UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 0-26917
UCN, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
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, Including Area Code)
Buyers United, Inc.
-------------------------------------------------------------------
(Former Name, Address and Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 13,742,579 shares of common
stock as of July 31, 2004.
FORM 10-Q
UCN, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 2004, and December 31, 2003 (unaudited) 3
Condensed Consolidated Statements of Operations for the
Three Months Ended June 30, 2004 and 2003 (unaudited) 4
Condensed Consolidated Statements of Operations for the
Six Months Ended June 30, 2004 and 2003 (unaudited) 5
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2004 and 2003 (unaudited) 6
Condensed Consolidated Statements of Stockholders'
Equity for the Six Months Ended June 30, 2004 8
Notes to Condensed Consolidated Financial Statements 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 4. Controls and Procedures 18
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
2
UCN, INC.
CONDENSED CONSOLIDATED BALANCE SHEET - (Unaudited)
June 30, December 31,
2004 2003
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,128,606 $ 3,055,384
Restricted cash 1,698,339 1,569,336
Accounts and other receivables, net 8,577,271 8,162,483
Other current assets 283,608 243,844
----------------- -----------------
Total current assets 12,687,824 13,031,047
Property and equipment, net 3,116,892 2,424,642
Intangible assets, net 7,346,085 8,018,682
Other assets 479,830 496,787
----------------- -----------------
Total assets $ 23,630,631 $ 23,971,158
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Line of credit $ 754,559 $ 4,093,782
Current portion of long-term debt and capital lease obligations 2,586,201 7,781,484
Trade accounts payable 9,137,253 11,248,152
Accrued liabilities 2,311,895 1,828,864
----------------- -----------------
Total current liabilities 14,789,908 24,952,282
Long-term debt and capital lease obligations 38,394 646,126
----------------- -----------------
Total liabilities 14,828,302 25,598,408
Stockholders' equity (deficit):
Preferred stock, $0.0001 par value, 15,000,000 shares authorized; Series A
8% cumulative convertible preferred stock; 1,827,500 and 1,865,000
shares issued and outstanding (liquidation values of $3,655,000
and $3,730,000) 183 187
Series B 8% cumulative convertible preferred stock; 417,800 and
721,729 shares issued and outstanding (liquidation values of
$4,178,000 and $7,217,290) 42 72
Common stock, $0.0001 par value; 100,000,000 shares authorized;
13,732,579 and 7,604,584 shares issued and outstanding 1,373 760
Additional paid-in capital 31,123,541 20,193,148
Warrants and options outstanding 3,392,046 3,928,110
Accumulated deficit (25,714,856) (25,749,527)
----------------- -----------------
Total stockholders' equity (deficit) 8,802,329 (1,627,250)
----------------- -----------------
Total liabilities and stockholders' equity (deficit) $ 23,630,631 $ 23,971,158
================= =================
See accompanying notes
3
UCN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - (Unaudited)
Three Months Ended June 30,
------------------------------------
2004 2003
Revenues from telecommunications services $ 16,727,909 $ 16,291,636
Operating expenses:
Costs of revenues 8,975,366 8,591,879
General and administrative 3,763,203 4,104,409
Selling and promotion 3,623,583 2,691,314
----------------- -----------------
Total operating expenses 16,362,152 15,387,602
----------------- -----------------
Income from operations 365,757 904,034
Other income (expense):
Interest income 7,456 2,800
Interest expense (191,692) (506,166)
----------------- -----------------
Total other expense, net (184,236) (503,366)
----------------- -----------------
Net income 181,521 400,668
8% Preferred dividends on Series A and B preferred stock (156,351) (215,193)
----------------- -----------------
Net income applicable to common stockholders $ 25,170 $ 185,475
================= =================
Net income per common share:
Basic $ 0.00 $ 0.03
Diluted 0.00 0.03
Weighted average common shares outstanding:
Basic 13,534,770 6,330,142
Diluted 14,649,308 6,354,982
See accompanying notes
4
UCN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - (Unaudited)
Six Months Ended June 30,
------------------------------------
2004 2003
Revenues from telecommunications services $ 33,471,616 $ 31,772,756
Operating expenses:
Costs of revenues 18,151,558 17,256,646
General and administrative 7,780,487 7,731,109
Selling and promotion 6,727,575 5,022,383
----------------- -----------------
Total operating expenses 32,659,620 30,010,138
----------------- -----------------
Income from operations 811,996 1,762,618
Other income (expense):
Interest income 21,306 5,401
Interest expense (549,117) (992,095)
Gain on early extinguishment of debt 109,150 -
----------------- -----------------
Total other expense, net (418,661) (986,694)
----------------- -----------------
Net income 393,335 775,924
8% Preferred dividends on Series A and B preferred stock (358,664) (397,088)
----------------- -----------------
Net income applicable to common stockholders $ 34,671 $ 378,836
================= =================
Net income per common share:
Basic $ 0.00 $ 0.06
Diluted 0.00 0.06
Weighted average common shares outstanding:
Basic 11,160,476 6,287,453
Diluted 12,490,536 6,322,395
See accompanying notes
5
UCN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Unaudited)
Six Months Ended June 30,
--------------------------------
2004 2003
Cash flows from operating activities:
Net income $ 393,335 $ 775,924
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 2,014,915 1,784,215
Amortization included in interest expense resulting from
issuing stock with notes - 5,312
Amortization of discount on long-term debt 104,106 231,010
Amortization of note financing costs 50,000 81,424
Amortization of deferred consulting fees - 10,417
Changes in operating assets and liabilities:
Accounts and other receivables (414,788) (2,977,483)
Other assets (17,299) (660,476)
Trade accounts payable (2,115,965) 3,314,524
Accrued liabilities 694,314 755,182
--------------- ---------------
Net cash provided by operating activities 708,618 3,320,049
--------------- ---------------
Cash flows from investing activities:
Decrease in other assets (22,124) (52,126)
Acquisition of customer base (757,856) -
Purchases of property and equipment (1,237,631) (524,402)
--------------- ---------------
Net cash used in investing activities (2,017,611) (576,528)
--------------- ---------------
Cash flows from financing activities:
Increase in restricted cash (129,003) (463,055)
Net borrowings and payments under line of credit (3,339,223) (382,665)
Borrowings on long-term debt, net of debt issuance costs - 2,299,955
Proceeds from exercise of options and warrants 1,849,500 -
Private placement of common stock, net of offering costs 8,108,062 -
Repurchase of common stock (500,000) (2,684)
Principal payments on long-term debt (5,607,121) (4,678,422)
--------------- ---------------
Net cash provided by (used in) financing activities 382,215 (3,226,871)
--------------- ---------------
Net decrease in cash and cash equivalents (926,778) (483,350)
Cash and cash equivalents at the beginning of the period 3,055,384 994,360
--------------- ---------------
Cash and cash equivalents at the end of the period $ 2,128,606 $ 511,010
=============== ===============
See accompanying notes
6
UCN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Unaudited)
Six Months Ended June 30,
--------------------------------
2004 2003
Supplemental cash flow information:
Cash paid for interest $ 544,202 $ 548,914
Supplemental schedule of noncash investing and financing activities:
Issuance of common shares in payment of preferred stock dividend $ 473,533 $ 377,688
Accrual of dividend payable on preferred stock 358,664 397,088
Issuance of common shares for officer's personal guaranty - 36,300
Issuance of warrants with private placement of common stock 189,336 -
Issuance of warrants with consulting contract 72,465 -
Retirement and replacement of note payable - 800,000
Conversion of note payable into common stock 300,000 -
Increase in Touch America obligation with amended agreement - 3,098,000
Issuance of preferred stock to acquire VoIP assets 91,348 1,400,738
See accompanying notes
7
UCN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) - (Unaudited)
Preferred Stock Common Stock Additional
------------------------ ------------------------- Paid-in
Shares Amount Shares Amount Capital
------------- --------- -------------- ---------- ------------
Balance at January 1, 2004 2,586,729 $ 259 7,604,584 $ 760 $ 20,193,148
Issuance of preferred stock in connection with the
acquisition of VoIP assets 16,071 2 - - 91,346
Conversion of preferred shares to common (357,500) (36) 1,637,500 164 (128)
Exercise warrants to purchase common stock - - 647,000 65 2,039,747
Exercise employee options to purchase common stock - - 255,000 26 554,974
Conversion of promissory note to common stock - - 150,000 15 299,985
Expiration of warrants to purchase common stock - - - - 52,553
Private placement of common stock, net of offering costs - - 3,782,000 378 7,918,348
Issuance of warrants for services - - - - -
Preferred stock dividends - - - - -
Issuance of common shares as payment of preferred stock dividends - - 171,055 17 473,516
Repurchase shares from stockholder - - (514,560) (52) (499,948)
Net income - - - - -
------------- --------- ------------ ---------- --------------
Balance at June 30, 2004 2,245,300 $ 225 13,732,579 $ 1,373 $ 31,123,541
============= ========= ============ ========== ==============
See accompanying notes
8
UCN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) - (Unaudited)
Warrants/
Options Accumulated
Outstanding Deficit Total
--------------- ----------------- ---------------
Balance at January 1, 2004 $ 3,928,110 $ (25,749,527) $ (1,627,250)
Issuance of preferred stock in connection with the acquisition
of VoIP assets - - 91,348
Conversion of preferred shares to common - - -
Exercise warrants to purchase common stock (745,312) - 1,294,500
Exercise employee options to purchase common stock - - 555,000
Conversion of promissory note to common stock - - 300,000
Expiration of warrants to purchase common stock (52,553) - -
Private placement of common stock, net of offering costs 189,336 - 8,108,062
Issuance of warrants for services 72,465 - 72,465
Preferred stock dividends - (358,664) (358,664)
Issuance of common shares as payment of preferred stock dividends - - 473,533
Repurchase shares from stockholder - - (500,000)
Net income - 393,335 393,335
--------------- ----------------- ---------------
Balance at June 30, 2004 $ 3,392,046 $ (25,714,856) $ 8,802,329
=============== ================= ===============
See accompanying notes
9
UCN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Unaudited)
June 30, 2004
1. Basis of presentation
These unaudited interim financial statements of UCN, Inc. and its subsidiary
(collectively, "UCN" or "the Company") have been prepared in accordance with
the rules and regulations of the United States Securities and Exchange
Commission (the "Commission"). Such rules and regulations allow the omission
of certain information and footnote disclosures normally included in the
financial statements prepared in accordance with accounting principles
generally accepted in the United States, so long as the statements are not
misleading. In the opinion of Company management, these financial statements
and accompanying notes contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial position
and results of operations for the periods shown. These interim financial
statements should be read in conjunction with the audited financial
statements and notes thereto contained in our Annual Report on Form 10-KSB
for the year ended December 31, 2003, as filed with the Commission on March
30, 2004.
The results of operations for the three and six month periods ended June 30,
2004 are not necessarily indicative of the results to be expected for the
full year.
2. Summary of significant accounting policies
Net Income Per Common Share: Basic net income per common share ("Basic EPS")
excludes dilution and is computed by dividing net income applicable to
common shareholders by the weighted average number of common shares
outstanding during the quarterly and year-to-date periods. Diluted net
income per common share ("Diluted EPS") reflects the potential dilution that
could occur if stock options or other common stock equivalents were
exercised or converted into common stock. The computation of Diluted EPS
does not assume exercise or conversion of securities that would have an
antidilutive effect on net income per common share.
Following is the reconciliation of Basic and Diluted EPS:
Three months Six months
ended June 30, ended June 30,
------------------------- ------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net income applicable to common
stockholders, as reported $ 25,170 $ 185,475 $ 34,671 $ 378,836
========== ========== ========== ==========
Basic EPS:
Weighted average number of common shares
outstanding 13,534,770 6,330,142 11,160,476 6,287,453
========== ========== ========== ==========
Basic net income per share $ 0.00 $ 0.03 $ 0.00 $ 0.06
========== ========== ========== ==========
Diluted EPS:
Common and common equivalent shares
outstanding:
Weighted average number of common
shares outstanding 13,534,770 6,330,142 11,160,476 6,287,453
Common stock equivalents from options and
warrants computed on the Treasury Stock
method, using the average fair market
value of common stock outstanding during
the period 1,114,538 24,840 1,330,060 34,942
---------- ---------- ---------- ----------
Shares used in the computation 14,649,308 6,354,982 12,490,536 6,322,395
========== ========== ========== ==========
Diluted net income per share $ 0.00 $ 0.03 $ 0.00 $ 0.06
========== ========== ========== ==========
10
Stock-Based Compensation: Employee compensation expense is measured using
the intrinsic method. No stock-based compensation cost is reflected in net
income applicable to common stockholders, since all options had an exercise
price equal to or greater than the market price of the underlying common
stock at the date of grant. The following table illustrates the effects on
net income (loss) applicable to common stockholders and earnings (loss) per
share if expense was measured using the fair value recognition provision of
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation:
Three months Six months
ended June 30, ended June 30,
--------------------- ----------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Net income (loss) applicable to common stockholders:
As reported $ 25,170 $ 185,475 $ 34,671 $ 378,836
Pro forma stock-option based compensation (163,808) (88,677) (276,900) (157,809)
Pro forma net income (loss) applicable to common stockholders $ (34,841) $ 96,798 $(138,433) $ 221,027
Basic and diluted net income (loss) per common share:
As reported $ 0.00 $ 0.03 $ 0.00 $ 0.06
Pro forma basic and diluted net income (loss) per common share $ 0.00 $ 0.02 $ (0.01) $ 0.04
We estimated the fair value of options granted under our employee
stock-based compensation arrangements at the date of grant using the
Black-Scholes model with the following weighted-average assumptions:
Six Months Ended
June 30,
--------------------
2004 2003
---- ----
Dividend yield None None
Expected volatility 95% 75%
Risk-free interest rate 4.39% 2.89%
Expected life (years) 4.5 4.8
Weighted average fair value of grants $1.37 $1.42
Other Comprehensive Income: There were no components of other comprehensive
income other than net income.
Long-Lived Assets: We evaluate the carrying value of long-lived assets,
including intangibles, when events or circumstances indicate the existence
of a possible impairment, based on projected undiscounted cash flows, and
recognize impairment when such cash flows will be less than the carrying
values. Measurement of the amounts of impairments, if any, is based upon the
difference between carrying value and fair value. Events or circumstances
that could indicate the existence of a possible impairment include
obsolescence of the technology, an absence of market demand for the product,
and/or continuing technology rights protection. Management believes the net
carrying amount of long-lived assets will be recovered by future cash flows
generated by commercialization of the technology related to the long-lived
asset and from cash flows generated from customer lists.
Capitalized Software Costs: In accordance with Statement of Position 98-1,
Accounting for Costs of Computer Software Developed or Obtained for Internal
Use, the Company capitalizes certain costs incurred for the development of
internal use software. These costs include the costs associated with coding,
software configuration, upgrades, and enhancements. During the three and six
months ended June 30, 2004, the Company capitalized $200,594 and $413,270,
respectively.
Recent Accounting Pronouncements: In March 2004, the Financial Accounting
Standards Board ("FASB") reached a consensus on Emerging Issues Task Force
(EITF) Issue No.03-1, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments. This pronouncement provides guidance to
determine the meaning of other-than-temporary impairment and its application
to investments classified as either available-for-sale or held-to-maturity
(including individual securities and investments in mutual funds), and
investments accounted for under the cost method or the equity method. The
guidance for evaluating whether an investment is other-than-temporarily
impaired is to be applied in other-than-temporary impairment evaluations
made in reporting periods beginning after June 15, 2004. Management believes
the adoption of Issue No. 03-1 will not have a material impact on the
financial statements.
11
3. Acquisitions
UCN entered into an agreement to purchase 37 dedicated long distance
customers from Source Communications, LLC for $757,856 in cash in February
2004. The transaction was closed in March 2004. The total purchase price was
entirely allocated to customer lists acquired, and is included in intangible
assets in the accompanying condensed consolidated balance sheets.
4. Gain on early extinguishment of debt
During 2003 the Company entered into a Purchase Agreement to acquire
approximately 12,000 long distance customers from Glyphics Communications,
Inc. Subsequently, the two parties agreed that UCN would accelerate payments
under the agreement in exchange for a discount on the purchase price. The
final payment under the agreement was made in February 2004, and the Company
recorded a $109,150 gain on the early extinguishment of the debt.
5. Intangible assets
Intangible assets consisted of the following:
June 30, 2004 December 31, 2003
---------------------------------------- ----------------------------------------
Gross Accumulated Intangible Gross Accumulated Intangible
asset amortization assets, net asset amortization assets, net
------------ ------------ ------------ ------------ ------------ ------------
Customer lists acquired $ 11,518,164 $ 5,106,275 $ 6,411,889 $ 10,760,307 $ 3,840,679 $ 6,919,628
Technology and patents 1,318,865 384,669 934,196 1,318,865 219,811 1,099,054
------------ ------------ ------------ ------------ ------------ ------------
$ 12,837,029 $ 5,490,944 $ 7,346,085 $ 12,079,172 $ 4,060,490 $ 8,018,682
============ ============ ============ ============ ============ ============
Total amortization expense of intangible assets was $728,672 for the three
months ended June 30, 2004, and $1,430,453 for the six months ended June 30,
2004. Depending on the type of customers, the useful lives of customer lists
acquired range from 36 to 48 months, and are evaluated for recoverability on
an annual basis.
6. Accrued liabilities
Accrued liabilities consisted of the following:
June 30, December 31,
2004 2003
------------ ------------
Accrued commissions $ 937,660 $ 669,523
Accrued dividends 358,664 478,599
Other 1,015,510 680,742
------------ ------------
$ 2,311,895 $ 1,828,864
============ ============
7. Capital Transactions
During the six months ended June 30, 2004, investors exercised warrants to
purchase a total of 647,000 shares of common stock. Total proceeds received
in these transactions was $1.3 million. Included in these amounts were
warrants to purchase 297,500 shares exercised by one of the Company's
directors, for which the Company received of $595,000.
On March 15, 2004 the Company closed a private placement to institutional
and accredited investors. The Company sold 3,782,000 shares of common stock
at $2.30 per share, or a total of approximately $8.7 million. Net proceeds
of the offering after placement fees and expenses were approximately $8.1
million. A portion of the expenses associated with this transaction was the
issuance to the investment banking firm of 164,125 warrants to purchase
common shares at $2.76 per share that expire March 15, 2007. The fair market
value of the warrants, using the Black-Scholes pricing model, was $189,336.
12
In connection with the placement, Acceris Communications Inc., formerly
I-link Incorporated and the holder of 300,000 shares of Series B Convertible
Preferred Stock, converted all of its preferred stock to 1.5 million common
shares. Acceris subsequently sold 750,000 of those common shares to the
investors in the private placement at $2.30 per share.
In January and February 2004, three Directors exercised options to purchase
a total of 255,000 shares of Common Stock. Total proceeds received by the
Company in connection with these exercises was $555,000.
In December 2003, a holder of 100,000 shares of Series B Convertible
Preferred Stock converted all of those shares to 500,000 shares of common
stock. In January 2004, the holder sold those common shares plus 14,560
additional shares, or a total of 514,560 shares, to UCN for $500,000 in a
privately negotiated transaction.
In May 2004, a holder of Preferred Stock converted a $300,000 promissory
note into 150,000 shares of common stock at a conversion price of $2.00 per
share. In June 2004, the Company repaid two other promissory notes totaling
$200,000 under prepayment terms that allowed UCN to repay the notes two
years earlier than the stated maturity dates. All three of these promissory
notes had been secured by equipment.
8. Major suppliers
For the three-month periods ended June 30, 2004 and 2003, approximately 55
and 63 percent, respectively, of the Company's cost of revenue was generated
from two telecommunication providers. For the six-month periods ended June
30, 2004 and 2003, approximately 54 and 63 percent of cost of revenue was
generated by the same two providers. As of June 30, 2004 and December 31,
2003, respectively, the Company owed $3.4 million and $3.0 million to these
providers.
9. Related party transactions
Related party transactions not previously disclosed include the following:
During the six months ended June 30, 2004, the Company paid one of its
directors $37,500 per month for consulting, marketing, and capital raising
activities. At June 30, 2004, there was $6,250 owing to the director.
During the six months ended June 30, 2004, there were several debt
arrangements with directors more fully described in the Company's Form
10-KSB filed with the Securities and Exchange Commission on March 30, 2004.
Interest expense on obligations owed to related parties during the three and
six months ended June 30, 2004 was $44,932 and $151,169, respectively.
On April 12, 2004, UCN repaid $2.3 million in promissory notes to one of its
directors. The director used $595,000 of the proceeds to exercise 297,500
warrants.
On April 26, 2004, the Company repaid a $50,000 note payable to another of
its directors.
Three of the Company's current and prior directors participated in the 1999
Series A and 2000 Series B Preferred Stock issuances under the same terms as
all other outside investors. In February 2004 dividends of Common Stock were
paid to all holders of Preferred Stock. Of this amount, the three directors
received 16,164 shares of Common Stock.
10. Contingencies and Commitments
In May 2004, the Company entered into a one-year consulting agreement. As
part of the consultant's compensation, UCN agreed to issue up to 140,000
five-year warrants to purchase common stock at an exercise price of $4.00
per share. The fair market value of the warrants were and will be calculated
using the Black-Scholes method. Up to 90,000 warrants worth a total of
$72,465 are to vest ratably over a period of one year, or until the
consulting agreement is terminated, whichever comes sooner. 50,000 warrants
will vest in January 2005 only upon the completion of certain performance
measures.
13
In October 2003, UCN acquired the exclusive right to sell and manage the
enhanced telecommunications functions of MyACD, Inc. ("MyACD"), with a
one-year option to purchase it for approximately $6.8 million, paid over a
three-year period beginning in January 2004. During the term of the
agreement, UCN has the sole right to manage sales, service and billing of
MyACD services. Under the agreement MyACD will continue to provide enhanced
service development and configuration, and UCN will reimburse MyACD for
actual costs related to these activities.
11. Subsequent events
At the Annual Meeting of Shareholders held on June 29, 2004, the
stockholders voted to change the name of the Company to UCN, Inc., which
change became effective July 15, 2004. The stockholders also approved a new
Employee Stock Purchase Plan that will commence January 1, 2005.
14
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
UCN, Inc. (formerly Buyers United, Inc.) is a domestic telecommunications
company that offers and sells a wide range of long distance and related
communication services to business and residential customers. Historically we
functioned as an aggregator and reseller of telecommunications services provided
by others. We intend to continue to pursue and develop this type of business.
In 2003 UCN purchased assets and licensed in perpetuity software that enabled
UCN to establish and operate a Voice over Internet Protocol communications
network (VoIP Network). With the VoIP Network UCN now offers, as a provider,
enhanced services such as fax to email. Furthermore, UCN transmits data and
other communication services for a portion of the journey over the VoIP Network
rather than entirely through third party providers.
In October 2003, UCN acquired the exclusive right to sell and manage the
enhanced telecommunications functions of MyACD, Inc. with a one-year option to
purchase it at a price of approximately $6.8 million. With the MyACD technology
we are now offering a new product approach that combines our national VoIP
Network with on-demand proprietary telephony software for contact
handling/management applications. We are changing the way mission critical
applications are delivered and priced for the contact center marketplace, or for
any business or department seeking to improve how it manages the productivity
and quality of its customer contact opportunities.
UCN entered into an agreement to purchase 37 dedicated long distance customers
from Source Communications, LLC for $757,856 in February 2004. The transaction
was completed in March 2004.
We generate internal growth by pursuing multiple marketing avenues, including
using independent agents, value-added resellers, and selling through our direct
sales force. We intend to expand and develop our direct sales force and
value-added reseller programs during the remainder of 2004.
Results of Operations
Revenues
Total revenues increased 2.7 percent to $16.7 million for the three months ended
June 30, 2004 as compared to $16.3 million for the same period in 2003. For the
six months ended June 30, 2004, revenues increased 5.3 percent to $33.5 million
as compared to $31.8 million for the same period in 2003. The increase in
revenue is due to new customers purchased throughout 2003 and the acquisition of
customers from Source Communication, LLC, which closed in March 2004. We also
generated growth internally from ongoing promotional efforts, primarily
involving independent agents. The increase in revenue from new and existing
customers during the first six months of 2004 was offset by attrition of our
residential customer base. We acquired new business customers and a substantial
residential customer base during the first six months of 2003 from Touch
America. We expect the residential customer base will continue to decline in
subsequent periods because our marketing focus is on the business user of
telecommunication services and not the residential long distance user.
Consequently, we expect a gradual transition in our sales mix in future periods
as the number of business customers increases and residential customers
decreases.
Cost of revenues
Cost of revenues for the three month period ended June 30, 2004 were $9.0
million, a 4.5 percent increase, compared to $8.6 million for the comparable
period in 2003. For the six month period ended June 30, 2004, costs of revenue
15
increased to $18.2 million, a 5.2 percent increase as compared to $17.3 million
for the six month period ended June 30, 2003. Cost of revenues as a percentage
of revenue for the three month period ended June 30, 2004 was 53.7 percent as
compared to 52.7 percent during 2003, and was 54.2 percent for the six months
ended June 30, 2004 compared to 54.3 percent for the same period in 2003.
The decrease in gross margin in the second quarter of 2004 compared to the
second quarter of 2003 is the result of lower, more competitive pricing we
adopted in some of the newer long-distance rate plans. Also affecting the
difference in gross margin rates for the second quarter was a one-time credit
recognized during 2003 from one of our long-distance service providers.
General and administrative expenses
General and administrative expenses in the second quarter of 2004 decreased 8.3
percent to $3.8 million compared to $4.1 million in the second quarter of 2003,
and for the six months ended June 30, 2004 decreased 0.6 percent to $7.8 million
as compared to $7.7 million for the six months ended June 30, 2003. A portion of
the difference is attributable to the higher costs we incurred in 2003 to
integrate and improve the VoIP Network acquired at the beginning of 2003
compared to the costs of maintaining and upgrading the Network during the first
six months of 2004.
Selling and promotion expenses
Selling and promotion expenses increased 34.6 percent to $3.6 million during the
three month period ended June 30, 2004 from $2.7 million for the same period in
2003. Such expenses increased 34.0 percent to $6.7 million for the six months
ended June 30, 2004 compared to $5.0 million during the six months ended June
30, 2003. The increases are the result of the transition in our sales mix over
the first six months of 2004 as higher commissioned business customers increased
in the first six months of 2004, and lower commissioned residential customers
decreased through attrition. In addition, during the second quarter of 2004 we
increased expenses related to our direct sales channel.
Other income (expense)
Interest expense for the three month period ended June 30, 2004 was $191,692,
compared to $506,166 in 2003, and for the six months ended June 30, 2004
interest expense was $549,117 compared to $992,095 in 2003. The decreases were
the result of a reduction in the outstanding debt throughout 2004 compared to
2003.
During the third quarter of 2003, UCN entered into a Purchase Agreement to
acquire approximately 12,000 long distance customers from Glyphics
Communications, Inc. Subsequently, the two parties agreed that UCN would
accelerate payments under the agreement in exchange for a discount on the
purchase price. The final payment under the agreement was made in February 2004,
and we recorded a $109,150 gain on the early extinguishment of the debt.
Liquidity and Capital Resources
UCN completed a private placement of common stock on March 15, 2004. UCN sold
3,782,000 shares of common stock at $2.30 per share, or a total of approximately
$8.7 million. Net proceeds of the offering after placement fees and expenses
were approximately $8.1 million. The net proceeds of the private placement have
been, and will be used for various purposes, including sales and marketing
related programs, funding further development of our VoIP Network, reducing
debt, and for working capital and other general corporate purposes.
UCN's current ratio as of June 30, 2004 increased to 0.86:1 from 0.52:1 at
December 31, 2003. The components of current assets and current liabilities that
16
changed most significantly since the end of 2003 were the line of credit, the
current portion of long-term debt and capital lease obligations, and accounts
payable.
During the six months ended June 30, 2004 long-term debt and the related current
portion of long-term debt decreased by $5.8 million. Included therein was $2.3
million in note repayments to one of UCN's directors. The director subsequently
exercised warrants to purchase 297,500 shares of common stock. The proceeds
received by UCN totaled $595,000. UCN also repaid a $50,000 note payable to
another of its directors. Also included in the long-term debt decrease was the
conversion of a $300,000 promissory note into 150,000 shares of common stock.
UCN has a line of credit agreement with RFC Capital Corporation that expires in
January 2006. The available borrowing limit is $5 million. Interest accrues at
prime plus three percent. The facility allows UCN to obtain financing on its
eligible accounts receivable, including unbilled receivables and regular monthly
billings. The facility is collateralized by the underlying receivables. On June
30, 2004, the maximum amount available based on eligible accounts receivable at
that time was approximately $3.5 million. The amount outstanding on that date,
less applied draws by RFC, aggregated $754,559. The facility requires UCN to
maintain a restricted cash account for the collection of the receivables. As of
June 30, 2004, UCN had $1.5 million of restricted cash specifically associated
with the RFC arrangement.
On September 10, 2003, UCN filed a registration statement on Form SB-2 with the
Securities and Exchange Commission to register for resale up to approximately
8.8 million shares of common stock underlying outstanding warrants, options and
convertible debt. During 2003, investors exercised warrants to purchase 522,500
shares of common stock providing cash to UCN of approximately $1.0 million. As
of June 30, 2004, investors had exercised warrants for an additional 647,000
shares of common stock, providing cash of $1,294,500.
In October 2003, UCN acquired the exclusive right to sell and manage the
enhanced telecommunications functions of MyACD, Inc. ("MyACD"), with a one-year
option to purchase it for approximately $6.8 million, paid over a three-year
period beginning in January 2004. During the term of the agreement, UCN has the
sole right to manage sales, service and billing of MyACD services. Under the
agreement MyACD will continue to provide enhanced service development and
configuration, and UCN will reimburse MyACD for actual costs related to these
activities.
Capital Commitments The following table discloses aggregate information about
our contractual obligations including notes payable and lease obligations, and
the periods in which payments are due as of June 30, 2004:
Less Than After
Contractual Obligations Total 1 Year 1-3 Years 4-5 Years 5 Years
--------------------------- ------------ ----------- ------------ ------------ -----------
Notes payable* $ 2,582,637 $ 2,582,637 $ - $ - $ -
Capital lease
obligations** 75,162 34,690 40,472 - -
Operating lease
obligations 1,489,245 465,761 1,023,484 - -
----------- ----------- ---------- ---------- ----------
Total contractual
obligations $ 4,147,044 $ 3,083,088 $1,063,956 $ - $ -
=========== =========== ========== ========== ==========
* Before discount of $26,448
** Not including interest of $6,755
Critical accounting policies and estimates
Revenue Recognition - UCN's revenue recognition policy with respect to reseller
agreements is to record gross revenues and receivables from customers when UCN
acts as principal in the transaction; takes title to the products or services;
and has risks and rewards of ownership, such as risk of loss for collection,
delivery, or returns. Revenues from sales of services are recognized upon
providing the services to the customers.
17
Accounts Receivable and Allowance for Doubtful Accounts - Accounts receivable is
comprised of amounts billed and billable to customers, net of an allowance for
uncollectible amounts. The allowance for doubtful accounts is estimated by
management and is based on specific information about customer accounts, past
loss experience, and general economic conditions. An account is written off by
management when deemed uncollectible, although collections efforts may continue.
Property and Equipment - Property and equipment are stated at cost. Major
additions and improvements are capitalized, while minor repairs and maintenance
costs are expensed when incurred. In accordance with Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," UCN capitalizes certain costs incurred for the development of
internal use software. These costs include the costs associated with coding,
software configuration, upgrades, and enhancements.
Long-Lived Assets - Our long-lived assets consist of acquired customer lists,
patents, and acquired technology. As June 30, 2004, the carrying value of these
assets was $7,346,085, or 31% of total assets. We evaluate the carrying value of
long-lived assets, including intangibles, when events or circumstances indicate
the existence of a possible impairment. In our evaluation, we estimate the net
undiscounted cash flows expected to be generated by the assets, and recognize
impairment when such cash flows will be less than carrying values. Events or
circumstances that could indicate the existence of a possible impairment include
obsolescence of the technology, an absence of market demand for the product,
and/or the partial or complete lapse of continuing technology rights protection.
Stock-Based Compensation - We have a stock option plan that provides for the
issuance of common stock options to employees and service providers. Although
SFAS No. 123, Accounting for Stock Based Compensation, encourages entities to
adopt a fair-value-based method of accounting for stock options and similar
equity instruments, it also allows an entity to continue measuring compensation
cost for stock-based compensation for employees and directors using the
intrinsic-value method of accounting prescribed by Accounting Principles Board
("APB") Opinion No 25, Accounting for Stock Issued to Employees. We have elected
to follow the accounting provisions of APB 25 and to furnish the pro forma
disclosures required under SFAS No. 123 for employees and directors, but we also
issue warrants to non-employees that are recognized as expense when issued in
accordance with the provisions of SFAS No. 123. We calculate compensation
expense under SFAS No. 123 using the Black-Scholes option pricing model. In so
doing, we estimate certain key variables used in the model. We believe the
estimates we use are appropriate and reasonable
Debt Issuance Costs - As an inducement to various investors, shareholders, and
board members to lend monies to UCN, shares of common stock and warrants to
purchase shares of common stock were issued to them. The fair market value of
those shares at the date of issuance has been capitalized as debt issuance costs
and is being amortized over the life of the loans.
Income Taxes - UCN recognizes a liability or asset for the deferred income tax
consequences of all temporary differences between the tax bases of assets and
liabilities and their reported amounts in the financial statements that will
result in taxable or deductible amounts in future years when the reported
amounts of the assets and liabilities are recovered or settled. These deferred
income tax assets or liabilities are measured using the enacted tax rates that
will be in effect when the differences are expected to reverse. Recognition of
deferred tax assets is limited to amounts considered by management to be more
likely than not of realization in future periods.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1985 provides a safe harbor for
forward-looking statements made by UCN, 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,
18
prospects, or new developments that we expect or anticipate will or may occur in
the future, including such things as expansion and growth of our operations and
other such matters are forward-looking statements. Any one or a combination of
factors could materially affect our 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
customers, legal and regulatory initiatives affecting customer marketing and
rebate programs or long distance service, and conditions in the capital markets.
Forward-looking statements made by us are based on knowledge of our business and
the environment in which we operate as of the date of this report. Because of
the factors listed above, as well as other factors beyond its control, actual
results may differ from those in the forward-looking statements.
Item 4. CONTROLS AND PROCEDURES
With the participation of management, UCN's chief executive officer and chief
financial officer evaluated its disclosure controls and procedures on August 05,
2004. Based on this evaluation, the chief executive officer and the chief
financial officer concluded that the disclosure controls and procedures are
effective in connection with UCN's filing of its interim report on Form 10-Q for
the quarterly period ended June 30, 2004.
Subsequent to August 05, 2004, through the date of this filing of Form 10-Q for
the quarterly period ended June 30, 2004, there have been no significant changes
in UCN's internal controls or in other factors that could significantly affect
these controls, including any significant deficiencies or material weaknesses of
internal controls that would require corrective action.
PART II. OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In May 2004 a noteholder converted his $300,000 promissory note into 150,000
shares of common stock at a conversion price of $2.00 per share. The shares were
issued in reliance on the exemption from registration provided by Section 4(2)
of the Securities Act of 1933 or Regulation D promulgated there under. Based on
information provided by the investor, we believe the investor was an accredited
investor within the meaning of Rule 501 of Regulation D.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders held on June 29, 2004, the stockholders
voted on the following matters:
(1) Election of Theodore Stern, Gary Smith, Edward Dallin Bagley,
Steve Barnett, and Paul Jarman as directors of UCN to serve
until their successors are duly elected and qualified;
(2) Approve an amendment to the certificate of incorporation to
effect a name change from "Buyers United, Inc." to "UCN,
Inc."; and
(3) Approve the Employee Stock Purchase Plan.
Each of the foregoing matters was approved by the stockholders. The number of
votes cast on the foregoing matters is as follows:
19
For Against Abstain
--- ------- -------
Election of Directors:
Theodore Stern 9,517,445 451,958 N/A
Gary Smith 9,949,195 20,208 N/A
Edward Dallin Bagley 9,949,196 20,207 N/A
Steve Barnett 9,517,696 451,707 N/A
Paul Jarman 9,949,196 20,207 N/A
Name Change to UCN, Inc. 9,967,823 1,440 140
Employee Stock Purchase Plan 6,263,233 506,447 54,374
Item 5. OTHER INFORMATION
Change in Directors
On July 21, 2004, Edward Dallin Bagley and Gary Smith tendered their
resignations as directors of UCN. On July 22, 2004, the Board of Directors
accepted the resignations, adopted a resolution increasing the size of the Board
to six persons, and appointed Blake O. Fisher, Jr., Paul F. Koeppe, and James H.
Ozanne as directors of UCN. The following is biographical information on each of
the new directors.
Blake O. Fisher, Jr., age 60, has been providing management and financial
consulting to the telecommunications and utility industries since May 2002,
including financial consulting to the USDA on Rural Utilities Service's
broadband program. From May 2004 to the present he has served as chief financial
officer for Fiber Utilities of Iowa, an entity that provides operation and
construction services to municipal utilities. From May 2002 to May 2004 he was
retired from business activities. From February 1996 to May 2002, he held senior
management positions with McLeodUSA, a telecommunications provider, initially as
Chief Financial Officer, then President of the company's Western region and as
Chief Development Officer.
Paul F. Koeppe, age 54, is a director of Distributed Energy Systems Corp., a
company listed on the Nasdaq Stock Market engaged in the business of creating
and delivering innovative products and solutions to the energy marketplace, and
has served as a director since its acquisition of Northern Power Systems, Inc.
in December 2003. Mr. Koeppe became a director of Northern Power Systems in
1998. Prior to his retirement in 2001, Mr. Koeppe served as executive vice
president of American Superconductor, an electricity solutions company. Mr.
Koeppe joined American Superconductor in 1997, in connection with the
acquisition of Superconductivity, Inc., a manufacturer of superconducting
magnetic energy storage systems, which Mr. Koeppe founded and served as
president. From 1993 to 1995, Mr. Koeppe was acting CEO and chairman of the
executive committee of the board of directors of Best Power, Inc., a supplier of
uninterruptible power supply packages.
James H. Ozanne, age 60, is a director of Distributed Energy Systems Corp., and
has served in that position since May 2003. From September 2002 to May 2003 he
served as a director of Proton Energy Systems, Inc., one of the predecessors of
Distributed Energy Systems. Mr. Ozanne has served as chairman of Greenrange
Partners, a venture capital investment company since 1996. He is also Chairman
of the Board of PECO Pallet; a privately owned start up company in the grocery
pallet rental business. Since May 2003, he has served as Chief Restructuring
Officer of Select Portfolio Servicing Inc.; a mortgage servicing company owned
by PMI Group and Financial Security Assurance.
20
Following the appointment of the new directors, the Board appointed:
To the Audit Committee
Steve Barnett, Chairman
Blake O. Fisher, Jr.
James H. Ozanne
To the Compensation Committee
Paul F. Koeppe, Chairman
Steve Barnett
The Board of Directors has determined that Steve Barnett, Blake O. Fisher, Jr.,
and James H. Ozanne are "audit committee financial experts" as defined in Item
401(h)(2) of Regulation S-K. Further, the Board has determined that each of the
members of the Audit Committee is "independent" under the standard set forth in
Rule 4350(d) of the Nasdaq Marketplace Rules.
Termination of Director Option Plan
On July 22, 2004, the Board of Directors terminated the Director Stock Option
Plan that was adopted in 2003.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits: Copies of the following documents are included or furnished as
exhibits to this report pursuant to Item 601 of Regulation S-K.
Exhibit
No. Title of Document
------- -----------------
31.1 Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certifications of the Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Reports on Form 8-K:
UCN filed a current report on Form 8-K with the Securities and Exchange
Commission on May 14, 2004, disclosing under Item 5 a letter distributed to the
shareholders with UCN's 2003 Annual Report to Stockholders, and reporting under
Item 12 the issuance of a press release regarding operating results for the
three months ended March 31, 2004.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UCN, INC.
Date: August 13, 2004 By: /s/ Theodore Stern, Chief Executive Officer
---------------------------------------------
Date: August 13, 2004 By: /s/ David R. Grow, Chief Financial Officer
---------------------------------------------
22