developments that
Buyers United expects or anticipates will or may occur in the
future, including such things as expansion and growth of its
operations and other such matters are forward-looking statements.
Any one or a combination of factors could materially affect
Buyers United's operations and financial condition. These
factors include competitive pressures, success or failure of
marketing programs, changes in pricing and availability of
services and products offered to members, legal and regulatory
initiatives affecting member marketing and rebate programs or
long distance service, and conditions in the capital markets.
Forward-looking statements made by Buyers United are based on
knowledge of its business and the environment in which it
operates as of the
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date of this report. Because of the factors
listed above, as well as other factors beyond its control, actual
results may differ from those in the forward-looking statements.
ITEM 3. DESCRIPTION OF PROPERTIES
Buyers United leases its executive offices at a single
location in Draper, Utah (a suburb of Salt Lake City). The
offices consist of approximately 2,600 square feet. The current
monthly lease rate is approximately $3,500, and increases
annually at the rate of 3.5 percent. The lease for this facility
expires on December 31, 2003, but Buyers United has an option to
renew the lease for an additional five years. Management
believes that the office space is adequate for Buyers United's
anticipated needs for at least the next 3 months.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth as of July 28, 1999, the
number and percentage of the outstanding shares of common stock
which, 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 5% of the outstanding common stock. The only
beneficial owners of more than 5% of the outstanding common stock
of which Buyers United is aware are also directors or officers.
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.
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Amount and Nature of
Beneficial Ownership
Common Preferred Percent
Name and Address Shares Shares Options(1) of Class(2)
Rod Smith (3) 248,151 0 391,250 18.8
66 E. Wadsworth Park Drive
Draper, Utah 84020
Theodore Stern 0 80,000 0 2.3
2210 One PPG Place
Pittsburgh, PA 15222
Gary Smith (3) 259,567 0 183,122 13.8
66 E. Wadsworth Park Drive
Draper, Utah 84020
Edward Dallin Bagley 297,912 20,000 0 10.5
2350 Oakhill Drive
Salt Lake City, Utah 84121
G. Douglas Smith (3) 61,184 0 238,913 9.2
66 E. Wadsworth Park Drive
Draper, Utah 84020
Paul Jarman 61,184 0 216,798 8.6
66 E. Wadsworth Park Drive
Draper, Utah 84020
All Executive officers and 927,998 100,000 1,030,083 49.6
Directors as a Group (6 persons)
persons)
________________________________
(1) These figures represent options that are vested or will vest
within 60 days from the date as of which information is
presented in the table.
(2) These figures represent the percentage of ownership of the
named individuals assuming each of them alone has exercised
his options or conversion rights, and percentage ownership
of all officers and directors as a group assuming all
purchase and conversion rights held by such individuals are
exercised.
(3) Gary Smith is the father of Rod Smith and G. Douglas Smith.
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ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS
Directors and Officers
The following table sets forth the names, ages, and
positions with Buyers United for each of the directors and
officers.
Name Age Positions (1) Since
Rod Smith 43 Chairman of the Board, 1996
President and Chief Executive
Officer
Theodore Stern 69 Director 1999
Gary Smith 61 Director 1999
Edward Dallin Bagley 60 Director 1999
G. Douglas Smith 30 Executive Vice President of 1997
Marketing
Paul Jarman 30 Treasurer and Vice President 1997
of Sales
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 the Board of Directors.
The following is information on the business experience of
each director and officer.
Rod Smith founded the predecessor of Buyers United in
January 1996 and has served as the President, Chief Executive
Officer, and Chairman of the Board since that time. From January
1993 to November 1995, Mr. Smith was an independent distributor
of health and beauty products provided by NuSkin International, a
consumer products network marketing organization.
Theodore Stern retired as senior executive vice president
and member of the board of directors of Westinghouse Electric
Corporation at the end of 1992, after 34 years of service in a
variety of positions with that company. After retiring form
Westinghouse Electric, Mr. Stern served as vice chairman of the
board of directors of Superconductivity, Inc., of Madison,
Wisconsin, a small technology company, until it was acquired in
April 1997. Mr. Stern currently is a member of the board of
directors of Copperweld Corporation of Pittsburgh, Pennsylvania,
a privately-owned steel and cable manufacturer, and Northern
Power Systems of Waitsfield, Vermont, a manufacturer of renewable
generation systems. Mr. Stern is also self-employed as a
consultant to manufacturing companies.
Gary Smith was the founder, majority owner and former
President of HealthRider, Inc. From 1991 until sale of the
business in 1997, he managed and directed every phase of business
15
<PAGE>
and sales operations at HealthRider. From 1997 to the present,
Mr. Smith has been self-employed as a business consultant and
advisor.
Edward Dallin Bagley has been self-employed as an investment
and financial consultant for the past five years. He is
currently a director of Tunex International, Inc., Gentner
Communications, National Environmental Services Corp., and
National Financial Corp.
G. Douglas Smith joined Buyers United in April 1997, and is
responsible for all aspects of marketing, including brand
strategy, advertising, promotions, corporate communication, and
product development. For six years prior to April 1997, Mr.
Smith served first as the Director of Media and then Senior Vice
President of HealthRider, Inc., an exercise equipment company
based in Salt Lake City, Utah. At HealthRider Mr. Smith was
responsible for infomercial marketing, which was the primary
sales strategy for HealthRider products.
Paul Jarman became employed by Buyers United in April 1997,
and is responsible for all facets of operations. He also comes
to Buyers United from HealthRider, where he was employed from
March 1994 to August 1996, first as Texas Regional Manager for 15
retail locations, then Western Area Manager in charge of 95
retail locations, and finally Acting Director of Retail
Operations managing 250 retail locations. In August 1996, Mr.
Jarman moved to HealthRider's marketing department as the
Director of New Product Development, where he served until April
1997.
ITEM 6. EXECUTIVE COMPENSATION
Annual Compensation
The following table 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, 1998, 1997, and 1996, 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 of the end of the last completed fiscal year
whose annual salary and bonuses exceeded $100,000 (collectively,
the "Named Executive Officers").
Name and Long Term All Other
Principal Position Annual Compensation Compensation Compensation
_____________________ ____________ ____________
Year Salary ($) Options/
SARs (#)
Rod Smith 1998 69,829 141,250 7,468
Chairman, President 1997 75,050 250,000 0
Chief Executive 1996 0 0 0
Officer
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Employment and Other Arrangements
Rod Smith, G. Douglas Smith, and Paul Jarman each receive a
salary of $6,500 per month for their respective services to
Buyers United as executive officers. Buyers United does not have
a written employment agreement with any of its executive
officers. All executive officers participate in insurance and
benefit programs established by Buyers United for its full time
employees.
In January 1998, Buyers United entered into an informal
consulting agreement with Gary Smith under which he agreed to
commit a substantial portion of his time and effort to the
development of retail sales programs for Buyers United's products
and services. Mr. Smith received $5,000 per month under the
agreement until June 1999, when it terminated.
Stock Options
The following table sets forth certain information with
respect to grants of stock options during 1998 and the first six
months of 1999 to the Named Executive Officers.
% of Total
Number of Options/SARs
Securities Granted to Exercise or
Name and Underlying Employees in Base Price Expiration
Principal Position Options Granted Fiscal Year ($/Sh) Date
Rod Smith 291,250 43.7 2.00 March 2008
Chairman, President 100,000 15.0 2.00 June 2009
Chief Executive
Officer
The following table sets forth certain information with
respect to unexercised options held by the Named Executive
Officers as of July 2, 1999. No outstanding options held by the
Named Executive Officers were exercised in 1998 or through July
2, 1999.
Number of Securities Value of Unexercised
Name and Principal Underlying Unexercised Options In-the-Money Options
Position At July 2, 1999 (#) at July 2, 1999 ($)(1)
Exercisable/Unexercisable Exercisable/Unexercisable
Rod Smith, Chairman 391,250/ -0- $1,173,750/ -0-
President and Chief
Executive Officer
___________________________________________
(1) This value is determined on the basis of the difference
between the fair market value of the securities underlying the
options and the exercise price at July 2, 1999. The fair market
value of the Company's common stock at July 2, 1999, is
determined by the last sale price on that date, which was $5.00
per share.
17
<PAGE>
Description of Long Term Stock Incentive Plan
The purpose of the Long Term Stock Incentive Plan is to
provide directors, officers, employees, and consultants with
additional incentives by increasing their ownership interests in
Buyers United. Directors, officers, and other employees of
Buyers United and its subsidiaries are eligible to participate in
the plan. In addition, awards may be granted to consultants
providing valuable services to Buyers United. As of June 30,
1999, Buyers United and its affiliates employed approximately 25
individuals and retained approximately two consultants who are
eligible to participate in the plan. A committee of the board or
the entire 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 committee or the Board of Directors has discretion to
determine the terms of a plan award, 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 30,000 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
10% 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. No outstanding stock
option or other award under the plan has been granted.
A maximum of 600,000 shares of common stock that may be
subject to outstanding awards, determined immediately after the
grant of any award under the plan. Shares of common stock which
are attributable to awards which 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 of Directors 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.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1996 and 1997, Gary Smith advanced $1,100,000 to Buyers
United for working capital and other corporate purposes. Under
an informal agreement with Buyers United, the advances by Gary
Smith accrued interest at the rate of 20% per annum and were
unsecured. In consideration for making these loans and for other
services provided, Buyers United issued to Gary Smith 259,567
shares of the common stock, and granted to him options to
purchase 55,622
18
shares of common stock at a price of $2.024 per
share, and additional options to purchase 185,405 shares at an
exercise price of $5.392 per share. Of the options exercisable
at $5.392, Gary Smith subsequently conveyed options for 27,811
shares to G. Douglas Smith and 18,541 shares to Paul Jarman as
inducements for them to accept employment with Buyers United.
In September 1997, Gary Smith and Rod Smith entered into
a Restructuring Agreement with Buyers United, which provides for
formalization of the debt obligation of Buyers United to Gary
Smith and the return of shares of common stock for cancellation.
Buyers United issued to Gary Smith an unsecured promissory note
in the principal amount of $1,300,000 (which included $200,000
borrowed by Rod Smith from Gary Smith and loaned to Buyers
United), bearing interest at 20% per annum. Principal was
payable in three installments during 1997 and 1998. Under the
Restructuring Agreement, Gary Smith returned to Buyers United for
cancellation 74,162 shares of common stock, and Rod Smith
returned to Buyers United for cancellation 37,081 shares of
common stock.. Buyers United was unable to meet the interest and
principal payments under the note to Gary Smith, which resulted
in a further restructuring of the obligation in January 1998. Of
the $1,300,000 loaned to Buyers United, $1,000,000 was provided
to Gary Smith by George Brimhall. Under the new restructuring,
Gary Smith assigned a portion of the repayment obligation to Mr.
Brimhall, which is represented by a note payable by the Company
in the principal amount of $1,000,000 bearing interest at 10
percent per annum with interest payable monthly in arrears
commencing February 1, 1998, and all principal and accrued
interest due and payable on November 15, 1998. The promissory
note given to Mr. Brimhall is guaranteed by Gary Smith. In
consideration of the guaranty given by Gary Smith, Buyers United
issued to him 74,162 shares of common stock. In addition, Buyers
United issued to Gary Smith a new promissory note in the
principal amount of $300,000 bearing no interest and providing
for payments of $10,000 per month commencing February 1, 1998 and
continuing through February 1, 1999, when all remaining principal
is due and payable.
In September 1998, the $1,000,000 note payable to Mr.
Brimhall was restructured to include $50,000 of accrued interest
and to extend the due date to April 2000, with monthly interest
payments of $8,750 commencing on October 15, 1998. As
consideration for the restructuring, Buyers United issued to Mr.
Brimhall 15,625 shares of common stock and granted to him the
right to convert $500,000 of the note into shares of common stock
at a price of $4.00 per share through April 15, 1999.
ITEM 8. DESCRIPTION OF SECURITIES
General
The authorized capitalization of Buyers United consists of
20,000,000 shares of common stock, par value $0.0001, and
5,000,000 shares of preferred stock, par value $0.0001, of which
2,000,000 shares are designated Series A Convertible Preferred
Stock. There are approximately 3,017,308 common shares
outstanding and 2,000,000 shares of Series A Convertible
Preferred Stock outstanding.
19
<PAGE>
Common Stock
Holders of common stock are entitled to one vote for each
share held on all matters submitted to a vote of shareholders and
do not have cumulative voting rights. Accordingly, holders of a
majority of the shares of all common stock outstanding entitled
to vote in any election of directors may elect all of the
directors standing for election. Holders of common stock are
entitled to receive ratably such dividends, if any, as may be
declared by the board of directors out of funds legally available
therefor. Upon the liquidation, dissolution or winding up of the
Company, the holders of all shares of common stock are entitled
to receive ratably the net assets of the Company available after
the payment of all debts and other liabilities. Holders of
common stock have no preemptive, subscription, redemption or
conversion rights.
Preferred Stock
General
The Board of Directors is authorized to classify any shares
of its authorized but unissued preferred stock as preferred stock
in one or more series. With respect to each series, the Board of
Directors shall determine the number of shares which shall
constitute 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 Buyers United; 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 Buyers United of any
other class or series; 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 any other
characteristics, preferences, limitations, rights, privileges,
immunities or terms not inconsistent with the provisions of the
Certificate of Incorporation. 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 authorized 2,000,000 shares of Series A
Convertible Preferred Stock (the "Series A Stock"). Cumulative
dividends accrue on the Series A 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 Buyers
United. If paid in common stock, the
20
<PAGE>
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 Buyers United fails to pay any
dividend within 60 days of its due date, the conversion price
will be adjusted downward by $0.25 per share per occurrence.
The Series A Stock is convertible to common stock at any
time at the election of the holder. Buyers United can convert
the Series A Stock to common stock by written notice to the
holders at any time when the closing bid prices for the common
stock of Buyers United for a period of 30 consecutive trading
days equals or exceeds $4.00 per share, and the common stock is
registered for resale under the Securities Act of 1933 or can be
sold without registration under Rule 144(k) promulgated under the
Securities Act of 1933. The conversion rate is one share for one
share, subject to adjustment in the event of a recapitalization,
reorganization, or other corporate restructuring or in the event
Buyers United shall sell or otherwise issue securities at a price
below $2.00 per share or the then adjusted conversion price.
The Series A Stock can be redeemed at Buyers United'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. Buyers United must give not more than 60 nor
less than 30 days advance written notice of the redemption date,
during which period the holder may convert to common stock.
The Series A 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 Series A Stock. The Series A Stock
is superior in right of payment in the event of liquidation and
with respect to dividends to the common stock and all other
series of preferred stock that may be subsequently authorized.
"Penny Stock" Trading Regulations Applicable to the Common
Stock
The Securities Exchange Act of 1934 and regulations
promulgated thereunder place restrictions on trading activities
in "penny stocks." Penny stocks are defined as equity securities
priced under $5.00, which are not listed for trading on a
national exchange or Nasdaq and are securities of issuers with a
net tangible book value less than $2,000,000 (if in business for
three years), a net tangible book value less than $5,000,000 (if
in business less than three years), and average annual revenues
less than $6,000,000 for the prior three years. Under this
definition, the common stock of Buyers United is a penny stock.
Brokers dealing in penny stocks are subject to special rules of
disclosure to their clients regarding the risks of penny stock
transactions, current market price, and trading activity and
compensation to the broker. In addition, brokers are required to
determine the suitability of penny stock transactions for each of
their clients and obtain from each client written consent to
participation in penny stock transactions. These regulatory
burdens discourage a number of brokers from becoming involved in
a security until it is no longer a penny stock, which may
adversely affect the depth and liquidity of any market in the
common stock of Buyers United.
21
<PAGE>
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of Buyers United trades sporadically in the
over-the-counter market. There was no trading market for the
common stock prior to the first quarter of 1998. The following
table sets forth for the respective periods indicated the prices
of the common stock in the over-the-counter market, as reported
and summarized on the OTC Bulletin Board. Such prices are based
on inter-dealer bid and asked prices, without markup, markdown,
commissions, or adjustments and may not represent actual
transactions. In April 1999, Buyers United effected a 1-for-4
reverse split in the issued and outstanding common stock in
connection with the change of its domicile to Delaware. All
prices have been adjusted to reflect the reverse split.
Calendar Quarter Ended High Bid ($) Low Bid ($)
March 31, 1998 12.00 7.00
June 30, 1998 14.00 6.00
September 30, 1998 9.00 5.00
December 31, 1998 4.50 2.00
March 31, 1999 4.25 1.00
June 30, 1999 3.00 3.00
Since its inception, no dividends have been paid on the
common stock. Buyers United intends to retain any earnings for
use in its business activities, so it is not expected that any
dividends on the common stock will be declared and paid in the
foreseeable future. At June 30, 1999, there were approximately
3,795 holders of record of the common stock.
ITEM 2. LEGAL PROCEEDINGS
Buyers United is not a party to any material pending legal
proceedings, and to the best of its knowledge, no such
proceedings by or against Buyers United have been threatened.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
There have been no changes in or disagreements with
accountants since the Company's organization.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
In September 1997, Buyers United issued approximately
2,498,044 shares to the former shareholders of WealthNet,
Incorporated, in connection with the acquisition of WealthNet,
Incorporated as a wholly owned subsidiary. These shares were
issued in reliance on the
22
<PAGE>
exemptions from registration under
Sections 3(b) and/or 4(2) of the Securities Act of 1933. No
broker was involved in the transaction and no commissions were
paid to any person.
From May 5, 1997, to September 9, 1997, Buyers United
sold 170,670 shares of stock to 23 accredited investors at a
gross purchase price of $514,808 in reliance on the exemption
from registration set forth in Section 4(2) of the Securities Act
of 1933. No brokers were involved in the transactions and no
commissions were paid to any person. All purchasers had access
to the information on Buyers United necessary to make an informed
investment decision and each purchaser provided written
confirmation of its status as an accredited investor.
From May 5, 1997, to September 9, 1997, Buyers United
issued 155,829 shares to 28 individuals as compensation in lieu
of salary for services rendered valued at $470,670. The shares
were issued in reliance on the exemption from registration set
forth in Section 4(2) of the Securities Act of 1933. The
services were performed by employees during 1996 and 1997. On
the basis of their employment with Buyers United and access to
management and financial statements, each of the employees had
such knowledge of the business and financial condition of Buyers
United so as to make an informed investment decision.
From January 9, 1998, through November 9, 1998, Buyers
United issued 327,308 shares of common stock for cash in the
amount of $1,174,708. The shares were sold to approximately 58
accredited investors in reliance on the exemption from
registration set forth in Section 4(2) of the Securities Act of
1933. No brokers were involved in the transactions and no
commissions were paid to any person. All purchasers had access
to the information on Buyers United necessary to make an informed
investment decision and each purchaser provided written
confirmation of its status as an accredited investor.
From January 9, 1998, through November 9, 1998, Buyers
United issued 46,975 shares to approximately 23 persons for
compensation in lieu of salary for services rendered valued at
$93,950. These shares were issued in reliance on the exemption
from registration set forth in 4(2) Securities Act of 1933. The
services were performed by employees during 1998. On the basis
of their employment with Buyers United and access to management
and financial statements, each of the employees had such
knowledge of the business and financial condition of Buyers
United so as to make an informed investment decision.
On May 29, 1998, Buyers United converted a $70,000 note
payable and related accrued interest of $12,834 held by Todd
Crosner, a shareholder, to 41,417 shares of common stock at a
price of $2.00 per share. On December 21, 1998, Buyers United
also converted an 8% convertible debenture, held by Dallin
Bagley, who subsequently became a director of Buyers United, in
the amount of $400,000 to 468,330 shares of common stock at a
price of $0.85 per share based on the contractual terms of the
debenture. Additionally, on February 6, 1998, Buyers United
issued 74,162 shares of common stock to Gary Smith, a Direct of
Buyers United, valued at $148,324 or $2.00 per share as
consideration for his guarantee of Buyers United's $1,000,000
note payable held by George Brimhall, an otherwise unrelated
party. On December 21, 1998, Buyers United also issued 31,250
shares of common stock valued at $62,500 or $2.00 per share to
George Brimhall in connection with restructuring the $1,000,000
note payable. These shares
23
<PAGE>
were issued in reliance on the
exemption from registration set forth in 4(2) Securities Act of
1933. These individuals had access to the information on Buyers
United necessary to make an informed investment decision and each
individual provided written confirmation of its status as an
accredited investor
From December 11, 1998, through March 24, 1999, Buyers
United sold 44,000 share of common stock for $176,000 in cash to
approximately 40 investors in reliance on the exemption from
registration under Rule 504, promulgated under the Securities Act
of 1933. No broker was used in the offering and no commissions
were paid to any person.
In July 1999, Buyers United sold 2,000,000 shares of its
8% Series A Convertible Preferred Stock, par value $0.0001 at an
offering price of $2.00 per share, or a total of $4,000,000. The
Series A Preferred Stock was sold to 60 accredited investors (as
defined in Rule 501 of Regulation D) in reliance on Rule 506 of
Regulation D. The shares were offered through First Level
Capital, Inc., a member firm of the NASD, which received a
commission of $400,000, a non-accountable expense allowance of
$120,000, and 500,000 shares of Buyers United common stock at a
purchase price of $5,000. In addition, Buyers United entered
into a three-year consulting agreement with First Level Capital,
Inc., providing for the payment of a monthly fee in the amount of
$3,000. First Level Capital, Inc., has a right of first refusal
to participate in future financings of Buyers United for a term
of five years. Buyers United plans to use the proceeds for
general corporate uses of sales and marketing, new product
implementation, working capital, short term debt repayment, and
accounts payable obligations.
From May 7, 1997, through June 30, 1997, and on February
6, 1998 Buyers United issued 3,708 shares of common stock valued
at $20,000 and 10,197 shares of common stock, valued at $55,000,
respectively, to repurchase prepaid teleconferencing units that
Buyers United had sold to 18 individuals during 1996. On
February 11, 1999 Buyers United issued 19,468 shares of common
stock to these same 18 individuals in exchange for their royalty
interest granted by Buyers United in 1996 for certain of Buyers
United's telecommunications services. These individuals had
access to the information on Buyers United necessary to make an
informed investment decision and each individual provided
confirmation of their status as an accredited investor.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Buyers United's Certificate of Incorporation 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 the
Company 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
24
<PAGE>
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 Certificate of
Incorporation and Bylaws provide that it 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 Certificate of Incorporation and Bylaws provide that
Buyers United will indemnify its directors and officers and may
indemnify employees or agents 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 Certificate of
Incorporation 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.
PART F/S
FINANCIAL STATEMENTS
The financial statements of Buyers United appear at the end
of this registration statement beginning with the Index to
Financial Statements on page F-1.
PART III
ITEM 1. INDEX TO EXHIBITS
ITEM 2. DESCRIPTION OF EXHIBITS
Copies of the following documents are included as exhibits
to this report.
Exhibit Form 1-A Title of Document Location*
No. Ref. No.
1 (8) Agreement and Plan of Merger dated
March 15, 1999 Initial Filing
Page E-1
2 (2) Certificate of Incorporation Initial Filing
Page E-5
3 (2)&(3) Certificate of Designation of Preferred Stock Initial Filing
Page E-9
4 (2) By-Laws Initial Filing
Page E-20
5 (6) Options granted to Rod Smith Initial Filing
Page E-35
6 (6) Options granted to Gary Smith Initial Filing
Page E-41
7 (6) Options granted to G. Douglas Smith Initial Filing
Page E-47
8 (6) Options granted to Paul Jarman Initial Filing
Page E-53
9 (6) Long-Term Stock Incentive Plan Initial Filing
Page E-59
10 (6) Commercial Lease Initial Filing
Page E-69
11 (6) SISNA Agreement dated October 12, 1998 Am. No. 1
Page E-1
12 (6) United Buyers Advantage Agreement Am. No. 1
dated January 19, 1999 Page E-10
13 (6) Restructuring Agreement dated Am. No. 1
September 29, 1997 Page E-20
14 (6) Promissory Note to Gary Smith dated Am. No. 1
October 1, 1997 Page E-23
15 (6) Promissory Note to Gary Smith dated Am. No. 1
January 9, 1998 Page E-25
16 (6) Promissory Note to George Brimhall Am. No. 1
dated January 9, 1998 Page E-27
17 (6) Guaranty of Gary Smith dated January Am. No. 1
9, 1998 Page E-29
18 (6) Memorandum of Agreement with Gary Smith Am. No. 1
dated May 11, 1999 Page E-31
19 (6) Memorandum of Agreement with Mogans Smed Am. No. 1
Page E-32
20 (6) I-Link Reseller Agreement Am. No. 1
Page E-33
21 (6) I-Link Settlement Agreement Am. No. 1
Page E-42
22 (6) IXC Service Agreement, without exhibits Am. No. 1
Page E-44
23 (15) Financial Data Schedules Am. No. 1**
* Exhibits identified as in the "Initial Filing" 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, and the
page references are to the page location of the exhibit in said filing.
Exhibits identified as in "Am. No. 1" are incorporated herein by this
reference to Amendment No. 1 to the Registration Statement on Form 10-SB/A,
filed September 21, 1999, and the page references are to the page location
of the exhibit in that filing.
** The Financial Data Schedule is presented only in the electronic filing
with the Securities and Exchange Commission of Amendment No. 1 to the
Registration Statement on Form-SB/A on September 21, 1999.
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act
of 1934, the registrant caused this registration statement to be
signed on its behalf by the undersigned thereunto duly
authorized.
BUI, INC.
Date: October 7, 1999 By: /s/ Rod Smith, President
27
<PAGE>
In accordance with the Exchange Act, this registration
statement has been signed by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Dated: October 7, 1999 /s/ Rod Smith, Chief Executive Officer
and Director
Dated: October 7, 1999 /s/ Paul Jarman, Chief Financial Officer
Dated: October __, 1999 ___________________________________
Theodore Stern, Director
Dated: October 7, 1999 /s/ Gary Smith, Director
Dated: October 7, 1999 /s/ Edward Dallin Bagley, Director
28
<PAGE>
BUI, INC. AND SUBSIDIARY
Index to Financial Statements
Condensed, Consolidated Financial Statements (Unaudited) as of June 30, 1999
and for the Six-Month Periods Ended June 30, 1999 And 1998
Condensed, Consolidated Balance Sheets as of June 30, 1999 (unaudited)
and December 31, 1998 F-2
Condensed, Consolidated Statements of Operations (unaudited)
for the three-month periods ended June 30, 1999 and 1998 F-3
Condensed, Consolidated Statements of Operations (unaudited)
for the six-month periods ended June 30, 1999 and 1998 F-4
Condensed, Consolidated Statements of Cash Flows (unaudited)
for the six-month periods ended June 30, 1999 and 1998 F-5
Notes to Condensed Consolidated Financial Statements (Unaudited) F-6
Consolidated Financial Statements as of December 31, 1998 and 1997
and for the years then ended
Report of Independent Public Accountants F-8
Consolidated Balance Sheet as of December 31, 1998 F-9
Consolidated Statements of Operations for the years ended
December 31, 1998 and 1997 F-10
Consolidated Statements of Shareholders' Deficits for the years ended
December 31, 1998 and 1997 F-11
Consolidated Statements of Cash Flows for the years ended
December 31, 1998 and 1997 F-12
Notes to Consolidated Financial statements F-14
F-1
<PAGE>
BUI, INC. AND SUBSIDIARY
Condensed, Consolidated Balance Sheets
(Unaudited)
Jun. 30, 1999 Dec. 31, 1998
Assets
Current Assets:
Cash $ 1,459,833 $ 22,690
Restricted Cash 43,507 42,263
Accounts receivable, net 729,524 631,324
Other current assets 19,149 3,124
Total Current Assets 2,252,013 699,401
Property and Equipment, net 91,558 112,262
Total Assets $ 2,343,571 $ 811,663
Liabilities and Stockholders Deficit
Current Liabilities:
Accounts Payable $ 485,261 $ 680,607
Accrued liabilites 417,828 349,359
Current portion of long-term debt 483,675 472,285
Accrued founders settlement 0 9,000
Preferred series A dividend payable 2,740 0
Total Current Liabilities 1,389,504 1,511,251
Long Term Debt, less current portion 1,000,000 1,050,000
Shareholders Deficit:
Preferred stock, $0.0001 par value;
5,000,000 shares authorized
Series A 8% convertible preferred
stock; 1,112,618 and 0 shares issued,
respectively 867,351 0
Common stock, $0.0001 par value;
20,000,000 shares authorized;
3,514,162 and 2,949,549 shares issued,
respectively 351 295
Additional paid in capital 4,809,068 3,610,152
Treasury stock (141,800) (141,800)
Options outstanding 17,889 52,411
Accumulated deficit (5,598,792) (5,270,646)
Total Shareholders Deficit (45,933) (1,749,588)
Total Liabilities and Stockholders
Deficit $ 2,343,571 $ 811,663
See accompanying notes to consolidated condensed financial statements.
F-2
<PAGE>
BUI, INC AND SUBSIDIARY
Condensed, Consolidated Statements of Operations
(Unaudited)
Three months ended June 30,
1999 1998
Revenues:
Telecommunications services $ 1,231,164 $ 1,445,850
Net commissions on
telecommunications services 0 152,872
Other 17,882 26,391
1,249,046 1,625,113
Operating Expenses:
Cost of telecommunications services 747,357 1,305,358
General and administrative 396,327 286,133
Selling and promotion 189,180 259,402
Depreciation and amortization 18,453 15,828
1,351,317 1,866,720
Loss From Operations (102,271) (241,607)
Other Income (Expense):
Interest income 1,363 0
Interest expense (31,903) (42,069)
Other Expense, Net (30,540) (42,069)
Loss Before Series A Preferred Stock Dividend (132,811) (283,676)
Series A Preferred Stock Dividends (2,740) 0
Net Loss Applicable to Common Shareholders $ (135,551) $ (283,676)
Net Loss Per Common Share:
Basic and diluted $ (0.04) $ (0.13)
Weighted Average Common Shares Outstanding:
Basic and diluted 3,045,607 2,171,577
See accompanying notes to consolidated condensed financial statements.
F-3
<PAGE>
BUI, INC AND SUBSIDIARY
Condensed, Consolidated Statements of Operations
(Unaudited)
Six months ended June 30,
1999 1998
Revenues:
Telecommunications services $ 2,513,563 $ 1,737,520
Net commissions on
telecommunications services 0 222,674
Other 57,216 58,556
2,570,779 2,018,750
Operating Expenses:
Cost of telecommunications services 1,613,302 1,586,263
General and administrative 864,055 750,888
Selling and promotion 319,224 413,170
Depreciation and amortization 35,579 30,576
2,832,160 2,780,897
Loss From Operations (261,381) (762,147)
Other Income (Expense):
Interest Income 1,519 116
Loan guarantee expense 0 (118,659)
Interest expense (65,544) (113,178)
Other Expense, net (64,025) (231,721)
Loss Before Series A Preferred Stock Dividend (325,406) (993,868)
Series A Preferred Stock Dividends (2,740) 0
Net Loss Applicable to Common Shareholders $ (328,146) $ (993,868)
Net Loss Per Common Share:
Basic and diluted $ (0.11) $ (0.48)
Weighted Average Common Shares Outstanding:
Basic and Diluted 3,005,116 2,077,426
See accompanying notes to consolidated condensed financial statements.
F-4
<PAGE>
BUI, INC AND SUBSIDIARY
Condensed, Consolidated Statements of Cash Flows
(Unaudited)
Six months ended June 30,
1999 1998
Operating Activities:
Net Loss $ (328,146) $ (993,868)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 35,579 30,576
Issuance of common shares for services 0 89,843
Issuance of common shares in connection
with debt agreements 0 188,659
Changes in operating assets and liabilities-
Increase in restricted cash (1,244) (72,093)
Increase in accounts receivable (98,200) (525,962)
Increase in other current assets (16,025) 0
(Decrease) increase in accounts payable (195,346) 12,187
Increase in accrued liabilities 62,209 366,415
Decrease in unearned revenue 0 (40,000)
Net cash used in operating activities (541,173) (944,243)
Investing Activities:
Purchase of equipment, furniture and fixtures (14,875) (28,535)
Net cash used in investing activities (14,875) (28,535)
Financing Activities:
Proceeds from borrowings under notes payable 57,348 1,483,903
Principal payments on notes payable (95,957) (1,539,916)
Issuance of common shares for cash and expense
of options 164,449 1,180,335
Net cash proceeds from issuance of
series A preferred stock 1,867,351 0
Net cash provided by financing activities 1,993,191 1,124,322
Increase in cash 1,437,143 151,544
Cash at beginning of period 22,690 0
Cash at end of period $ 1,459,833 $ 151,544
Supplemental disclosures of cash flow information
Cash paid for interest $ 59,000 $ 27,610
See accompanying notes to consolidated condensed financial statements.
F-5
<PAGE>
BUI, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The condensed consolidated financial statements include
the accounts of BUI, Inc., a Delaware company, and its
wholly owned subsidiary, Buyers United, Inc. (together,
the "Company"). All significant intercompany balances
and transactions have been eliminated in consolidation.
The financial statements have been prepared, without
audit, in accordance with generally accepted accounting
principles, pursuant to the rules and regulations of
the Securities and Exchange Commission. In the opinion
of management, the accompanying financial statements
include all adjustments which are necessary for a fair
presentation of the results for the interim periods
presented, such adjustments being of a normal recurring
nature. Certain information and footnote disclosures
have been condensed or omitted pursuant to such rules
and regulations. The December 31, 1998, condensed
consolidated statement of financial position was
derived from, the audited balance sheet of the Company
for the year then ended. It is suggested that these
condensed consolidated financial statements and notes
thereto be read in conjunction with the audited
financial statements of the Company for the year ended
December 31, 1998. Results of operations in interim
periods are not necessarily indicative of results to be
expected for a full year.
Note 2. Private Offering of Series A Convertible Preferred Stock
On April 21, 1999, the Board of Directors authorized an
offering of a minimum of 600,000 shares or a maximum of
2,000,000 shares of 8% Series A Convertible Preferred
Stock (see Note 6) at an offering price of $2.00 per
share. The Series A Preferred Stock provides for a
cumulative dividend of 8 percent per annum payable semi-
annually on June 30 and December 31 beginning December
31, 1999 out of funds legally available therefore.
Dividends may be paid in cash or common stock at the
election of the Company. If the Company fails to pay
any dividend within 60 days of its due date the
conversion price will be adjusted by $0.25 per share.
The Series A Preferred Stock is convertible into shares
of common stock at an initial conversion price of $2.00
per share at the election of the holder at any time and
under limited circumstances at the election of the
Company.
In connection with the Offering, the Company agreed to
pay First Level Capital, Inc. (the "Placement Agent") a
sales commission equal to 10 percent of the gross
proceeds from the sale of the Series A Preferred Stock.
The Company also agreed
F-6
<PAGE>
to pay to the Placement Agent a
non-accountable expense allowance equal to 3 percent of
the gross proceeds. As additional compensation, the
Company agreed to sell to the Placement Agent at the
closing of the minimum number of shares offered 500,000
shares of the Company's common stock at a price of
$0.01 per share. The Series A Preferred Stock was
offered by the Placement Agent on a "best efforts/ all-
or-none" basis as to the first 600,000 shares with a
total subscription price of $1,200,000 and a "best
efforts" basis thereafter. The Company also agreed to
enter into a two-year consulting agreement with the
Placement Agent. For investment banking and advisory
services provided to the Company, the Placement Agent
will receive $3,000 per month. The Placement Agent
upon completion of the offering may designate two
members of the Company's Board of Directors for two
years.
As of July 16, 1999, the 2,000,000 shares of Series A
Convertible Preferred Stock were sold with the Company
receiving net proceeds of $3,480,000.
Note 3. Net Loss Per Common Share
Basic net loss per common share ("Basic EPS") excludes
dilution and is computed by dividing net loss by the
weighted average number of common shares outstanding
during the year. Diluted net loss per common share
("Diluted EPS") reflects the potential dilution that
could occur if stock options or other contracts to
issue common stock 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.
Options to purchase 1,339,645 shares of common stock at
weighted average exercise price of $2.82 per share as
of June 30, 1998, was not included in the computation
of diluted EPS. The inclusion of the options and
warrants would have been antidilutive, thereby
decreasing net loss per common share.
F-7
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To BUI, Inc.:
We have audited the accompanying consolidated balance sheet of
BUI, Inc. (formerly Buyers United International, Inc.) (a
Delaware corporation) and subsidiary as of December 31, 1998 and
the related consolidated statements of operations, shareholders'
deficit and cash flows for the years ended December 31, 1998 and
1997. 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 generally accepted
auditing standards. 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 consolidated
financial position of BUI, Inc. and subsidiary as of December 31,
1998, and the results of their operations and their cash flows
for the years ended December 31, 1998 and 1997 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
July 16, 1999
F-8
<PAGE>
BUI, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1998
ASSETS
CURRENT ASSETS:
Cash $ 22,690
Restricted cash 42,263
Accounts receivable 631,324
Other current assets 3,124
Total current assets 699,401
EQUIPMENT, FURNITURE AND FIXTURES,
net of accumulated depreciation of $159,726 112,262
Total assets $ 811,663
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current portion of notes payable $ 472,285
Accounts payable 680,607
Accrued liabilities 349,359
Accrued Founders settlement 9,000
Total current liabilities 1,511,251
NOTES PAYABLE, net of current portion 1,050,000
COMMITMENTS AND CONTINGENCIES (Notes 1, 5, 6 and 8)
SHAREHOLDERS' DEFICIT:
Preferred stock, $0.0001 par value; 5,000,000
shares authorized -
Common stock, $0.0001 par value; 20,000,000
shares authorized; 2,949,549 shares issued 295
Additional paid-in capital 3,610,152
Treasury stock, 74,162 shares, at cost (141,800)
Options outstanding 52,411
Accumulated deficit (5,270,646)
Total shareholders' deficit (1,749,588)
Total liabilities and shareholders' deficit $ 811,663
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
BUI, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
REVENUES:
Telecommunications services $ 4,580,575 $ -
Net commissions on
telecommunications services 428,382 770,758
Other 78,404 91,994
5,087,361 862,752
OPERATING EXPENSES:
Cost of telecommunication services 3,088,344 -
Cost of other revenues 52,606 51,108
General and administrative 1,950,854 1,706,407
Selling and promotion 1,073,440 1,276,549
6,165,244 3,034,064
LOSS FROM OPERATIONS (1,077,883) (2,171,312)
OTHER INCOME (EXPENSE):
Interest and other income 274 20,315
Interest expense (388,973) (542,405)
Total other expense, net (388,699) (522,090)
NET LOSS $(1,466,582) $(2,693,402)
NET LOSS PER COMMON SHARE:
Basic and diluted $ (0.66) $ (1.41)
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic and diluted 2,228,702 1,907,329
See accompanying notes to consolidated financial statements.
F-10
<PAGE>
BUI, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Treasury Stock Options Accumulated
Shares Amount Capital Shares Amount Outstanding Deficit Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996 1,462,904 $ 146 $ 309,447 - $ - $ - $(1,110,662) $ (801,069)
Sale of common shares for cash 170,670 17 514,808 - - - - 514,825
Issuance of common shares for srevices 155,829 16 470,654 - - - - 470,670
Issuance of common shares in connection
with debt issuance 74,162 7 223,993 - - - - 224,000
Issuance of common shares in merger
with Lingusitix, Inc. 151,299 15 31,995 - - - - 32,010
Issuance of common shares in settlement
of Founders agreements 3,708 - 20,000 - - - - 20,000
Surrendor of common shares for
cancellation by major shareholders (74,162) (7) 7 - - - - -
Repurchase of common shares for cash - - - 74,162 (141,800) - - (141,800)
Net loss - - - - - - (2,693,402) (2,693,402)
BALANCE, December 31, 1997 1,944,410 $ 194 $1,570,904 74,162 $(141,800) $ - $(3,804,064) $(2,374,766)
</TABLE>
See accompanying notes to consolidated financial statements.
F-11
<PAGE>
BUI, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997 (CONTINUED)
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Treasury Stock Options Accumulated
Shares Amount Capital Shares Amount Outstanding Deficit Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1997 1,944,410 $194 $1,570,904 74,162 $(141,800) $ - $(3,804,064) $(2,374,766)
Sale of common shares for cash 332,808 33 1,196,708 - - - - 1,196,741
Issuance of common shares for services 46,975 5 93,945 - - - - 93,950
Issuance of common shares in
connection with conversion of
debt and related accrued interest 509,747 51 482,783 - - - - 482,834
Issuance of common shares in
connection with loan guarantee
and loan extension 105,412 11 210,813 - - - - 210,824
Issuance of common shares in settlement
of Founders agreements 10,197 1 54,999 - - - - 55,000
Issuance of options to purchase
common shares - - - - - 52,411 - 52,411
Net loss - - - - - - (1,466,582) (1,466,582)
BALANCE, December 31, 1998 2,949,549 $295 $3,610,152 74,162 $(141,800) $52,411 $(5,270,646) $(1,749,588)
</TABLE>
See accompanying notes to consolidated financial statements.
F-12
<PAGE>
BUI, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
Increase (Decrease) in Cash
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,466,582) $(2,693,402)
Adjustments to reconcile net loss to
net cash used in
operating activities:
Depreciation and amortization 62,174 75,981
Issuance of common shares for services 93,950 470,670
Issuance of common shares in connection
with debt agreements 210,824 224,000
Issuance of common shares as payment
for interest 12,834 -
Expense for options to purchase common shares 52,411 -
Gain on sale of equipment, furniture and
fixtures - (4,783)
Changes in operating assets and liabilities-
Increase in restricted cash (42,263) -
(Increase) decrease in accounts receivable (617,421) 200,000
Increase in other current assets (2,559) (565)
(Decrease) increase in checks written
in excess of cash balance (10,721) 10,721
Increase in accounts payable 350,266 254,067
Increase in accrued liabilities 168,887 88,324
(Decrease) increase in unearned revenue (81,788) 81,788
(Decrease) increase in accrued Founder
settlement (6,000) -
Net cash used in operating activities (1,275,988) (1,293,199)
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired in merger with Linguistix - 32,010
Proceeds from the sale of equipment,
furniture and fixtures - 12,500
Purchase of equipment, furniture and fixtures (28,535) (154,331)
Net cash used in investing activities (28,535) (109,821)
See accompanying notes to consolidated financial statements.
F-13
<PAGE>
BUI, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
Increase (Decrease) in Cash
1998 1997
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings under notes payable 238,000 793,000
Principal payments on notes payable (107,528) (26,187)
Net advances from major shareholder - 22,797
Issuance of common shares for cash 1,196,741 514,825
Repurchase of common shares - (141,800)
Net cash provided by financing
activities 1,327,213 1,162,635
NET INCREASE (DECREASE) IN CASH 22,690 (240,385)
CASH AT BEGINNING OF PERIOD - 240,385
CASH AT END OF PERIOD $ 22,690 $ -
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 187,955 $ 306,443
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Conversion of notes payable to common shares $ 470,000 $ -
Issuance of common shares in settlement
of Founders agreements 55,000 20,000
Assumption of debt from major shareholder - 200,000
See accompanying notes to consolidated financial statements.
F-14
<PAGE>
BUI, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF THE COMPANY AND NATURE OF OPERATIONS
The Company was originally incorporated in Utah on January 16,
1996 as WealthNet Incorporated ("WealthNet"). On November 13,
1997, WealthNet was merged into Linguistix Acquisition Inc.
("LAI"), a Utah corporation and wholly owned subsidiary of
Linguistix, Inc. ("Linguistix")(the "Linguistix Merger"). LAI
was the surviving corporation and effective with the Linguistix
Merger changed its name to Buyers United, Inc. ("Buyers United").
The Linguistix Merger was approved, with the recommendation of
the Board of Directors of WealthNet, to enhance the ability of
WealthNet to raise debt and equity capital needed for operations.
Linguistix was a Utah corporation organized in August 1994 as a
vehicle to receive the assets of Twin Creek Exploration Co., Inc.
("Twin Creek") prior to a business reorganization. Prior to the
Linguistix Merger, Linguistix' operations were limited to
receiving minimal oil and gas royalties, which have not
continued, and as of the date of the merger the only significant
identifiable asset consisted of $32,010 of cash. There were no
liabilities assumed in the merger. In connection with the
Linguistix Merger, Linguistix changed its name to Buyers United
International, Inc. ("BUII").
The merger of WealthNet with Buyers United and BUII has been
reflected in the accompanying consolidated financial statements
as a reverse acquisition accounted for as a purchase. WealthNet
has been presented as the continuing accounting entity with the
equity accounts and common shares outstanding being retroactively
restated to reflect the effect of the exchange ratio established
in the Linguistix Merger. BUII is presented as the acquired
entity with its assets and liabilities being recorded at
estimated fair value as of the merger date and the results of
operations of BUII being included in the accompanying
consolidated financial statements from the date of the Linguistix
Merger. Following the Linguistix Merger, BUII has pursued the
business of WealthNet.
BUI, Inc. was incorporated in the state of Delaware on March 15,
1999 for the purpose of reincorporating BUII as a Delaware
corporation. Effective April 9, 1999, BUII was merged into BUI,
Inc. (the "BUI Merger"). In the BUI Merger, each four shares of
BUII common stock and each four options to purchase shares of
BUII's common stock were converted into one share of common stock
of BUI, Inc. or options to purchase one share of BUI Inc.'s
common stock. The equity accounts and the common shares
outstanding in the accompanying consolidated financial statements
have been retroactively restated to reflect the effect of the BUI
Merger.
BUI, Inc., BUII, Buyers United, and WealthNet are collectively
referred to herein as the "Company."
The Company is a consumer buying organization with the objective
of providing high quality consumer products and services at
favorable prices to its consumer members. The Company has begun
to form strategic alliances and joint ventures with various
consumer service
F-15
<PAGE>
providers in an effort to combine the purchasing
power of its consumer members to negotiate favorable prices from
these providers. The Company markets its products and services
by offering incentives to its consumer members to attract
additional consumers with whom they have ongoing relationships to
the Company's products and services. As of December 31, 1998,
the Company provided discounted long distance telecommunication
services to its consumer members.
As of December 31, 1998, the Company had a working capital
deficit of $811,850, a shareholders' deficit of $1,749,588 and
has incurred net losses of $1,466,582, and $2,693,402 during the
years ended December 31, 1998 and 1997, respectively. Subsequent
to December 31, 1998, the Company has raised $173,000 of
additional equity capital through the sale of common shares and
has raised $3,480,000 in an offering of 2,000,000 shares of 8%
Series A Convertible Preferred Stock at an offering price of $2
per share (see Note 8). In addition, the Company received
$160,000 in May 1999 under an 8% unsecured convertible promissory
note due June 1, 2000 and five-year warrants to purchase shares
of common stock at an exercise price of $1.25 per share.
The Company is subject to certain risk factors frequently
encountered by companies lacking adequate capital and which are
in the early stages of developing a business line that may impact
its ability to become a profitable enterprise. These risk
factors include:
a) The consumer buying organization industry is characterized
by intense competition, and many of the Company's competitors are
substantially larger than the Company with greater financial and
other resources. In addition, the Company is currently marketing
telecommunications services, including long distance services, to
its consumer members. The U.S. long distance telecommunications
industry is highly competitive and significantly influenced by
the marketing and pricing strategies of the major industry
participants, which are significantly larger than the Company and
have substantially greater resources.
b) The Company's ability to effectively provide
telecommunications services to its members depends on its ability
to form strategic alliances and joint ventures with third party
telecommunications service providers that provide high quality
services at competitive prices. The Company currently obtains
its telecommunications services from one supplier. Although
there are a limited number of telecommunication service
providers, a change in suppliers could cause a disruption in
service and possible loss of revenues, which could affect
operating results adversely.
c) The Company's relationship marketing system is or may be
subject to or affected by extensive government regulation,
including without limitations, state regulation of marketing
practices and federal and state regulation of the offer and sale
of business franchises, business opportunities, and securities.
Long distance telecommunications carriers currently are subject
to extensive federal and state government regulation.
d) Additional funds will be required to finance the Company's
operations until profitability can be achieved and to fund the
repayment of debt obligations and other liabilities. There can
be no assurance that the additional funding will be available or,
if available, that it will be available on acceptable terms or in
required amounts.
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(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with
generally accepted accounting principles 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.
Equipment, Furniture and Fixtures
Equipment, furniture and fixtures are stated at cost. Major
additions and improvements are capitalized, while minor repairs
and maintenance costs are expensed when incurred. Depreciation
is computed using the straight-line method over the estimated
useful lives of the related assets which are as follows:
Computer and office equipment 3 years
Furniture and fixtures 3 years
When equipment, furniture and fixtures are retired or otherwise
disposed of, the book value is removed from the asset and related
accumulated depreciation accounts, and the net gain or loss is
included in the determination of net income (loss).
Fair Value of Financial Instruments
The carrying amounts reported in the accompanying consolidated
balance sheets 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 also approximate fair value based on
current rates for similar debt instruments.
Revenue Recognition and Related Arrangements
Beginning in January 1997, the Company's long distance service
was provided under a Strategic Member Reseller Agreement (the
"Reseller Agreement") with I-Link WorldWide, Inc. ("I-Link").
Under the Reseller Agreement, the Company functioned as a
commissioned agent for selling I-Link's long distance service.
The commissions received by the Company were based on revenues
collected by I-Link from the Company's members. Under the
Reseller Agreement, I-Link provided all provisioning, tariffing,
negotiating and securing local exchange carrier agreements,
billing and collection services, status tracking, accounting and
reporting. Accordingly, the Company recognized commission
revenue monthly as received from I-Link.
Due to difficulties encountered under the arrangement with I-
Link, in May 1998, the Company and I-Link entered into a business
separation agreement to provide for the separation of their
business relationship and a mutual release of all claims which
may have arisen between them prior to the date of the Reseller
Agreement. Under the separation agreement, the Company agreed to
undertake at its own expense on a "best efforts" basis to collect
all current and past due accounts receivable relating to I-Link
services utilized by the Buyers United customers after January 1,
1997. All collected funds were to be distributed fifty percent
to the Company and fifty percent to I-Link; provided, however,
that the first $200,000 collected was to be allocated to
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the Company and the second $200,000 collected was to be allocated to
I-Link. Thereafter, any collected funds would be distributed on
a 50/50 basis to the Company and I-Link. As of December 31,
1998, the Company had received the initial $200,000 and
management does not expect to receive any additional amounts
under the separation agreement.
In December 1997, the Company entered into a three year
Service Agreement with IXC Communications, Inc. ("IXC") (the "IXC
Service Agreement"). Under the IXC Service Agreement, IXC agreed
to sell to the Company telecommunications services at certain
rates and the Company has the rights to resell the services to
its members. Pursuant to the IXC Service Agreement, the Company
is billed monthly for the long distance line costs incurred by
the Company's members and the Company has the obligations to
perform all tariffing, billing and collections. Accordingly,
revenues from telecommunications services under the IXC Service
Agreement are recognized as the services are provided and billed
to the customers with a provision for uncollectable accounts and
cost of revenues are recognized as the services are provided by
IXC.
Initially the Company contracted to have IXC provide certain
billing , status tracking, accounting and reporting services.
Pursuant to the IXC Service Agreement, the Company has granted to
IXC a first priority security interest in the Company's
receivables from its customers and has directed its customers to
make all payments directly to a lockbox account for the benefit
of IXC. As of December 31, 1998, the lockbox account had a
balance of $42,263, which is reflected in the accompanying
consolidated balance sheet as restricted cash, and the Company
had a payable to IXC of $525,734, secured by the Company's
accounts receivable of $631,324.
Revenues from sales of products are recognized upon shipment
of the products to the customers.
The Company's revenue recognition policy with respect to reseller
agreements is to record gross revenues and receivables from customers
when title to the products or services passes to the Company and then
from the Company to the end customer. This is evidenced by the Company's
obligation to pay the supplier for the products and services regardless
of whether the Company eventually collects from its end customer and the
Company bears the credit risk related to its customers. Revenues from
sales of products are recognized upon shipment of the products to the
customer and revenues from services are recognized as the services are
provided.
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Member Incentive Payments
Each month the Company rebates ten percent of collected usage revenue to
its members under an incentive program referred to as "Piece of the Pie."
Collected usage revenue is defined as the usage portion of a bill that is
paid in full within 45 days of the statement date. This rebate pool is
referred to as the "Pie." The "Pie" is disbursed proportionally every
month to qualifying members according to the amount of usage generated
by their referrals. Qualifying members are only billed for the difference
between their monthly statement and the amount of the rebate earned. In
situations where the amount of the rebate exceeds the amount on the
member's statement, the excess amount is paid to the member in the form
of a check. There are no guaranteed rebates. Members do not have the
option to exchange excess rebates for services in future periods.
The Company accounts for the piece of the pie rebates by recording an
accrual for the estimated rebates to be paid applicable to each month's
revenues. The rebates are classified as selling and promotion expense
in the accompaning statements of operations and the rebate is accrued
in the accompanying balance sheet under accrued liabilities. The
rebates amounted to $310,780 and $336,308 during the years ended December
31, 1998 and 1997, respectively, and as of December 31, 1998 accrued
rebates amounted to $73,898.
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.
Net Loss Per Common Share
Basic net loss per common share ("Basic EPS") excludes dilution
and is computed by dividing net loss by the weighted average
number of common shares outstanding during the year. Diluted net
loss per common share ("Diluted EPS") reflects the potential
dilution that could occur if stock options or other contracts to
issue common stock 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.
Options to purchase 622,930 and 1,339,645 shares of common stock
at weighted average exercise prices of $3.49 and $2.82 per share
as of December 31, 1997 and 1998, respectively, were not included
in the computation of diluted EPS. The inclusion of the options
and warrants would have been antidilutive, thereby decreasing net
loss per common share.
Reclassifications
Certain reclassifications have been made to the 1997 and 1996
financial statements to be consistent with the 1998 presentation.
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(3) NOTES PAYABLE
Notes payable consist of the following as of December 31, 1998:
Note payable to an individual; interest at 10
percent payable monthly, principal due on
April 15, 2000 ($500,000 of principal is
convertible to common stock at $4 per share
at the option of the holder on or before
April 15, 2000); secured by certain assets
of a shareholder of the Company (see
discussion below) $ 1,050,000
Note payable to a shareholder; interest at 20
percent through January 9, 1998 and 6
percent thereafter payable monthly; due on
demand; unsecured (see discussion below) 251,312
Note payable to a shareholder; interest at 10
percent; due on demand (convertible to
common stock at $2.00 per share at the
option of the holder); unsecured 150,000
Note payable to a limited liability company;
interest at 10 percent , principal and
interest due in monthly installments of
$9,578, secured by interest in accounts
receivable 48,771
Note payable to a shareholder; interest at 10
percent; due on demand; unsecured 22,202
Total notes payable 1,522,285
Less current portion (472,285)
Notes payable, net of current portion $1,050,000
As of December 31, 1996, the Company had borrowed $163,300 from
Rod Smith, the Company's president, major shareholder and
founder, under an unsecured note payable arrangement providing
interest at 9 percent per annum with the principal and accrued
interest due on June 30, 1997. In October 1997, this amount was
repaid to Rod Smith in connection with the Company assuming a
$200,000 obligation of Rod Smith's to his father, Gary Smith, and
was included in the $1,300,000 note payable to Gary Smith as of
December 31, 1997 included above.
During 1996 and 1997, Gary Smith advanced $1,100,000 to the
Company for working capital and other corporate purposes. Under
an informal agreement with the Company, the advances by Gary
Smith accrued interest at the rate of 20 percent per annum and
were unsecured. In consideration for making these loans and for
other services provided, the Company issued to Gary Smith 185,405
and 74,162 shares of common stock during 1996 and 1997,
respectively, and granted options to purchase 55,622 shares of
common stock at $2.02 per share and 185,405 shares of common
stock at $5.39 per share. The estimated fair market value of the common
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shares issued to Gary Smith has been reflected as
additional interest expense or administrative expense in the
accompanying consolidated financial statements.
In October 1997, Gary Smith and Rod Smith entered into a
Restructuring Agreement with the Company, which provided for
formalization of the debt obligation of the Company to Gary Smith
and the return of shares of common stock for cancellation by both
Rod Smith and Gary Smith to assist the Company in obtaining
additional capital (see Note 6). The Company issued to Gary
Smith an unsecured promissory note in the principal amount of
$1,300,000 (which included the $200,000 borrowed by Rod Smith
from Gary Smith and loaned to the Company), bearing interest at
20 percent per annum.
In January 1998, the Company restructured the $1,300,000 note
payable to Gary Smith. The Company transferred $1,000,000 of the
$1,300,000 note payable to an individual. The new $1,000,000
note payable included interest at ten percent payable monthly
with all principal and accrued interest to be due November 15,
1998. The $1,000,000 note payable was guaranteed by Gary Smith.
As consideration for Gary Smith's guarantee of the $1,000,000
note payable, the Company issued 74,162 shares of common stock to
Gary Smith. The terms of the remaining $300,000 were initially
changed to be non-interest bearing and to include monthly
principal payments of $10,000 commencing February 1, 1998 and
continuing thereafter to February 1, 1999, when all remaining
principal was due and payable. Subsequently, the terms of the
remaining $300,000 were modified to include interest at 6 percent
payable monthly with the principal due as the Company has
available resources. The remaining principal balance of $251,312
as of December 31, 1998 has been included as a current note
payable in the accompanying financial statements.
In September 1998, the $1,000,000 note payable was restructured
to add $50,000 of accrued interest to the principal balance,
extend the due date to April 15, 2000 with monthly interest
payments commencing on October 15, 1998, and secure the note with
certain assets of Gary Smith and terminate the guarantee. As
consideration, the individual was issued 31,250 shares of common
stock and was granted an option to convert $500,000 of the note
into shares of common stock at a price of $4.00 per share through
April 15, 2000. The $1,050,000 is classified as a noncurrent
liability in the accompanying December 31, 1998 consolidated
balance sheet.
(4) INCOME TAXES
The components of the net deferred income tax assets as of
December 31, 1998 are as follows:
Net operating loss carryforwards $ 1,428,100
Writeoff of WealthNet System for financial
reporting purposes 138,900
Reserves and accrued liabilities 37,000
Total deferred income tax assets 1,604,000
Valuation allowance (1,604,000)
Net deferred income tax assets $ -
As of December 31, 1998, the Company had net operating loss
carryforwards for federal income tax reporting purposes of
approximately $3,860,000. For federal income tax purposes,
utilization of these carryforwards is limited if the Company has
had more than a 50 percent
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change in ownership (as defined by the
Internal Revenue Code) or, under certain conditions, if such a
change occurs in the future. The tax net operating loss
carryforwards will expire beginning in 2011.
No benefit for income taxes has been recorded during the years
ended December 31, 1998 and 1997. As discussed in Note 1,
certain risks exist with respect to the Company's future
profitability and management has concluded that, due to these
uncertainties, the related deferred income tax assets may not be
realized. Accordingly, a valuation allowance has been recorded
to offset the deferred income tax assets.
(5) COMMITMENTS AND CONTINGENCIES
Legal Matters
Teleconference Units - As discussed in Note 6, in 1996 the
Company entered into agreements with certain investors pursuant
to which they were entitled to receive 1,000 teleconference
units, each unit entitling the holder to one 30-minute conference
call for up to 200 participants through December 1998. As of
December 31, 1998, the Company has reacquired all of the units
except for 900 units granted to Mr. Ray Gray. On October 15,
1997, the Company made a formal demand on Mr. Gray to surrender
all 1,000 teleconferencing units he received as an original
investor in the Company in exchange for $10,000, as provided in
the original agreement. On December 16, 1997, the Company was
served with a complaint filed in the Third Judicial District
Court, Salt Lake County, Utah, alleging that the Company breached
a contract to provide teleconferencing units resulting in damages
to the plaintiff, It Makes Cents ("IMC"), of at least $270,000.
IMC is allegedly the assignee of 900 teleconferencing units
originally granted to Mr. Gray. The Company is of the opinion
that the purported assignment of the units is a breach of the
Company's contract with Mr. Gray.
The teleconferencing units were granted to the original investors
based on certain beliefs regarding the cost of providing the
teleconferencing units. Subsequently, the Company determined
that the costs to provide the teleconferencing units would be
higher than originally estimated. The original investors,
including Mr. Gray, agreed not to sell any of the
teleconferencing units without first contacting the Company. Mr.
Gray did not contact the Company prior to his alleged sale of
teleconferencing units to IMC.
The Company, by way of defense, asserts that Mr. Gray agreed to
not market or sell the teleconferencing units and that Mr. Gray
is in breach of that contractual agreement. The Company also
asserts that the plaintiff is not in privity of contract with the
Company and therefore, the Company owes no contractual duty to
Plaintiff. A pre-trial conference has been held at which the
complaint was dismissed without prejudice for failure of the
plaintiff to appear. If the plaintiff does not refile the
complaint within one year, it will be barred from doing so under
the applicable statute of limitations. Based on the foregoing
circumstances and after discussion with legal counsel, management
believes that the ultimate outcome of this matter will not have a
material effect on the Company's financial position or results of
operations.
Bountiful - As discussed in Note 7, commencing in January 1996,
the Company was involved in a series of transactions with
Bountiful. Bountiful originally obtained funds for its
operations in 1995 by selling income participation interests to a
small group of individuals ("Participants") and borrowing certain
funds from the Participants. Bountiful was formed for the purpose of
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developing a multi-level marketing training system
known as the "WealthNet System," and an infomercial for marketing
the system primarily to NuSkin distributors. Bountiful was
unable to market its program to NuSkin distributors and sought to
market the WealthNet System to other multilevel distributors
through marketing companies and the infomercial. This also
proved unsuccessful. On January 23, 1998, the Participants filed
a lawsuit in Federal District Court, District of Utah against Rod
Smith, individually, Bountiful, and the Company. The complaint
alleged that Rod Smith and Bountiful committed fraud in
connection with the offer and sale of the revenue participation
interests to the Participants, that Rod Smith and Bountiful
violated securities registration requirements of federal and
state securities laws in connection with the offer and sale of
those interests, and that Rod Smith and Bountiful wrongfully
diverted funds and other assets of Bountiful to the Company. The
Participants sought rescission of their investment in Bountiful
in the amount of approximately $675,000 and asked by way of
relief that the stock of the Company owned by Rod Smith be
declared to be held in trust for the benefit of the Participants.
The Participants further demanded unspecified damages against the
Company for the conversion of the assets of Bountiful.
Subsequent to December 31, 1998, two of the plaintiffs and Rod
Smith entered into a settlement agreement. Under the settlement
agreement, the Company will grant to the two plaintiffs options
to purchase a total of 50,000 shares of the Company's common
stock at a price of $2.00 per share exercisable through July 15,
1999. The plaintiffs will dismiss their claims against the
Company with prejudice, and will indemnify the Company against
all claims and causes of actions which were or could be brought
against the Company by the remaining two plaintiffs. Management
believes, after discussion with legal counsel, that the ultimate
outcome of this matter will not have a material effect on the
Company's financial position or results of operations.
The Company is the subject of certain other legal matters, which
it considers incidental to its business activities. It is the
opinion of management, after discussion with legal counsel, that
the ultimate disposition of these legal matters will not have a
material impact on the financial position, liquidity or results
of operations of the Company.
(6) CAPITAL TRANSACTIONS
Authorized Capitalization
As a result of the reincorporation as a Delaware corporation
discussed in Note 1, the authorized capitalization of the Company
consists of 20,000,000 shares of common stock, par value $0.0001,
and 5,000,000 shares of preferred stock, par value $0.0001. In
the reincorporation, each four shares of common stock previously
issued and outstanding and each four outstanding options to
purchase shares of common stock were converted into one share of
common stock or options to purchase one share of common stock, a
one for four reverse stock split. The equity accounts and the
common shares outstanding in the accompanying consolidated
financial statements have been retroactively restated to reflect
the reverse stock split.
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 which constitute 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
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<PAGE>
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 winding up
of the affairs of the Company, or otherwise; and any other
characteristics, preferences, limitations, rights, privileges,
immunities or terms.
Series A Convertible Preferred Stock - The Board of Directors has
authorized 2,000,000 shares of Series A Convertible Preferred
Stock (the "Series A Preferred Stock"). Cumulative dividends
accrue on the Series A 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.
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 share for one share, subject to adjustment in the
event of a recapitalization, reorganization, or other corporate
restructuring or in the event 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.
The Series A 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 Series A Preferred Stock. The
Series A Preferred Stock is superior in right of payment in the
event of liquidation and with respect to dividends to the common
stock and all other series of preferred stock that may be
subsequently authorized.
As discussed in Note 8, subsequent to December 31, 1998 the
Company sold the 2,000,000 shares of Series A Preferred Stock in
a private offering.
Merger of WealthNet into LAI
As discussed in Note 1, on November 13, 1997 WealthNet was merged
into Buyers United, a wholly owned subsidiary of BUII, formerly
Linquistix. The merger of WealthNet with Buyers United has been
reflected in the accompanying consolidated financial statements
as a reverse acquisition accounted for as a purchase. WealthNet
has been presented as the continuing accounting entity with the
equity accounts and common shares outstanding being retroactively
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<PAGE>
restated to reflect the effect of the exchange ratio established
in the merger. BUII is presented as the acquired entity with its
assets and liabilities being recorded at estimated fair value as
of the merger date. Prior to the merger, BUII's operations were
limited to receiving minimal oil and gas royalties, which have
not continued, and as of the date of the merger the only
significant identifiable asset consisted of $32,010 of cash.
There were no liabilities assumed in the merger. The 151,299
shares (post reverse stock split) of common stock of BUII
outstanding at the date of the merger have been recorded at the
value of the cash obtained in the merger.
Stock Issued for Services
During the years ended December 31, 1997 and 1998, the Company
has issued shares of common stock to certain officers, key
employees and others for services provided to the Company. The
shares issued have been valued by the Company's Board of
Directors at estimated fair values based on other shares issued
for cash and on the terms of the related transactions. The
Company has issued 46,975, and 155,829 shares of common stock to
other key employees, directors, and promoters for services
rendered during the years ended December 31, 1998 and 1997,
respectively. These shares were valued at $2.00 per share during
1998 and at $3.02 per share during 1997.
In connection with the Linguistix Merger and the Company's
efforts to obtain additional financing, in September 1997 Rod
Smith and Gary Smith (the "Shareholders") entered into a
Restructuring Agreement with the Company. Pursuant to the
agreement, the Shareholders agreed to surrender 37,081 and 74,162
shares of common stock, respectively, to the Company for
cancellation. The shares surrendered were previously issued to
the Shareholders for services as described above. The 37,081
shares of common stock to be surrendered by Rod Smith were not
actually returned to the Company, but rather were transferred to
new investors who purchased common shares in 1998 as discussed
below.
Private Offerings of Common Stock
During the year ended December 31, 1997, the Company sold 170,670
shares of common stock for cash at prices ranging from $1.96 to
$5.40 per share resulting in net proceeds of $514,825. The
Company also repurchased 74,162 shares of common stock from a
shareholder in exchange for $141,800 in cash and the issuance of
options to purchase 4,635 shares of common stock at $4.00 per
share through October 15, 1999.
In February 1998, the Board of Directors authorized a best
efforts private offering of 500,000 shares of common stock at a
price of $4.00 per share. The shares were offered directly by
the Company. During 1998, the Company sold 286,288 shares of
common stock at a price of $4.00 per share. With respect to the
investors that acquired 260,038 of the 286,288 shares of common
stock, as additional incentive to invest in the Company Rod Smith
agreed to transfer to the investors one share of common stock
from his personal shares for each share acquired resulting in the
investors effectively paying $2.00 per share. The 260,038 shares
of common stock transferred by Rod Smith to the investors
included the 37,081 shares he had committed to return to the
Company in 1997 as discussed above. Additionally, the Company
sold 41,020 shares of common stock to certain employees at a
price of $2.00 per share, based on the effective price of $2.00
per share paid during the year by a majority of investors.
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During 1998, the Company also sold 5,500 shares of common stock
to investors at a price of $4.00 per share in connection with an
offering of shares in the State of New York. The New York
offering was completed to satisfy a public offering requirement
related to the Founders agreements discussed below.
Debt Conversions and Related Agreements
As discussed in Note 3, during the year ended December 31, 1998
the Company converted an 8% convertible debenture in the amount
of $400,000 to 468,330 shares of common stock at a price of $0.85
per share based on the contractual terms of the debenture. The
Company also converted a $70,000 note payable and related accrued
interest of $12,834 to 41,417 shares of common stock at a price
of $2.00 per share. In connection with the conversion of the
$70,000 note payable, the Company granted options to purchase
6,250 shares of common stock at $4.00 per share to the debt
holder.
Additionally, the Company issued 74,162 shares of common stock to
Gary Smith valued at $148,324 or $2.00 per share as consideration
of his guarantee of the Company's $1,000,000 note payable. The
Company also issued 31,250 shares of common stock valued at
$62,500 or $2.00 per share in connection with restructuring the
$1,000,000 note payable. As discussed in Note 3, certain of the
Company's notes payable are convertible to common stock at the
option of the holders at prices ranging from $2.00 to $4.00 per
share.
Founders Agreements
On January 16, 1996, the Company entered into agreements
("Founders Agreements") with 19 individuals and/or entities that
had previously provided $105,000 of funding to Rod Smith for the
purpose of acquiring certain telecommunications services. The
funds paid to Rod Smith were used for the benefit of the Company.
The Founders also provided services to the Company in promoting
the original members for the consumer buying organization. Under
the Founders Agreements, the Company agreed to pay each Founder
one-twentieth of 1 percent of the gross receipts from certain
telecommunications services for a term of 60 years, or until such
time that the Company sells its assets to a third party or makes
a public offering of its common stock. At the time of a public
offering, the Founders in aggregate were to receive options to
purchase 19,468 shares of common stock at a price of $0.06 per
share in exchange for the royalty interests. As discussed above,
the Company sold certain shares of common stock during 1998 in
the State of New York, which was determined by the Company to
satisfy the requirement of a public offering. Accordingly, the
royalty interest was terminated and options to purchase 19,468
shares of common stock at $.06 per share were issued to the
Founders. The estimated fair value of the options granted of
$38,156 was recorded by the Company as additional royalty expense
in 1998 with the corresponding credit recorded as outstanding
options.
The Founders also received the right to transfer, assign, or sell
an aggregate of 21,000 teleconferencing units, as defined in the
Founders Agreements, at any price deemed appropriate by the
Founders until December 31, 1998. The Company reserved the right
to purchase back or cancel any untransferred, unassigned, or
unsold units at any time prior to December 31, 1998 for a price
of $10 per unit.
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As discussed in Note 5, subsequent to entering into the Founders
Agreements the Company determined that the teleconferencing units
were granted based on certain beliefs regarding the cost of
providing the teleconferencing units. Subsequently, the Company
determined that the costs to provide the teleconferencing units
would be higher than originally estimated and the Company
proceeded with purchasing back the units. As of December 31,
1998, the Company had issued 35,226 shares of common stock for
19,000 of the teleconferencing units rather than purchasing the
units at a price of $10 per unit and had paid $11,000 for 1,100
of the remaining units. As of December 31, 1998, the Company had
recorded the contract price of $10 per unit for the 900 units not
repurchased as accrued Founder settlement in the accompanying
consolidated balance sheet. As discussed in Note 5, the
remaining 900 units are subject to certain legal proceedings.
The Company has, in effect, issued shares of common stock to the
Founders in exchange for their initial cash investments and for
the promotion services rendered to the Company. The amount of
the initial investments has been recorded as proceeds from the
issuance of stock and the additional cost to repurchase the
telecommunication units has been expensed with a credit to
shareholders' equity for the shares issued.
Stock Options
The Company's Board of Directors has from time to time authorized
the grant of stock options to directors, officers and key
employees as compensation and in connection with obtaining
financing. The following tables summarize the option activity
for the period from inception (January 16, 1996) to December 31,
1996 and for the years ended December 31, 1997 and 1998.
Weighted
Options Price Range Average Exercise
Price
Balance, December 31, 1996 259,567 $2.02 - 5.39 $4.43
Granted 363,363 2.70 - 5.40 2.82
Balance, December 31, 1997 622,930 2.02 - 5.40 3.49
Granted 969,840 0.06 - 9.00 2.71
Cancelled or expired (253,125) 4.00 - 9.00 4.06
Balance, December 31, 1998 1,339,645 $0.06 - 9.00 $2.82
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The weighted average fair value of options granted during the
years ended December 31, 1998 and 1997 was $0.39 and $0.10,
respectively. A summary of the options outstanding and options
exercisable at December 31, 1998 is as follows:
Options Outstanding Options Exercisable
____________________________________________________ _____________________
Weighted
Average
Range of Remaining Weighted Weighted
Exercise Options Contractual Average Options Average
Prices Outstanding Life Exercise Exercisable Exercise
Price Price
0.06 - 1.99 19,468 0.5 years $ 0.06 19,468 $ 0.06
2.00 - 3.99 1,070,762 6.6 years 2.22 959,519 2.16
4.00 - 5.99 221,290 4.0 years 5.20 221,290 5.20
6.00 - 9.00 28,125 2.6 years 9.00 15,625 9.00
0.06 - 9.00 1,339,645 6.0 years $ 2.82 1,215,902 $ 2.77
Stock-Based Compensation
The Company applies Accounting Principles Board Opinion No. 25
and related interpretations in accounting for its grants of
options to purchase common shares to employees. SFAS No. 123,
"Accounting for Stock-Based Compensation," requires pro forma
information regarding net income (loss) as if the Company had
accounted for its stock options granted under the fair value
method of the statement. The fair value of the stock options was
estimated at the grant date by the Company based on the Black-
Scholes option pricing model. The following assumptions were
used in the Black-Scholes model: a risk-free interest rate of 6.0
percent, a dividend yield of 0.0 percent, and weighted-average
expected lives of 7.5 years and 3.0 years for the years ended
December 31, 1998 and 1997 respectively. The pro forma net
losses under SFAS No. 123 for the years ended December 31, 1998
and 1997 are $1,948,191, and $2,837,384, respectively, as
compared to the reported net losses of $1,466,582 and $2,693,402,
respectively.
Due to the nature and timing of option grants, the resulting pro
forma compensation cost may not be indicative of future years.
(7) RELATED-PARTY TRANSACTIONS
Bountiful, Inc.
Effective February 1, 1996, WealthNet entered into a license
agreement with Bountiful, Inc. ("Bountiful"), a Utah corporation
owned by WealthNet's founder and major shareholder, Rod Smith.
Under the License Agreement, WealthNet licensed the rights to the
"WealthNet System" and to an infomercial produced to market the
WealthNet System in exchange for a one-time license fee of
$150,000, future royalties on sales of the WealthNet System and
278,107 shares of WealthNet's common stock. The WealthNet System
was designed to provide training regarding forming and operating
a home-based business using relationship marketing to sell
products and services.
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Bountiful sold certain of the 278,107 shares of common stock of
the Company to investors for proceeds of $613,653. From the
proceeds received by Bountiful, Bountiful made cash advances to
the Company of $190,000, paid expenses on behalf of the Company
of $223,283, and used $200,370 to further develop the WealthNet
System and related infomercial. As of December 31, 1996, the
Company had a receivable from Bountiful of $225,370. During
1997, the Company and Bountiful agreed that the Company would
forgive the receivable from Bountiful in exchange for Bountiful's
remaining interest in the WealthNet System. Accordingly, the
receivable was reclassified to investment in the WealthNet
System. As of December 31, 1996 the Company was no longer
selling the WealthNet System; therefore, the Company determined
that the total investment of $375,370 in the WealthNet System
should be written off.
IXC Service Agreement
In connection with the IXC Service Agreement discussed in Note 2,
the Company was required to establish with IXC a $100,000 letter
of credit upon execution of the Agreement to secure the Company's
performance. The requirement to provide letters of credit was
released under the IXC Service Agreement upon the Company
granting to IXC a first priority security interest in the
Company's receivables from its end users and directing the end
users to make payments directly into a lockbox account for the
benefit of IXC (see Note 2).
In December 1997, the Company obtained the initial letter of
credit required for the IXC Agreement under an agreement with
Gary Smith (the "LC Agreement"). The LC Agreement provided that
Gary Smith would make available to the Company upon its request a
letter of credit in the principal amount of $100,000 issued
through a bank for a term of six months. In the event any amount
was drawn on the letter of credit and not repaid within five days
following the date of the draw, the amount drawn was to bear
interest at the rate of 20 percent per annum. If the letter of
credit was not replaced by another credit facility by the end of
the initial six month term, then the letter of credit was
automatically extended for a term of six additional months and in
consideration for such extension interest would accrue on the
principal amount of the letter of credit at the rate of 20
percent per annum, excluding any amounts drawn against the line
of credit. In addition, the Company agreed to issue to Gary
Smith shares of common stock in number equal to the principal
amount of the letter of credit, excluding any amount representing
a draw under the agreement. As consideration for the LC
Agreement, the Company agreed to extend the term of options to
purchase 139,054 shares of common stock at $5.40 per share and
options to purchase 55,622 shares of common stock at $2.04 per
share held by Gary Smith. The option exercise period was
extended from October 15, 1998 to October 15, 1999.
On July 1, 1998, the Company extended the term of the LC
Agreement and modified the consideration to be paid to Gary Smith
to include the issuance of five-year options to purchase 27,500
shares of common stock at $2.00 per share. The estimated fair
value of the options of $14,255 was recorded as interest expense
during the year ended December 31, 1998 and as outstanding
options in the accompanying December 31, 1998 consolidated
balance sheet.
Consulting Agreement
In January 1998, the Company entered into a one year consulting
agreement with Gary Smith pursuant to which the Company agreed to
pay $5,000 per month to Gary Smith for marketing and other
related consulting services. The agreement was subsequently
modified to cancel the
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consulting payments during 1998 and to
continue the consulting agreement for an additional one-year term
beginning January 1, 1999.
(8) SUBSEQUENT EVENTS
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 600,000
shares of common stock of the Company to be awarded to
participants and their beneficiaries. The 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, grant 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.
Private Offering Of Series A Preferred Stock
On April 21, 1999, the Board of Directors authorized an offering
of a minimum of 600,000 shares or a maximum of 2,000,000 shares
of 8% Series A Convertible Preferred Stock (see Note 6) at an
offering price of $2.00 per share. The Series A Preferred Stock
provides for a cumulative dividend of 8 percent per annum payable
semi-annually on June 30 and December 31 beginning December 31,
1999 out of funds legally available therefore. Dividends may be
paid in cash or common stock at the election of the Company. If
the Company fails to pay any dividend within 60 days of its due
date the conversion price will be adjusted by $0.25 per share.
The Series A Preferred Stock is convertible into shares of common
stock at an initial conversion price of $2.00 per share at the
election of the holder at any time and under limited
circumstances at the election of the Company.
In connection with the Offering, the Company agreed to pay First
Level Capital, Inc. (the "Placement Agent") a sales commission
equal to 10 percent of the gross proceeds from the sale of the
Series A Preferred Stock. The Company also agreed to pay to the
Placement Agent a non-accountable expense allowance equal to 3
percent of the gross proceeds. As additional compensation, the
Company agreed to sell to the Placement Agent at the closing of
the minimum number of shares offered 500,000 shares of the
Company's common stock at a price of $0.01 per share. The Series
A Preferred Stock was offered by the Placement Agent on a "best
efforts/ all-or-none" basis as to the first 600,000 shares with a
total subscription price of $1,200,000 and a "best efforts" basis
thereafter. The Company also agreed to enter into a two-year
consulting agreement with the Placement Agent. For investment
banking and advisory services provided to the Company, the
Placement Agent will receive $3,000 per month. The Placement
Agent upon completion of the offering may designate two members
of the Company's Board of Directors for two years.
As of July 16, 1999, the 2,000,000 shares of Series A Convertible
Preferred Stock have been sold with the Company receiving net
proceeds of $3,480,000.
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