U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Amendment No. 1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934
Date of Report (Date of earliest event reported): May 1, 2003
BUYERS UNITED, INC.
(Exact name of registrant as specified in its charter)
0-26917
(Commission File No.)
Delaware 87-0528557
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
14870 Pony Express Road, Bluffdale, Utah 84065
(Address of principal executive offices)
(801) 320-3300
(Registrant's telephone number)
Not Applicable
(Former address, if changed since last report)
Item 2. Acquisition or Disposition of Assets
On December 6, 2002, Buyers United, Inc. entered into the Asset Purchase
Agreement and Software License Agreement to purchase assets of I-Link, Inc., and
its subsidiary, I-Link Communications, Inc., and license in perpetuity software
developed by I-Link for the operation of a real-time Internet protocol
communications network (RTIP Network). The transaction was closed effective May
1, 2003.
The assets acquired include dedicated equipment required for operating the
RTIP Network, customers of I-Link serviced through the network, and certain
trademarks. In consideration for the assets and software license, Buyers United
issued to I-Link 246,430 shares of Series B Convertible Preferred Stock, assumed
certain liabilities, and agreed to issue an additional 53,570 shares of Series B
Convertible Preferred Stock in equal monthly installments over a term of 10
months commencing June 1, 2003, subject to satisfaction of certain conditions
pertaining to provisioning of one of the former I-Link customers acquired in the
transaction.
Assuming the additional 53,570 shares are issued to I-Link, Buyers United
will have 853,800 shares of Series B Convertible Preferred Stock outstanding.
The Series B Preferred Stock is senior to the common stock with respect to
payment of dividends and distributions in liquidation. Holders of the Series B
Preferred Stock are entitled to receive dividends payable semi-annually equal to
8 percent of the liquidation preference value of the Series B Preferred Stock,
which is $10.00 per share. No dividends or distributions may be made with
respect to the common stock unless all dividend payments on the Series B
Preferred Stock are current. Each share of Series B Preferred Stock is
convertible at the election of the holder to five shares of common stock,
subject to adjustment in certain circumstances to prevent dilution of the equity
interest of the holders of the Series B Preferred Stock. Buyers United may
convert the Series B Preferred Stock to common stock when the market price of
Buyers United common stock is $4.00 or more during 30 consecutive trading days.
The Series B Preferred Stock does not have voting rights. Under the Asset
Purchase Agreement Buyers United may redeem the Series B Preferred Stock issued
to I-link at the liquidation preference value after December 5, 2007. Assuming
all of the shares of Series B Preferred Stock are issued to I-Link and converted
to common stock, I-Link would hold approximately 12.11 percent of the
outstanding common stock of Buyers, without giving effect to the exercise of
conversion or purchase rights under any other outstanding shares of preferred
stock, options, or warrants.
In connection with the closing, the parties together with Counsel
Corporation, an Ontario corporation, and Counsel Communications LLC, a Delaware
limited liability company, both affiliates of I-Link, entered into a
Reimbursement Agreement pursuant to which Counsel Corporation, Counsel
Communications, and I-Link agreed to reimburse Buyers United for any loss
sustained as a result of any claims asserted against the assets acquired from
I-Link by certain creditors of I-Link, and out of the shares it received in the
transaction I-Link deposited in escrow 40,000 shares of Series B Preferred Stock
that may be applied to reimburse any such loss. This is in addition to 25,000
shares of Series B Preferred Stock I-Link received in the transaction that it
deposited in escrow under the Asset Purchase Agreement to satisfy any claims for
indemnification under the Asset Purchase Agreement.
2
This report amends the Report on Form 8-K of Buyers United filed with the
Securities and Exchange Commission on May 8, 2003 that reports the closing of
the acquisition of the I-Link assets.
Item 7. Financial Statements and Exhibits
Financial Statements.
(a) Financial Statements. Included in this filing beginning at page F-1 are the
following reports and financial statements.
Audited balance sheet at December 31, 2002, and the related statements of
operations, of changes in stockholders' equity and cash flows for the years
ended December 31, 2001 and 2002; and
Unaudited balance sheet at March 31, 2003, and the related unaudited statements
of operations, of changes in stockholders' equity and cash flows for quarters
ended March 31, 2003 and 2002.
(b) Pro Forma Financial Information. Included in this filing beginning at page
PF-1 is the following proforma financial information giving effect to the
acquisition of the business acquired from I-Link at March 31, 2003, and the
three months then ended, and for the year ended December 31, 2002.
Proforma Condensed Combined Balance Sheet
Proforma Condensed Combined Statement of Operations
(c) Exhibits. Copies of the following documents are included as exhibits:
SEC Ref. No Title of Document Location
10.1 Asset Purchase Agreement dated December 6, 2002, with (1)
I-Link
Communications, Inc. and I-Link Incorporated,
without exhibits
10.2 Reimbursement Agreement dated April 30, 2003, with (2)
Counsel
Corporation, Counsel Communications LLC, I-Link
Communications, Inc. and I-Link Incorporated
99.1 Press Release dated May 1, 2003 (2)
(1) This document was filed with the Securities and Exchange Commission on April
14, 2003, as Exhibit No. 10.10 to the Annual Report on Form 10-KSB of Buyers
United for the year ended December 31, 2002, and is incorporated herein by this
reference.
(2) These documents were filed with the Securities and Exchange Commission on
May 8, 2003, as exhibits to the Current Report on Form 8-K of Buyers United and
are incorporated herein by this reference.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
BUYERS UNITED, INC.
Date: July 14, 2003 By: /s/ Paul Jarman, President
3
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors:
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in stockholders' deficit and of cash flows present
fairly, in all material respects, the financial position of I-Link
Communications, Inc. at December 31, 2002, and the results of its operations and
its cash flows for the years ended December 31, 2001 and 2002 in conformity with
accounting principles generally accepted in the United States of America. 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 of these statements in accordance with
auditing standards generally accepted in the United States of America, which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has negative working capital and a stockholders' deficit that raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
As discussed in Note 3 to the financial statements, on December 6, 2002 I- Link
Incorporated entered into an agreement to sell substantially all of the
Company's assets and customer base.
PricewaterhouseCoopers
Salt Lake City, Utah
June 27, 2003
F-1
I-LINK COMMUNICATIONS, INC.
BALANCE SHEETS
December 31, March 31,
ASSETS 2002 2003
------ ------------ -----------
Current assets: (Unaudited)
Cash and cash equivalents $ 346,255 $ 416,167
Accounts receivable, less allowance for
doubtful accounts of $87,254
at December 31, 2002 and March 31, 2003,
respectively 1,248,584 832,455
Other current assets 608,933 320,605
---------- ----------
Total current assets 2,203,772 1,569,227
---------- ----------
Furniture, fixtures, equipment and software,
net (held for sale at December 31, 2002 and
March 31, 2003, respectively) 1,080,000 1,080,000
Other assets:
Intangible assets not subject to
amortization, net (held for sale at
December 31, 2002 and March 31, 2003,
respectively) 270,000 270,000
Other assets 220,374 190,505
---------- ----------
Total assets $ 3,774,146 $ 3,109,732
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current liabilities:
Accounts payable $ 833,805 $ 807,790
Accrued liabilities 2,555,309 3,055,206
Unearned revenue 247,274 244,292
Notes payable 2,745,840 2,745,840
---------- ----------
Total current liabilities 6,382,228 6,853,128
Intercompany debt payable to I-Link
Incorporated 73,804,977 72,946,528
---------- ----------
Total liabilities 80,187,205 79,799,656
---------- ----------
Commitments and contingencies (note 8)
Stockholders' deficit:
Common stock, $.001 par value, authorized
10,000 shares, issued and outstanding
4,000 at December 31, 2002 and March 31,
2003, respectively 4 4
Additional paid-in capital 3,589,440 3,589,440
Accumulated deficit (80,002,503) (80,279,368)
---------- ----------
Total stockholders' deficit (76,413,059) (76,689,924)
---------- ----------
Total liabilities and stockholders'
defict $ 3,774,146 $ 3,109,732
========== ==========
The accompanying notes are an integral part of these financial statements
F-2
I-LINK COMMUNCATIONS, INC.
STATEMENTS OF OPERATIONS
For the Years Ended Three Months Ended
---------------------------- -----------------------
December 31, December 31, March 31, March 31,
2001 2002 2002 2003
----------- ---------- ---------- ---------
(Unaudited)
Revenue:
Telecommunication services $ 24,598,641 $ 6,392,316 $ 1,767,671 $1,331,322
Other 2,025,585 1,409,294 388,621 264,302
---------- ---------- --------- ---------
Total revenues 26,624,226 7,801,610 2,156,292 1,595,624
---------- ---------- --------- ---------
Operating costs and expenses:
Telecommunication network expense
(exclusive of depreciation and
amortization shown below) 28,284,502 8,369,666 2,647,659 1,836,991
Selling, general, administrative
and other 5,297,508 3,716,620 1,032,614 133,261
Provision for doubtful accounts 1,205,798 110,442 136,481 3,000
Depreciation and amortization 3,757,973 3,864,989 847,974 -
Loss (gain) on disposal of assets - 261,813 4,446 -
Impairment of long-lived assets 8,040,054 3,608,770 - (200,000)
Gain on disposal of subsidiary (588,943) - - -
Interest expense 241,921 377,683 94,420 99,237
---------- ---------- --------- ---------
Total operating costs and
expenses 46,238,813 20,309,983 4,763,594 1,872,489
---------- ---------- --------- ---------
Net loss $(19,614,587) $(12,508,373) $ (2,607,302) $ (276,865)
========== ========== ========= =========
The accompanying notes are an integral part of these financial statements
F-3
I-LINK COMMUNICATIONS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
Common Stock Additional Total
------------- Paid In Accumulated Stockholders'
Shares Amount Capital Deficit Deficit
------ ------ ---------- ----------- -----------
Balance, December 31, 2000 4,000 $4 $3,589,440 $(47,879,543) $(44,290,099)
Net loss - - - (19,614,587) (19,614,587)
----- --- --------- ---------- ----------
Balance, December 31, 2001 4,000 4 3,589,440 (67,494,130) (63,904,686)
Net loss - - - (12,508,373) (12,508,373)
----- --- --------- ---------- ----------
Balance, December 31, 2002 4,000 4 3,589,440 (80,002,503) (76,413,059)
Net loss (unaudited) - - - (276,865) (276,865)
----- --- --------- ---------- ----------
Balance, March 31, 2003
(unaudited) 4,000 $4 $3,589,440 $(80,279,368) $(76,689,924)
===== === ========= ========== ==========
The accompanying notes are an integral part of these financial statements
F-4
I-LINK COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended Three Months Ended
--------------------------- -----------------------
December 31, December 31, March 31, March 31,
2001 2002 2002 2003
----------- ---------- --------- -------
(Unaudited)
Cash flows from operating activities:
Net loss $(19,614,587) $(12,508,373) $(2,607,302) $(276,865)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization 3,757,973 3,864,989 847,974 -
Provision for doubtful accounts 1,205,798 110,442 136,481 3,000
Impairment of long-lived assets 8,040,054 3,608,770 - (200,000)
Gain on disposal of subsidiary (588,943) - - -
Loss (gain) on disposal of assets - 261,813 4,446 -
Amortization of debt discount 215,257 - - -
Increase (decrease) from changes in
operating assets and liabilities:
Accounts receivable 630,777 (195,276) 61,550 413,129
Other assets 875,577 208,842 373,734 318,197
Accounts payable and accrued liabilities (18,486,624) (2,787,165) (1,997,387) 473,882
Unearned revenue 694,724 (699,480) (410,091) (2,982)
---------- --------- --------- -------
Net cash provided by (used in) operating
activities (23,269,994) (8,135,438) (3,590,595) 728,361
---------- --------- --------- -------
Cash flows from investing activities:
Purchases of furniture, fixtures, equipment
and software (591,992) (438,900) (174,019) -
---------- --------- --------- -------
Net cash used in investing activities (591,992) (438,900) (174,019) -
---------- --------- --------- -------
Cash flows from financing activities:
Net proceeds from (repayments of)
intercompany debt payable to
I-Link Incorporated 23,315,602 7,696,936 3,999,556 (658,449)
Payment of capital leases (457,014) - - -
---------- --------- --------- -------
Net cash provided by (used in) financing
activities 22,858,588 7,696,936 3,999,556 (658,449)
---------- --------- --------- -------
Increase (decrease) in cash and cash
equivalents (1,003,398) (877,402) 234,942 69,912
Cash and cash equivalents at beginning of
period 2,227,055 1,223,657 1,223,657 346,255
---------- --------- --------- -------
Cash and cash equivalents at end of period $ 1,223,657 $ 346,255 $ 1,458,599 $ 416,167
========== ========= ========= =======
The accompanying notes are an integral part of these financial statements
F-5
I-LINK COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS
I-Link Communications, Inc. ("ILC") or ("the Company"), a subsidiary of I- Link
Incorporated (I-Link), develops and markets enhanced communications products and
services utilizing its own private intranet and both owned and leased network
switching and transmission facilities. The communications solutions are
delivered through I-Link's proprietary technologies.
On March 1, 2001, I-Link became a majority-owned subsidiary of Counsel
Communications, LLC (subsequently reorganized and renamed Counsel Communications
LLC), which is a majority-owned subsidiary of Counsel Corporation (collectively,
"Counsel").
The financial statements also include the activity of WebToTel, another wholly
owned subsidiary of I-Link between the months of March and December 2001.
WebToTel was acquired by I-Link from Counsel in April 2001, and ILC and WebToTel
were operated and accounted for as a single integrated telecommunications
provider until WebToTel was sold as discussed in Note 4.
In order to reduce I-Link's need for continuous infusion of capital and to
refocus its efforts, I-Link began, over the year ended December 31, 2002, to
resize ILC's operations in relationship to its revenue base. This process
culminated in an agreement to sell the business operations of ILC to Buyer's
United in December 2002 (see Note 3).
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern and do not include any adjustments to reflect
the possible future effects on the recoverability of assets and liquidation of
liabilities that may result from this uncertainty. The Company incurred a net
loss from operations of $12,508,373 for the year ended December 31, 2002, and as
of December 31, 2002 had a stockholder's deficit of $76,413,059 and negative
working capital of $4,178,456. These matters raise substantial doubt about the
Company's ability to continue as a going concern. To date, the Company has
financed its operations principally through intercompany debt advanced by its
parent company I-Link.
F-6
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue recognition
Revenue is recognized when persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, the Company's price to the
customer is fixed or determinable, and collection of the resulting receivable is
reasonably assured. Revenue is derived from telecommunications usage, based on
minutes of use. Revenue derived from usage is recognized as services are
provided, based on agreed upon usage rates.
In July 2000, the Company received a nonrefundable payment of $10,000,000 from
Red Cube International ("Red Cube"). This payment was a service prepayment that
was to be credited against services performed for and/or provided to Red Cube by
June 30, 2001. As of June 30, 2001, there remained $9,543,000 which had not been
used by Red Cube and as the Company had no further obligation under the
prepayment arrangement, the $9,543,000 was recognized as revenue as of June 30,
2001.
Use of estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the 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 those estimates.
Examples of significant estimates include revenue recognition, the provision for
doubtful accounts, the ultimate recoverability of long-lived assets.
Interim financial information (unaudited)
The accompanying interim financial statements as of March 31, 2003 and for
the three months ended March 31, 2002 and 2003 are unaudited but have been
prepared on the same basis as the annual financial statements and, in the
opinion of management, reflect all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the Company's financial
condition at March 31, 2003 and the results of its operations and its cash
flows for the three months ended March 31, 2002 and 2003. The results of
operations of any interim period are not necessarily indicative of the
results of operations for the full year.
F-7
Cash and cash equivalents
The Company considers all highly liquid investments with an original maturity
of three months or less to be cash equivalents. The Company maintains its
cash and cash equivalents primarily with financial institutions in Utah,
California, and Pennsylvania. These accounts may from time to time exceed
federally insured limits. The Company has not experienced any losses on such
accounts.
Provision for doubtful accounts
The Company evaluates the collectibility of its receivables at least
quarterly, based upon various factors including the financial condition and
payment history of major customers, an overall review of collections
experience on other accounts and economic factors or events expected to
affect the Company's future collections experience.
Furniture, fixtures, equipment and software
Furniture, fixtures, equipment and software are stated at cost. Depreciation
and amortization is calculated using the straight-line method over the
following estimated useful lives:
Telecommunications network equipment 3-5 years
Furniture, fixtures and office equipment 3-10 years
Software 3 years
Betterments and renewals that extend the life of the assets are capitalized.
Other repairs and maintenance charges are expensed as incurred. The cost and
related accumulated depreciation or amortization applicable to assets retired
are removed from the accounts and the gain or loss on disposition is
recognized in operations. The Company regularly evaluates whether events or
circumstances have occurred that indicate the carrying value of its
furniture, fixtures, equipment and software may not be recoverable. When
factors indicate the asset may not be recoverable, the Company compares the
related undiscounted future net cash flows to the carrying value of the asset
to determine if impairment exists. If the expected future net cash flows are
less than the carrying value, impairment is recognized based on the fair
value of the asset.
Long-lived assets that are to be disposed of by sale are measured at the
lower of net book value or estimated net realizable value less costs to sell.
As a result of the sale of assets to Buyers United, effective December 6,
2002 the Company's furniture, fixtures, equipment and software were
classified as held for sale and depreciation of such assets ceased (see Note
3).
F-8
Intangible Assets
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 141, "Business Combinations" (SFAS 141) and
SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). Under SFAS
141 and 142 all business combinations are accounted for using the purchase
method and goodwill and intangible assets with indefinite useful lives are
not amortized, but are tested for impairment at least annually. The adoption
of SFAS 141 and 142 did not impact the results of operations or financial
condition of the Company.
As discussed in Note 4, the Company recorded an $8,040,054 impairment charge
in 2001, representing the remaining balance of the goodwill associated with
the WebToTel acquisition. Such goodwill was being amortized using the
straight-line method over 5 years.
Prior to the adoption of SFAS 142, the Company's intangible assets were being
amortized using the straight-line method over 5 years.
The following represents what the net loss for the year ended December 31,
2001 would have been exclusive of amortization expense recognized in that
period related to goodwill and intangible assets that are no longer being
amortized.
2001
----------
Reported net loss $(19,614,587)
Add back: goodwill amortization 962,810
Add back: amortization of other intangible
assets not subject to amortization 54,000
Less adjustments to goodwill impairment (962,810)
----------
Adjusted net loss $(19,560,587)
==========
F-9
Concentrations of credit risk
The Company's retail telecommunications subscribers are primarily residential
and small business subscribers in the United States. The Company's customers
are generally concentrated in the areas of highest population in the United
States, more specifically California, Florida, New York, Texas and Illinois.
The Company's wholesale customers are primarily based in Utah. One customer,
Big Planet, accounted for over 80% of revenues in 2002. Red Cube accounted
for approximately 56% of revenues in 2001.
Concentration of third party service providers
The Company depends on certain large telecommunications carriers to provide
network services for significant portions of the Company's telecommunications
traffic. If these carriers were to refuse to provide such services in the
future, the Company's ability to provide services to its customers would be
adversely affected and the Company might not be able to obtain similar
services from alternative carriers on a timely basis.
Income taxes
The Company is included in the I-Link consolidated federal and state tax
returns. The Company's provision for income taxes is prepared on a separate
company basis. The Company records deferred taxes in accordance with (SFAS)
No. 109, "Accounting for Income Taxes." The statement requires recognition
of deferred income tax assets and liabilities for temporary differences
between the tax bases of assets and liabilities and the amounts at which they
are carried in the financial statements, based upon the enacted tax rates in
effect for the year in which the differences are expected to reverse. A
valuation allowance is established when necessary to reduce deferred tax
assets to the amount expected to be realized.
F-10
Stock-based compensation
At December 31, 2002, I-Link has five stock-based employee compensation
plans. The Company's employees represent substantially all of the employees
of I-Link. I-Link accounts for those plans under the recognition and
measurement principles of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25), and related
Interpretations. No stock-based employee compensation cost is reflected in
the statement of operations, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on
the date of the grant. The following table illustrates the effect on the net
loss of the Company if it had applied the fair value method for the
recognition and measurement provisions of SFAS No. 123, "Accounting for Stock-
Based Compensation", to its stock-based employee compensation.
Years ended Three months ended
--------------------------- -----------------------
December 31, December 31, March 31, March 31,
2001 2002 2002 2003
----------- ---------- --------- -------
(Unaudited)
Net loss as reported $(19,614,587) $(12,508,373) $(2,607,302) $(276,865)
Deduct:
Total compensation
cost determined
under the fair
value based method
for all awards,
net of -0- tax (1,877,164) (832,237) (308,273) (11,511)
---------- ---------- --------- -------
Pro forma net loss $(21,491,751) $(13,340,610) $(2,915,575) $(288,376)
========== ========== ========= =======
Recent accounting pronouncements
On August 15, 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 143, "Accounting for Asset Retirement Obligations" (SFAS 143). SFAS
143 establishes accounting standards for the recognition and measurement of
an asset retirement obligation and its associated asset retirement cost.
SFAS 143 was effective for the Company January 1, 2003 and did not have a
material impact on the Company's results of operations or financial
condition.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 requires that long-
lived assets that are to be disposed of by sale be measured at the lower of
net book value or fair value less costs to sell. All provisions of SFAS 144
were adopted on January 1, 2002 and did have a material impact on the
Company's results of operations or financial position.
In April 2002, the FASB issued SFAS No. 145, "Recission of FAS Nos. 4, 44 and
64, Amendment of FAS 13 and Technical Corrections as of April 2002" (SFAS
145), which rescinds FAS Nos. 4, 44 and 64 and amends other existing
authoritative pronouncements to make various technical corrections, clarify
meaning, or describe their applicability under changed conditions. Among
other things, SFAS 145 eliminates the requirement that gains and losses from
extinguishment of debt be classified as an extraordinary item. SFAS 145 is
effective for the Company January 1, 2003 and is not expected to have a
material effect on the Company's results of operations.
F-11
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated
with Exit or Disposal Activities" (SFAS 146). SFAS 146 requires the
recognition of a liability for costs associated with an exit or disposal
activity when incurred. SFAS 146 also establishes that the liability should
initially be measured and recorded at fair value. The provisions of SFAS 146
will be effective for any exit and disposal activities initiated after
December 31, 2002 and is not expected to have a material impact on the
Company's results of operations or financial condition.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123" (SFAS 148). SFAS 148, which is effective for years ending after
December 15, 2002, provides alternative methods for a voluntary change to the
fair value based method of accounting for stock-based employee compensation
and requires prominent disclosure about the method of accounting for stock-
based employee compensation and the effect of the method used on reported
results. The Company has adopted the disclosure provisions of SFAS 148 and
expects to continue following the provisions of APB 25 for its stock-based
compensation plans.
In November 2002, the FASB issued FASB Interpretation No., 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (an interpretation of SFAS No. 5, 57,
and 107 and rescission of FIN 34)" (FIN 45). FIN 45 clarifies the
requirements of SFAS No. 5, "Accounting for Contingencies," relating to a
guarantor's accounting for, and disclosure of, the issuance of certain types
of guarantees. FIN 45 is effective for guarantees issued or modified after
December 31, 2002. The disclosure requirements of FIN 45 are effective for
financial statements for periods ending after December 15, 2002. The
adoption of FIN 45 is not expected to have a material impact on the Company's
results of operations or financial condition.
On January 17, 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities -- an Interpretation of ARB No.
51" (FIN 46). FIN 46 clarifies the application of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," to certain entities in
which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. FIN 46 is effective for entities created after January 31,
2003 and is not expected to have a material impact on the Company's results
of operations or financial condition.
F-12
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity " (SFAS
150). SFAS 150 establishes standards on the classification and measurement
of certain financial instruments with characteristics of both liabilities and
equity. The provisions of SFAS 150 are effective for financial instruments
entered into or modified after May 31, 2003 and to all other instruments that
exist as of the beginning of the first interim financial reporting period
beginning after June 15, 2003. The Company is currently evaluating the
effects this statement may have on its financial statements.
NOTE 3 - SALE OF ILC
On December 6, 2002, I-Link entered into an agreement to sell substantially
all of ILC's assets and customer base. The sale includes the physical assets
required to operate the Company's nationwide network using its patented VoIP
technology and a license in perpetuity to use I-Link's proprietary software
platform. The sale closed in the second quarter of 2003. The sale price
consists of 300,000 shares of Series B convertible preferred stock (8%
dividend) of Buyers United, subject to adjustment in certain circumstances,
of which 75,000 are subject to an earn-out provision (contingent
consideration) based on future events related to ILC's single largest
customer. The earn-out takes place over a fourteen-month period beginning
January 2003, calculated on a monthly basis.
As of December 31, 2002, the net book value of the assets to be sold was
$2,936,531, which was composed of furniture, fixtures, equipment and software
with a net book value of $2,666,531 and intangible assets with a net book
value of $270,000. The fair value of the 225,000 shares (non-contingent
consideration to be received) of Buyer's United convertible preferred stock
was determined to be $1,350,000 as of December 31, 2002, based on the value
of the underlying common stock of Buyer's United adjusted for certain
qualitative issues and marketability of the common stock underlying the
preferred stock. As the value of the consideration to be received is less
than the book value of the assets sold, ILC recorded an impairment charge of
$1,586,531 which has been included in the net loss for 2002. All of the
impairment charge was allocated to furniture, fixtures, equipment and
software.
In the first quarter of 2003, the Company recorded a reduction of $200,000
to the original impairment of assets held for sale. The reduction in the
impairment allowance represents an adjustment to the value of shares to be
received for the ILC business and realization of contingent consideration
(16,071 shares of Series B convertible preferred stock) received in the
first quarter of 2003.
F-13
NOTE 4- ACQUISTION OF WEBTOTEL
On April 17, 2001, I-Link completed its acquisition of WebToTel and its
subsidiary Nexbell, for 17,454,333 shares of I-Link common stock issued to
Counsel, the owner of WebToTel. The acquisition of I-Link and WebToTel was
accounted for similar to a pooling-of-interests using Counsel's book values
of the WebToTel assets and liabilities, effective March 1, 2001, the earliest
date that all three entities were under common control of Counsel.
I-Link continuously reviews the products it offers and their contribution to
I-Link and its overall strategy. These reviews resulted in a determination
that it was not economically justified to continue to maintain a portion of I-
Link's network related to leased lines for local access origination and
Nexbell's METS product. In the fourth quarter of 2001, I-Link approved a
plan to discontinue offering the METS product. With this determination, I-
Link performed an impairment analysis of the goodwill recorded in connection
with the acquisition by Counsel of WebToTel and its subsidiary Nexbell. The
analysis was performed in response to projected losses on the METS product
acquired in the WebToTel acquisition. As a result of this review, an
$8,040,054 impairment charge, representing the remaining balance of the
goodwill, was recorded in 2001.
In December 2001, I-Link sold Nexbell to an unrelated party. The sale was a
sale of Nexbell's common stock and accordingly the assets and liabilities of
Nexbell were assumed by the purchaser with no further financial obligation to
I-Link. At the time of the sale, the liabilities exceeded the assets of
Nexbell and accordingly a gain on sale in the amount of $588,943 (the amount
by which the liabilities exceeded the assets) was recorded.
F-14
NOTE 5 - COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
Furniture, fixtures, equipment and software, after consideration of the
$1,586,531 impairment charge discussed in Note 3, consisted of the following
at December 31, 2002:
Telecommunications network equipment $3,077,935
Furniture, fixtures and office equipment 2,346,805
Leasehold improvements 497,047
Software and information systems 1,468,461
---------
7,390,248
Less accumulated depreciation and amortization (6,310,248)
---------
$1,080,000
=========
Other current assets consisted of the following at December 31, 2002:
Prepaid insurance $ 351,378
Other assets 257,555
-------
$ 608,933
=======
Accrued liabilities consisted of the following at December 31, 2002:
Interest payable $ 623,539
Payroll 625,000
Professional fees 420,000
Other 886,770
---------
$2,555,309
=========
F-15
NOTE 6 - NOTES PAYABLE
Notes payable consisted of the following at December 31, 2002:
Note payable to a service provider, interest at 7.0%, $ 746,625
due on demand
Note payable to Winter Harbor, interest at prime plus
9% 1,999,215
---------
$2,745,840
=========
As of September 30, 2001, ILC was in default on an equipment lease. This
lease was secured by a letter of credit issued by an affiliate of Winter
Harbor LLC (Winter Harbor), a former majority shareholder of I-Link. On
October 11, 2001, the leasing company drew against the letter of credit in
the amount of $1,999,215. On October 26, 2001, ILC received a demand for
payment from Winter Harbor LLC for the amount of the draw on the letter of
credit and interest (at prime plus 9%) since October 11, 2001. As of
December 31, 2002, ILC has reflected the principal and interest related to
this draw on the letter of credit in its financial statements. The Company
is evaluating Winter Harbor's demand in light of the various agreements
entered into between the Company, Counsel Communications LLC and Winter
Harbor. While the Company believes that it will not be required to pay cash
to Winter Harbor of the amount claimed, there can be no assurance as to the
ultimate outcome of this matter.
NOTE 7 - TRANSACTIONS WITH I-LINK
The Company has financed operations principally through the use of
intercompany debt from I-Link. The intercompany debt does not require
interest and has no specified maturity. The intercompany debt is classified
as long-term at December 31, 2002 based on written representations from I-
Link that it will not demand repayment prior to April 1, 2004.
As I-Link and the Company share services such as buildings, computer
equipment and personnel, an allocation of expenses has been performed between
I-Link and the Company based on labor hours.
F-16
NOTE 8 - COMMITMENTS AND CONTIGENCIES
Agreements classified as operating leases have terms ranging from one to six
years. The Company's rental expense for operating leases was approximately
$420,000 and $404,000 for 2001 and 2002, respectively.
Future minimum rental payments required under operating leases with initial
or remaining terms in excess of one year consists of the following at
December 31, 2002:
Year ending December 31:
2003 $ 526,797
2004 170,726
2005 84,065
-------
Total minimum payments $ 781,588
=======
Subsequent to December 31, 2002, the Company was released from certain
operating leases with rental payments of $324,049 in 2003, $168,125 in 2004
and $84,065 in 2005, subject to the closing of the Buyer's United transaction.
NOTE 9 - STOCK-BASED COMPENSATION PLANS
Employees of ILC participate in I-Link stock compensation plans as described
below. At December 31, 2002, I-Link has several stock-based compensation
plans, which are described below. I-Link applies APB Opinion No. 25 and
related interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for its fixed option plans.
In accordance with FASB Interpretation No. 44, "Accounting for Certain
Transactions involving Stock Compensation, an interpretation of APB 25" the
Company has accounted for the options issued to its employees by I-Link, its
parent company, in the accompanying financial statements. The employees of
the Company represent substantially all of the employees of I-Link.
Therefore, the following disclosures reflect information relating to all
option plans of I-Link as well as grants, cancellations and exercises of all
stock options.
F-17
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted
average assumptions: expected volatility of 120% and 150% in 2001 and 2002,
respectively, risk free rates ranging from 3.17% to 6.62% and 2.02% to 4.40%
in 2001 and 2002, respectively, expected lives of 3 years for each year, and
dividend yield of zero for each year.
Years Ending December 31,
--------------------------------------------
2001 2002
-------------------- -----------------------
Weighted Weighted
Average Average
Options Exercise Options Exercise
and Warrants Price and Warrants Price
------------ -------- ------------ ----------
Outstanding at beginning of
year 45,354,992 $2.57 28,033,464 $2.27
Granted 20,509,559 0.76 95,000 0.07
Exercised - - - -
Expired (1,643,177) 3.43 (2,605,410) 6.34
Forfeited (36,187,910) 1.42 (353,780) 4.27
---------- ----------
Outstanding at end of year 28,033,464 $2.27 25,169,274 $1.82
========== ==========
Options and warrants
exercisable
at year end 27,090,203 25,136,567
========== ==========
Weighted-average fair value of
options and warrants granted
during the year $0.57 $0.03
The following table summarizes information about stock options outstanding at
December 31, 2002:
Weighted Number Weighted
Average Exercisable Average
Exercise at December Options Remaining
Exercise Price Price 31, 2002 Outstanding Life (years)
--------------- -------- ----------- ---------- ------------
$0.07 to $ 1.00 $0.60 15,310,660 15,335,660 0.60
$1.13 to $ 3.00 2.61 2,811,613 2,813,278 6.32
$3.14 to $ 5.87 3.93 6,402,718 6,402,718 4.25
$6.25 to $13.88 6.55 611,576 617,618 7.09
---------- ----------
$1.82 25,136,567 25,169,274 2.32
========== ==========
F-18
2001 Stock option and appreciation rights plan
In September 2001, the shareholders of I-Link approved the 2001 Stock Option
and Appreciation Rights Plan which provides for the issuance of incentive
stock options, non-qualified stock options and stock appreciation rights
(SARs) up to an aggregate of 14,000,000 shares of common stock (subject to
adjustment in the event of stock dividends, stock splits, and other similar
events). The price at which shares of common stock covered by the option can
be purchased is determined by I-Link's Board of Directors or its committee;
however, in the case of incentive stock options the exercise price shall not
be less than the fair market value of I-Link's common stock on the date the
option is granted. There were no options granted under this plan in 2001 or
2002.
1997 Recruitment stock option plan
In October 2000, the shareholders of I-Link approved an amendment of the 1997
Recruitment Stock Option Plan which provides for the issuance of incentive
stock options, non-qualified stock options and stock appreciation rights
(SARs) up to an aggregate of 7,400,000 shares of common stock (subject to
adjustment in the event of stock dividends, stock splits, and other similar
events). The price at which shares of common stock covered by the option can
be purchased is determined by I-Link's Board of Directors; however, in all
instances the exercise price is never less than the fair market value of I-
Link's common stock on the date the option is granted.
As of December 31, 2002, there were options to purchase 2,118,024 shares of I-
Link's common stock outstanding. The outstanding options vest over three
years at exercise prices of $0.07 to $13.88 per share. Options issued under
the plan must be exercised within ten years of grant and can only be
exercised while the option holder is an employee of I-Link. I-Link has not
awarded any SARs under the plan. During, 2001 and 2002, options to purchase
2,600,430, and 859,356 shares of common stock, respectively, were forfeited
or expired. There were no exercises during 2002.
Director stock option plan
I-Link's Director Stock Option Plan authorizes the grant of stock options to
directors of I-Link. Options granted under the Plan are non-qualified stock
options exercisable at a price equal to the fair market value per share of
common stock on the date of any such grant. Options granted under the Plan
are exercisable not less than six months or more than ten years after the
date of grant.
F-19
As of December 31, 2002, options for the purchase of 4,668 shares of common
stock at prices ranging from $0.875 to $3.875 per share were outstanding, all
of which are exercisable. In connection with the adoption of the 1995
Director Plan, the Board of Directors authorized the termination of future
grants of options under the plan; however, outstanding options granted under
the plan will continue to be governed by the terms thereof until exercise or
expiration of such options. During 2002 and 2001 no options were exercised
and during 2002, 2,334 expired.
1995 Director stock option and appreciation rights plan
The 1995 Director Stock Option and Appreciation Rights Plan (the 1995
Director Plan) provides for the issuance of incentive options, non-qualified
options and SARs to directors of I-Link of up to 250,000 shares of common
stock (subject to adjustment in the event of stock dividends, stock splits,
and other similar events).
The 1995 Director Plan also provides for the grant of non-qualified options
on a discretionary basis to each member of the Board of Directors then
serving to purchase 10,000 shares of common stock at an exercise price equal
to the fair market value per share of the common stock on that date. Each
option is immediately exercisable for a period of ten years from the date of
grant. I-Link has 190,000 shares of common stock reserved for issuance under
the 1995 Director Plan. As of December 31, 2002, options to purchase 170,000
shares of common stock at prices ranging from $1.00 to $1.25 per share are
outstanding and exercisable. No options were granted or exercised under this
plan in 2001 or 2002.
F-20
1995 Employee stock option and appreciation rights plan
The 1995 Employee Stock Option and Appreciation Rights Plan (the 1995
Employee Plan) provides for the issuance of incentive options, non-qualified
options, and SARs. Directors of I-Link are not eligible to participate in
the 1995 Employee Plan. The 1995 Employee Plan provides for the grant of
stock options which qualify as incentive stock options under Section 422 of
the Internal Revenue Code, to be issued to officers who are employees and
other employees, as well as non-qualified options to be issued to officers,
employees and consultants. In addition, SARs may be granted in conjunction
with the grant of incentive options and non-qualified options.
The 1995 Employee Plan provides for the grant of incentive options, non-
qualified options and SARs of up to 400,000 shares of common stock (subject
to adjustment in the event of stock dividends, stock splits, and other
similar events). To the extent that an incentive option or non-qualified
option is not exercised within the period of exercisability specified
therein, it will expire as to the then unexercisable portion. If any
incentive option, non-qualified option or SAR terminates prior to exercise
thereof and during the duration of the 1995 Employee Plan, the shares of
common stock as to which such option or right was not exercised will become
available under the 1995 Employee Plan for the grant of additional options or
rights to any eligible employee. The shares of common stock subject to the
1995 Employee Plan may be made available from either authorized but unissued
shares, treasury shares or both. I-Link has 400,000 shares of common stock
reserved for issuance under the 1995 Employee Plan. As of December 31, 2002,
options to purchase 135,250 shares of common stock with an exercise price of
$3.90 are outstanding under the 1995 Employee Plan. During 2001and 2002,
options to purchase 37,500 and 10,000, respectively, of common stock were
forfeited or expired. No options were exercised in 2002 or 2001.
Other warrants and options
In 1996, I-Link approved the issuance of 1,750,000 options to executives of
the Company, as part of their employment agreements, and 64,000 options to a
consultant. The options expire in 2006 and have an option price of $3.90.
As of December 31, 2002, there remained 1,564,000 options outstanding.
On July 1, 1996, I-Link approved the issuance of options to purchase
2,000,000 shares of common stock to two officers of the Company as part of
their employment agreements. Each option had an exercise price of $7.00 per
share. The options expired in 2002.
During 1997, I-Link issued options to purchase 1,210,000 shares of common
stock (210,000 of which were issued under the 1997 Recruitment Stock Option
Plan) to consultants at exercise prices ranging from $4.875 to $8.438
(repriced to $3.90 on December 13, 1998), which was based on the closing
price of the stock at the grant date. The remaining options must be
exercised within ten years of the grant date. As of December 31, 2002, there
remained 890,000 options outstanding.
F-21
During 1997, I-Link issued non-qualified options to purchase 2,295,000 shares
of common stock to certain executive employees. The options must be
exercised within ten years of the grant date and have an exercise price of
$3.90. There were no options forfeited in 2001 or 2002. No options expired
or were exercised during 2001 and 2002. As of December 31, 2002, there
remained 2,118,219 options outstanding.
During 1998, I-Link issued non-qualified options to purchase 935,000 shares
of common stock to certain executive employees at exercise prices ranging
from $2.563 to $3.125, which price was based on the closing price of the
stock at the grant date. The options must be exercised within ten years of
the grant date. No options were exercised during 2001 and 2002. As of
December 31, 2002, there remained 809,446 options outstanding.
During 1999, I-Link issued non-qualified options to purchase 655,000 shares
of common stock to certain executive employees at exercise prices ranging
from $2.50 to $3.563, which price was based on the closing price of the stock
at the grant date. The options must be exercised within ten years of the
grant date. No options were exercised during 2001 and 2002. During 2001,
50,000 of these options were forfeited. As of December 31, 2002, there
remained 375,000 options outstanding.
During 1999, I-Link issued non-qualified options to purchase 200,000 shares
of common stock to a consultant at an exercise price of $3.00, which was
based on the closing price of the stock at the grant date. As of December
31, 2002, there remained 200,000 options outstanding.
During 2000, I-Link issued non-qualified options to purchase 2,585,000 shares
of common stock to certain executive employees at exercise prices ranging
from $2.75 to $6.375, which price was based on the closing price of the stock
at the grant date. The options must be exercised within ten years of the
grant date. During 2001, 1,208,335 of these options were forfeited. As of
December 31, 2002, there remained 1,376,665 options outstanding.
During 2000, I-Link obtained approval from its shareholders to establish the
2000 Employee Stock Purchase Plan. This plan allows all eligible employees
of I-Link to have payroll withholding of 1 to 15 percent of their wages. The
amounts withheld during a calendar quarter are then used to purchase common
stock at a 15 percent discount off the lower of the closing sale price of I-
Link's stock on the first or last day of each quarter. I-Link issued 34,518
shares to employees based upon payroll withholdings during 2001. There were
no issuances in 2002.
F-22
NOTE 10 - INCOME TAXES
The Company recognized no income tax benefit from its losses in 2001 and
2002. The reported benefit from income taxes varies from the amount that
would be provided by applying the statutory U.S. Federal income tax rate to
the loss before taxes for the following reasons:
2001 2002
--------- ---------
Expected federal statutory tax benefit $(6,668,960) $(4,252,847)
Increase (reduction) in taxes
resulting from:
State income taxes (382,498) (412,604)
Change in valuation allowance 4,323,387 4,663,680
Impairment of non-deductible
goodwill 2,725,780 -
Other 2,291 1,771
--------- ---------
$ - $ -
========= =========
The change in the valuation allowance was $4,323,387 and $4,663,680 for 2001
and 2002 respectively.
At December 31, 2002, the Company had total net operating loss carryforwards
for federal income tax purposes of approximately $60,000,000. These net
operating loss carryforwards expire between 2006 and 2022. As required by
Internal Revenue Code Section 382, the Company's utilization of approximately
$28,391,000 of the total net operating loss carryforwards against future
taxable income will be subject to an annual limitation because of the change
in ownership that occurred in 2001. The Company also has net operating loss
carryforwards for state income tax purposes which differ by jurisdiction.
The components of the deferred tax asset and liability of operations as of
December 31, 2002 is as follows:
2002
----------
Deferred tax assets:
Tax net operating loss carryforwards $ 22,371,484
Amortization of deferred compensation on stock options 121,912
Allowance for doubtful accounts 32,456
Accrued payroll and vacation 81,222
Furniture, fixtures, equipment and software 2,008,806
Other 111,795
Valuation allowance (24,727,675)
----------
Total deferred tax asset $ -
==========
F-23
The valuation allowance at December 31, 2001 and 2002 has been provided to
reduce the total deferred tax assets to the amount which is considered more
likely than not to be realized, primarily because the Company has not
generated taxable income from its business communications services. The
change in the valuation allowance is due primarily to the increase in net
operating loss carryforwards.
NOTE 11 - LEGAL PROCEEDINGS
On or about January 24, 2001, Red Cube delivered to I-Link a written demand
for arbitration under the May 2000 Cooperation and Framework Agreement
between the parties. Red Cube's demand constituted written notice of an
alleged breach of the Cooperation and Framework Agreement. I-Link denied
these allegations, filed a counterclaim against Red Cube and filed a third-
party claim against Red Cube seeking compensatory and/or punitive damages for
Red Cube Inc.'s default under a subsequent agreement to provide approximately
$60,000,000 in equity funding to I-Link, engaging in a scheme to drive I-Link
out of business and obtain control of I-Link's proprietary technology,
telecommunications network, key employees and customers.
On July 9, 2002, an evidentiary arbitration hearing was held in New York
before a panel of arbitrators of the AAA and the AAA panel issued its award
effective October 7, 2002. The AAA panel dismissed all of Red Cube's claims
with prejudice and determined that Red Cube had breached the agreements
between the parties. The arbitration panel awarded I-Link $6,741,835 in
damages against Red Cube. In addition, the AAA panel ordered Red Cube to pay
I-Link $18,210 as reimbursement for certain administrative fees and expenses
and $64,033 as reimbursement for a portion of the arbitrators' compensation.
As uncertainty exists at this time as to the ultimate collectibility of the
awarded amount, management has not recorded any benefit relating to this
reward in the financial statements.
On November 9, 2000 D/Vit, Inc ("Dvit") filed an action against I-Link in
federal court in Texas alleging that I-Link's use of the "V-Link" trademark
infringed upon Dvit's intellectual property rights in the mark "V Linc".
Dvit's complaint sought damages and an injunction enjoining I-Link's use of
the mark "V-Link". On August 22, 2001, the court issued a preliminary
injunction enjoining I-Link's use of the "V-Link" mark. I-Link had already
elected to change the name of its product to "I-Link One Number". On
February 14, 2002, I-Link filed a motion for summary judgment asking the
court to rule as a matter of law that I-Link's past use of the "V-Link" mark
did not constitute an infringement upon Dvit's intellectual property rights
in the "V Linc" mark. Also on February 14, 2002, Dvit filed a motion for
partial summary judgment asking the court to determine as a matter of law
that I-Link's prior use of the "V-Link" mark infringed upon Dvit's rights in
the "V Linc" mark. On May 8, 2002, the court issued a Memorandum and Order
("Order") denying I-Link's motion for summary judgment and granting Dvit's
partial motion for summary judgment. The Order permanently enjoined I-Link
from using the "V-Link" mark in association with the sale, marketing,
description, development or service of its telecommunications products. The
court's Order did not address possible damages. In December 2002, I-Link
settled for $180,000 of which $120,000 was previously reserved.
F-24
The Company is involved in litigation relating to other claims arising out of
its operations in the normal course of business. The litigation and
arbitration referred to above is not expected, individually or in the
aggregate, to have a material adverse affect on the Company.
F-25
BUYERS UNITED, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
March 31, 2003
I-Link
Buyers Communica- Pro Forma Pro Forma
United, Inc. tions, Inc. Adjustments Combined
------------ ----------- ------------- ------------
ASSETS
------------------------
Current assets:
Cash $ 62,277 $416,167 $(416,167) b $ 62,277
Restricted cash 1,064,487 - - 1,064,487
Accounts receivable,
net 8,373,410 832,455 - 9,205,865
Other receivables 767,801 - - 767,801
Other current assets 203,014 320,605 (75,000) e 448,619
----------- ------------ ------------ ------------
Total current assets 10,470,989 1,569,227 (491,167) 11,549,049
Property and equipment,
net 841,012 1,080,000 (580,000) b 1,341,012
Other assets:
Intangible assets, net - 270,000 (270,000) b -
Intangible assets
acquired from I-Link - 1,500,000 a 1,500,000
Touch America
customers, net 6,977,224 - - 6,977,224
Deferred advertising
costs, net 1,563,355 - - 1,563,355
Other assets, net 378,265 190,505 - 568,770
----------- ------------ ------------ ------------
Total assets $20,230,845 $3,109,732 $ 158,833 $23,499,410
=========== ============ ============ ============
LIABILITIES AND
STOCKHOLDERS' DEFICIT
-----------------------
Current liabilities:
Checks in excess of
available cash
balances $ 372,612 $ - $ - $ 372,612
Line of credit 287,134 - - 287,134
Notes payable 5,682,092 2,745,840 (2,745,840) b 5,682,092
Current portion of
Touch America
obligation 2,500,000 - - 2,500,000
Accounts payable 9,306,947 807,790 - 10,114,737
Accrued liabilities 1,013,439 3,055,206 (2,713,723) b 1,354,922
Accrued dividends
payable on preferred
stock 175,661 - - 175,661
Accrued commissions
and rebates 649,224 - - 649,224
Unearned revenue - 244,292 - 244,292
----------- ------------ ------------ ------------
Total current
liabilities 19,987,109 6,853,128 (5,459,563) 21,380,674
Notes payable 3,838,980 - - 3,838,980
Obligation under Touch
America transaction 1,250,000 - - 1,250,000
Intercompany debt - 72,946,528 (72,946,528) b -
----------- ------------ ------------ ------------
Total liabilities 25,076,089 79,799,656 (78,406,091) 26,469,654
Stockholders' deficit:
Preferred stock 240 - 30 c 270
Common stock 633 4 (4) d 633
Additional paid-in
capital 16,438,644 3,589,440 (1,714,470) c,d 18,313,614
Warrants and options
outstanding 4,592,514 - - 4,592,514
Deferred consulting
fees (19,965) - - (19,965)
Accumulated deficit (25,857,310) (80,279,368) 80,279,368 d (25,857,310)
----------- ------------ ------------ ------------
Total stockholders'
deficit (4,845,244) (76,689,924) 78,564,924 (2,970,244)
----------- ------------ ------------ ------------
Total liabilities
and stockholders'
deficit $20,230,845 $3,109,732 $158,833 $23,499,410
=========== ============ ============ ============
See accompanying notes
PF-1
BUYERS UNITED, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
Year ended December 31, 2002
I-Link
Buyers Communica- Pro Forma Pro Forma
United,Inc. tions, Inc. Adjustments Combined
------------ ------------- ------------ -----------
Revenues:
Telecommunications
services $30,110,528 $ 6,392,316 $ - $36,502,844
Other 52,922 1,409,294 - 1,462,216
---------- ------------ --------- ------------
Total revenues 30,163,450 7,801,610 - 37,965,060
---------- ------------ --------- ------------
Operating expenses:
Costs of revenues and
telecommunications
network 16,295,201 8,369,666 - 24,664,867
Selling, general and
administrative 12,011,598 7,692,051 400,000 f 20,103,649
Loss on disposal of
assets - 261,813 - 261,813
Impairment of long-
lived assets - 3,608,770 - 3,608,770
---------- ------------ --------- ------------
Total operating
expenses 28,306,799 19,932,300 400,000 48,639,099
---------- ------------ --------- ------------
Income (loss) from
operations 1,856,651 (12,130,690) (400,000) (10,674,039)
---------- ------------ --------- ------------
Other income (expense):
Interest income 17,980 - - 17,980
Interest expense (1,544,448) (377,683) - (1,922,131)
---------- ------------ --------- ------------
Total other expense,
net (1,526,468) (377,683) - (1,904,151)
---------- ------------ --------- ------------
Net income (loss) $ 330,183 $(12,508,373) $(400,000) $(12,578,190)
8% dividends on Series A
and B preferred stock (749,725) - - (749,725)
---------- ------------ --------- ------------
Net loss applicable
to common stock-
holders $ (419,542) $(12,508,373) $(400,000) $(13,327,915)
========== ============ ========= ============
Net loss applicable to
common shareholders:
Basic and diluted $(0.07) $(2.32)
Weighted average common
shares outstanding:
Basic and diluted 5,740,811 5,740,811
See accompanying notes
PF-2
BUYERS UNITED, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
Three Months Ended March 31, 2003
I-Link
Buyers Communica- Pro Forma Pro Forma
United, Inc. tions, Inc. Adjustments Combined
------------ ----------- ------------ ------------
Revenues:
Telecommunications services $15,481,120 $1,331,322 $ - $16,812,442
Other - 264,302 - 264,302
---------- ---------- --------- ------------
Total revenues 15,481,120 1,595,624 - 17,076,744
---------- ---------- --------- ------------
Operating expenses:
Costs of revenues and
telecommunications network 8,664,767 1,636,991 - 10,301,758
Selling, general, and
administrative 5,957,769 136,261 100,000 f 6,194,030
Total operating expenses 14,622,536 1,773,252 100,000 16,495,788
---------- ---------- --------- ------------
Income (loss) from
operations 858,584 (177,628) (100,000) 580,956
---------- ---------- --------- ------------
Other income (expense):
Interest income 2,601 - - 2,601
Interest expense (485,929) (99,237) - (585,166)
Total other expense, net (483,328) (99,237) - (582,565)
---------- ---------- --------- ------------
Net income (loss) $ 375,256 $(276,865) $(100,000) $ (1,609)
8% dividends on Series A and
B preferred stock (181,895) - - (181,895)
---------- ---------- --------- ------------
Net income (loss)
applicable to common
stockholders $ 193,361 $(276,865) $(100,000) $(183,504)
========== ========== ========= ============
Net income (loss) per common
share:
Basic $0.03 $(0.03)
Diluted 0.03 (0.03)
Weighted average common
shares outstanding:
Basic 6,107,466 6,107,466
Diluted 6,150,660 6,150,660
See accompanying notes
PF-3
BUYERS UNITED, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
On December 6, 2002, Buyers United, Inc. (the "Company") entered into the
Asset Purchase Agreement and Software License Agreement to purchase certain
assets of I-Link, Inc., and its subsidiary, I-Link Communications, Inc.,
and license in perpetuity software developed by I-Link for the operation of
a real-time Internet protocol communications network (RTIP Network). The
transaction was closed effective May 1, 2003. The assets acquired include
dedicated equipment required for operating the RTIP Network, customers of I-
Link serviced through the network, and certain trademarks. In
consideration for the assets and software license, Buyers United issued to
I-Link 246,430 shares of Series B Convertible Preferred Stock, assumed
certain liabilities, and agreed to issue an additional 53,570 shares of
Series B Convertible Preferred Stock in equal monthly installments over a
term of 10 months commencing June 1, 2003, subject to satisfaction of
certain conditions pertaining to provisioning of one of the former I-Link
customers acquired in the transaction
The accompanying unaudited pro forma combined condensed financial
statements have been prepared to illustrate the estimated effect of this
transaction. The pro forma financial statements do not reflect any
anticipated cost savings inherent in the Company redirecting acquired
resources, or synergies that are anticipated to result from the
transaction, and there can be no assurance that any such cost savings or
synergies will occur. The Unaudited Pro Forma Combined Condensed
Statements of Operations for the year ended December 31, 2002 and three
months ended March 31, 2003 give pro forma effect as if the transaction had
occurred on January 1, 2002 and 2003, respectively. The Unaudited Pro
Forma Combined Condensed Balance Sheet gives pro forma effect as if the
transaction had occurred on March 31, 2003.
The accompanying pro forma information is presented for illustrative
purposes only and is not necessarily indicative of the financial position
or results of operations which would actually have been reported had the
transaction taken place on the assumed dates or during the periods
presented, or which may be reported in the future. The pro forma
adjustments are described in these accompanying notes and are based upon
available information and certain assumptions that the Company believes are
reasonable. This pro forma information should be read in conjunction with
the historical financial statements and notes related thereto for Buyers
United, Inc. and I-Link Communications, Inc.
A preliminary allocation of the purchase price has been made to major
categories of assets in the accompanying pro forma financial statements
based on information currently available. The Company is presently engaged
in appraising the fair market value of the assets and liabilities acquired.
The actual allocation of purchase price and the resulting effect on income
or loss from operations may differ significantly from the pro forma amounts
included herein. These pro forma adjustments represent the Company's
preliminary determination of purchase accounting adjustments and are based
on available information and certain assumptions that the Company believes
to be reasonable. Consequently, the amounts reflected in the pro forma
financial statements are subject to change, and the final amounts may
differ substantially.
The transaction was recorded using the purchase method of accounting. The
allocation of the aggregate purchase price to the tangible and
indentifiable assets acquired in connection with this acquisition was based
on the estimated fair values as estimated by the Company. The purchase
price allocation is summarized below:
Indentifiable assets........... $ 500,000
Customer list.................. 800,000
Software license............... 500,000
Other intangible assets........ 200,000
----------
Total purchase price...... $ 2,000,000
==========
The total purchase price of $1.95 million consisted of 300,000 shares of
Buyers United, Inc. preferred stock, convertible into 1.5 million shares of
common stock, valued at $1,875,000 based upon the fair market value of
Buyers United, Inc. common stock of $1.25 per share on the date the
transaction was closed. The purchase price also included transaction costs
of approximately $125,000. The customer list, software license and other
intangible assets are being amortized on a straight-line basis over
estimated periods of benefit of two to five years.
PF-4
2. PRO FORMA ADJUSTMENTS
Pro forma adjustments for the unaudited pro forma combined condensed
financial statements are as follows:
(a) Represents $1,500,000 of acquired intangible assets, summarized as
follows:
Customer list................... $ 800,000
Software license................ 500,000
Other intangible assets......... 200,000
---------
Total...................... $1,500,000
=========
(b) Represents adjustments to reflect assets and liabilities not acquired
or assumed by Buyers United, Inc.
(c) Represents the preferred stock issued in connection with the asset
purchase.
(d) Represents the elimination of equity accounts of I-Link Communication,
Inc.
(e) Represents prepaid transactions costs accumulated in the months prior
to closing.
(f) Represents amortization of intangible assets over two to five years.
3. PRO FORMA NET LOSS PER SHARE
The net loss attributable to common shareholders and shares used in
computing the net loss per share attributable to common shareholders for
the year ended December 31, 2001 and for the three months ended March 31,
2003 are based on the historical weighted average common shares
outstanding. Common stock issuable upon the exercise of stock options,
warrants, or the conversion of preferred stock have been excluded from the
computation of net loss per share attributable to common shareholders as
the effect would be anti-dilutive.
PF-5