<PAGE> 1
================================================================================
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, 1999
OR
[ ] 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 - 26173
STUDENT ADVANTAGE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8699 04-3263743
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) INDUSTRIAL IDENTIFICATION
CLASSIFICATION CODE NUMBER)
NUMBER)
---------------
280 SUMMER STREET
BOSTON, MASSACHUSETTS 02210
(Address of Principal Executive Offices) (Zip Code)
(617) 912-2011
(Registrant's telephone number, including area code)
---------------
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 No X
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 34,797,546 shares of common
stock as of August 1, 1999.
---------------
<PAGE> 2
Student Advantage, Inc.
Form 10-Q
For the Quarter ended June 30, 1999
---------------
<TABLE>
<CAPTION>
INDEX
<S> <C> <C>
PAGE (S)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at December 31, 1998 and June 30, 1999 (Unaudited) 3
Consolidated Statement of Operations for the three and six months ended June 30, 1999 4
(Unaudited)
Consolidated Statement of Cash Flows for the six months ended June 30, 1999 5
(Unaudited)
Notes to Consolidated Financial Statements (Unaudited) 6
Item II. Management Discussion and Analysis of Financial Condition and Results of Operations 9
Risk Factors That May Affect Results of Operations and Financial Condition 16
Item III. Quantitative and Qualitative Disclosure about Market Risk 23
PART II. OTHER INFORMATION 23
Item I. Legal Proceedings 23
Item II. Changes in Securities and Use of Proceeds 23
Item IV. Submission of Matters to a Vote of Security Holders 23
Item VI. Exhibits and Reports on Form 8-K 24
Signatures 25
Exhibit Index 26
</TABLE>
2
<PAGE> 3
PART 1. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
STUDENT ADVANTAGE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents ...................................... $26,235 $ 6,140
Marketable securities .......................................... 20,582 --
Accounts receivable (net of allowance for doubtful
accounts of $74 and $70, at June 30, 1999 and December 31,
1998, respectively) .......................................... 2,190 3,209
Prepaid expenses and other current assets ...................... 788 352
------- -------
Total current assets ...................................... 49,795 9,701
Property and equipment, net ...................................... 2,205 1,386
Intangible assets, net ........................................... 1,636 617
------- -------
Total assets .............................................. $53,636 $11,704
======= =======
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Borrowings under line of credit ................................ 60 $ --
Accounts payable ............................................... 3,276 1,985
Accrued compensation ........................................... 1,079 1,095
Other accrued expenses ......................................... 3,675 1,912
Deferred revenue ............................................... 8,532 7,064
------- -------
Total current liabilities ................................ 16,622 12,056
------- -------
Notes payable .................................................. 430 --
Total liabilities ........................................ 17,052 12,056
------- -------
Series A redeemable convertible preferred stock; $1 par value;
Authorized: 4,000,000 shares; Issued: 0 and 2,952,568 shares at
June 30, 1999 and
December 31, 1998, respectively; Outstanding: 0 and 2,747,036
shares at June 30, 1999 and December 31, 1998, respectively .. -- 10,196
------- -------
Stockholders' equity (deficit)
Common stock, $.01 par value; Authorized: 150,000,000 shares;
Issued: 33,897,547 and 20,739,378 at June 30, 1999 and December
31, 1998, respectively (unaudited), Outstanding: 33,897,547 and
18,524,313 at June 30, 1999 and December 31, 1998, respectively
(unaudited) .................................................... 338 207
Additional paid-in capital ..................................... 73,839 19,765
Accumulated deficit ............................................ (34,557) (26,527)
Treasury stock (at cost) ....................................... -- (630)
Deferred compensation .......................................... (3,036) (3,363)
------- -------
Total stockholders' equity (deficit) ..................... 36,584 (10,548)
------- -------
Total liabilities, redeemable convertible preferred
stock and stockholders' equity (deficit) ............... $53,636 $11,704
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE> 4
STUDENT ADVANTAGE, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------------------------
1999 1998 1999 1998
---------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Revenue
<S> <C> <C> <C> <C>
Subscription ............................................... $ 2,366 $ 2,274 $ 4,034 $ 4,012
Other ...................................................... 2,426 1,377 5,665 3,249
------- ------- ------- -------
Total revenue .................................... 4,792 3,651 9,699 7,261
------- ------- ------- -------
Costs and expenses
Cost of subscription revenue ............................... 484 413 804 715
Cost of other revenue ...................................... 2,147 944 4,822 2,539
Product development ........................................ 1,553 1,363 2,810 2,282
Sales and marketing ........................................ 2,837 1,621 4,957 2,788
General and administrative ................................. 2,552 1,122 4,374 1,903
Depreciation and amortization .............................. 364 488 734 759
Stock-based compensation ................................... 282 -- 554 --
------- ------- ------- -------
Total costs and expenses ................................ 10,219 5,951 19,055 10,986
------- ------- ------- -------
Loss from operations ......................................... (5,427) (2,300) (9,356) (3,725)
Interest income (expense), net ............................... 50 22 124 75
------- ------- ------- -------
Net loss...................................................... (5,377) (2,278) $(9,232) $(3,650)
======= ======= ======== =======
Basic and diluted net loss per share.......................... (0.26) $ (0.13) $ (0.47) $ (0.21)
======= ======= ======== =======
Shares used in computing basic and diluted
net loss per share ......................................... 21,027 17,592 19,792 17,339
Pro forma basic and diluted net loss per share................ (0.19) $ (0.10) $ (0.34) $ (0.17)
======= ======= ======= =======
Shares used in computing pro forma basic and
diluted net loss per share ................................. 28,169 21,886 27,484 21,632
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE> 5
STUDENT ADVANTAGE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
For the Six Months Ended
------------------------------
June 30,
------------------------------
1999 1998
------------- ----------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net loss .................................................................... $ (9,232) $(3,650)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization ............................................. 559 422
Reserve for bad debts ..................................................... 4 --
Compensation expense relating to issuance of equity ....................... 554
Issuance of stock in exchange for services ................................ 65 168
Changes in assets and liabilities:
Accounts receivable ..................................................... 1,015 (686)
Prepaid expenses and other current assets ............................... (436) (173)
Accounts payable ........................................................ 1,291 815
Accrued compensation .................................................... (16) 218
Accrued expenses ........................................................ 2,193 1,240
Deferred revenue ........................................................ 1,468 (306)
-------- -------
Net cash used for operating activities .................................. (2,535) (1,952)
======== =======
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed assets ................................................... (1,088) (804)
Acquisitions of businesses for cash and common stock ........................ (1,190) (655)
Proceeds from sale of fixed assets .......................................... 16 --
Purchase of marketable securities ........................................... (20,582) --
-------- --------
Net cash used for investing activities .................................. (22,844) (1,459)
======== =======
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of preferred stock, net .................................. -- 2,000
Proceeds from issuance of common stock, net of issuance costs ............... 43,255 6
Proceeds from exercise of stock options ..................................... 300
Proceeds from exercise of warrants .......................................... 212
Borrowings under line of credit ............................................. 60
Proceeds from short-term debt -- related party .............................. -- 400
Repayment of short-term debt -- related party ............................... -- (100)
Distributions to stockholders ............................................... -- (1,043)
-------- -------
Net cash provided by financing activities ............................... 43,827 1,263
Adjustment to conform fiscal period of University Netcasting, Inc. ............ 1,647 --
-------- -------
Net increase (decrease) in cash and cash equivalents .......................... 20,095 (2,148)
-------- -------
Cash and cash equivalents, beginning of period ................................ 6,140 5,806
-------- -------
Cash and cash equivalents, end of period ...................................... $ 26,235 $ 3,658
======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND
NON-CASH INVESTING AND FINANCING ACTIVITIES
Cash paid during the year for interest ........................................ $ 54 $128
======== =======
Capital stock and warrants issued for business acquisitions ................... $ 299 $225
======== =======
Capital stock issued for note receivable ...................................... $ -- $165
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE> 6
STUDENT ADVANTAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - THE COMPANY
BASIS OF PRESENTATION
Student Advantage, Inc. and its subsidiaries ("Student Advantage" or the
"Company") provide college students with discounts on a broad range of products
and services nationwide through the Student Advantage membership program, as
well as its Web site and magazine. Student Advantage also offers marketing
services to corporations seeking to communicate effectively with the college
student market. Student Advantage, Inc. was incorporated in the State of
Delaware on October 20, 1998. The Company began operations in 1992 as a sole
proprietorship, converted to a general partnership in 1995, converted to a
limited liability company in 1996 and became a C Corporation in 1998. From
inception through December 1997, our revenue was derived primarily from annual
membership fees. Since that time, the Company has expanded our product and
service offerings through internal growth as well as acquisitions.
In June of 1999 the Company completed an initial public offering ("IPO") of
6,000,000 shares of the Company's common stock resulting in $44.6 million net of
underwriters discounts and commissions. Upon closing of the IPO, each
outstanding share of redeemable convertible preferred stock converted into
shares of common stock at a three to one ratio.
All amounts for all periods presented have been restated to reflect the
acquisition of University Netcasting, Inc. ("UNI") in June 1999, which was
accounted for as a pooling of interests and, accordingly, the historical
consolidated financial statements of the Company prior to the acquisition have
been restated to include UNI's financial position, results of operations and
cash flows.
These financial statements should be read in conjunction with the
consolidated financial statements and related footnotes included in the
Company's Form S-1 registration statement, as amended, filed with the
Securities and Exchange Commission ("SEC") in connection with the Company's IPO.
UNAUDITED INTERIM FINANCIAL INFORMATION
The unaudited interim consolidated financial statements of the Company for
the three and six months ended June 30, 1998 and 1999, respectively, included
herein have been prepared in accordance with generally accepted accounting
principals for interim financial information and with the instructions for Form
10-Q under the Securities Exchange Act of 1934, as amended, and Article 10 of
Regulation S-X under the Securities Act of 1933, as amended. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations relating to interim financial
statements.
In the opinion of management, the accompanying unaudited interim
consolidated financial statements reflect all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial position
of the Company at June 30, 1999, and the results of its operations and its cash
flows for the three and six months ended June 30, 1998 and 1999, respectively.
The results for the three and six months ended June 30, 1999 are not necessarily
indicative of the expected results for the full fiscal year or any future
period. Certain prior period balances have been reclassified to conform to the
current period presentation.
NOTE 2 - ACQUISITIONS
THE TRAVEL HOLDING GROUP, LLC AND THE CAMPUS AGENCY, LLC. On April 1, 1999,
Student Advantage completed its acquisitions of substantially all the assets of
The Travel Holding Group, LLC and The Campus Agency, LLC in exchange for a
promissory note in the amount of $330,000. The Campus Agency provides media
planning and strategy consulting services to the U.S. student travel market. The
Travel Holding Group is a reseller of Eurail passes. The acquisitions have been
accounted for under the purchase method of accounting and the results of
operations of each company have been included in Student Advantage's results
beginning on the acquisition date. Goodwill and other intangible assets in the
aggregate amount of $305,000 were recorded in connection with these acquisitions
and are being amortized over 3 years.
MENTOR INTERACTIVE CORP. On May 27, 1999, Student Advantage acquired
substantially all of the assets of Mentor Interactive Corp., a provider of
Internet-based research tools and related materials, in exchange for 18,056
shares of common stock and a warrant to purchase 24,000 shares of common stock
at a purchase price of $11.08 per share with an aggregate estimated fair value
of approximately $300,000. This acquisition has been accounted for under the
purchase method of accounting and the results of Mentor Interactive Corp. have
been included in Student Advantage's results beginning on the acquisition date.
Goodwill and other intangible assets in the aggregate amount of $312,000 were
recorded in connection with the acquisition and are being amortized over
6
<PAGE> 7
a three year period.
TRANSACTION SERVICE PROVIDERS, INC. On June 11, 1999, Student Advantage
acquired Transaction Service Providers, Inc. ("TSP"), a provider of debit card
services to college students and local merchants, in a transaction accounted for
as a pooling of interests. Because the historical results of operations and
financial position of Transaction Services Providers were immaterial to Student
Advantage, prior period financial statements have not been restated and TSP's
results of operations have been included in Student Advantage's results as of
April 1, 1999. In connection with the acquisition, Student Advantage issued
195,000 shares of common stock to the stockholders of Transaction Service
Providers.
UNIVERSITY NETCASTING, INC. On June 18, 1999, Student Advantage acquired
all of the outstanding capital stock of UNI in exchange for 2,439,680 shares of
Student Advantage common stock and the conversion of all UNI outstanding common
stock options for options to purchase 62,922 shares of Student Advantage common
stock. University Netcasting is a leading operator of official athletic Web
sites for colleges, universities and college sports associations. Through its
FANSonly Network, FANSonly.com, University Netcasting provides sports fans with
comprehensive online information and analysis on college sports. This
acquisition was accounted for using the pooling-of-interests method and,
accordingly, the historic consolidated financial statements of Student Advantage
prior to the acquisition have been restated to reflect the financial position,
results of operations and cash flows of UNI.
Effective, June 18, 1999, UNI's fiscal year end was changed from March 31
to December 31 to conform to Student Advantage's year end. UNI's results of
operations for the three and six months ended September 30, 1998 have been
included in Student Advantage's three and six months ended June 30, 1998
results, respectively. Accordingly, UNI's operations for the three months ended
March 31, 1999 will be included in Student Advantage's results for both of the
year ended December 31, 1998 and 1999 (when presented). Revenue and net loss for
UNI for the three months ended March 31, 1999 were $682,000 and $(1.6) million,
respectively. This net loss amount has been reported as an adjustment to the
consolidated accumulated deficit.
The following is a reconciliation of revenues and net loss previously
reported by the company for the three and six month periods ended June 30, 1998
and 1999, with the combined amounts currently presented in the financial
statements for those two periods:
<TABLE>
<CAPTION>
(IN THOUSANDS) FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1999
------------------------------- -------------------------------
SA UNI COMBINED SA UNI COMBINED
<S> <C> <C> <C> <C> <C> <C>
Revenues $3,398 $ 253 $ 3,651 $ 4,289 $ 503 $ 4,792
Net income (loss) $ (928) $(1,350) $(2,278) $(3,170) $(2,207) $(5,377)
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1999
------------------------------- ---------------------------
SA UNI COMBINED SA UNI COMBINED
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 6,794 $ 467 $ 7,261 $ 8,514 $ 1,185 $ 9,699
Net income (loss) $(1,233) $(2,417) $(3,650) $(5,379) $(3,853) $(9,232)
</TABLE>
7
<PAGE> 8
NOTE 3 - COMPUTATION OF UNAUDITED NET LOSS PER SHARE AND PRO FORMA NET LOSS PER
SHARE
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
---------- ----------- ----------- -----------
BASIC AND DILUTED NET LOSS PER SHARE: (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net loss $(5,377) $(2,278) $(9,232) $(3,650)
======= ======= ======= =======
Basic and diluted weighted average common shares
outstanding (1) 21,027 17,592 19,792 17,339
======= ======= ======= =======
Basic and diluted net loss per share $ (0.26) $ (0.13) $ (0.47) $ (0.21)
======= ======= ======= =======
PRO FORMA BASIC AND DILUTED NET LOSS PER SHARE:
Net loss $(5,377) $(2,278) $(9,232) $(3,650)
======= ======= ======= =======
Shares attributable to common stock, excluding effects of
preferred stock conversion (1) 19,928 17,592 19,243 17,339
Shares attributable to the assumed conversion of convertible
preferred stock upon closing of the initial public offering 8,241 4,294 8,241 4,294
------- ------- ------- -------
Pro forma basic and diluted weighted average shares
outstanding 28,169 21,886 27,484 21,632
======= ======= ======= =======
Pro forma basic and diluted net loss per share $(0.19) $(0.10) $(0.34) $ (0.17)
======= ======= ====== ======
</TABLE>
(1) All amounts for all periods presented have been restated to reflect the
acquisition of University Netcasting, Inc. in June 1999, which was
accounted for as a pooling of interests.
(2) Net loss per share is computed under SFAS No. 128, "Earnings Per Share".
Basic net loss per share is computed using the weighted average number of
shares. Diluted loss per share does not differ from basic loss per share
since potential common shares from conversion of preferred stock and
exercise of stock options are anti-dilutive for all periods presented. Pro
forma basic and diluted net loss per share have been calculated assuming
the conversion of all outstanding shares of Series A preferred stock into
common shares, as if the shares had converted immediately upon their
issuance.
NOTE 4 - SUBSEQUENT EVENTS
On July 21, 1999 Student Advantage entered into a marketing agreement with
Lycos, Inc.. In connection with the transaction, Lycos was granted a warrant
(the "Lycos warrant") to purchase 550,000 shares of Student Advantage common
stock at a price of $10.875 per share in exchange for certain marketing rights
and Lycos content. The Lycos warrant terminates on July 21, 2002 and is
exercisable on or after July 21, 2000. The Company has valued the Lycos warrant
at $2.2 million which will be recognized as a sales and marketing expense on a
straight line basis over the term of the agreement.
On July 21, 1999 an additional 900,000 shares of common stock were issued
by the Company as a result of the full exercise of the underwriters'
over-allotment option in the Company's initial public offering. The Company
received additional proceeds of $6.7 million as the result of the exercise.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Student Advantage, Inc. has included in this filing certain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 concerning Student Advantage's business,
operations and financial condition. The words or phrases "can be", "expects",
"may affect", "may depend", "believes", "estimate", "project", and similar words
and phrases are intended to identify such forward-looking statements. Such
forward-looking statements are subject to various known and unknown risks and
uncertainties and Student Advantage cautions you that any forward-looking
information provided by or on behalf of Student Advantage is not a guarantee of
future performance. Actual results could differ materially from those
anticipated in such forward-looking statements due to a number of factors, some
of which are beyond Student Advantage's control, in addition to those discussed
in Student Advantage's other public filings, press releases and statements by
Student Advantage's management, including those set forth below under "Risk
Factors That May Affect Future Results". All such forward-looking statements are
current only as of the date on which such statements were made. Student
Advantage does not undertake any obligation to publicly update any
forward-looking statement to reflect events or circumstances after the date on
which any such statement is made or to reflect the occurrence of unanticipated
events.
OVERVIEW
We are dedicated to serving the needs of college students through our
leading membership program and Web site. We provide college students with
discounts on a broad range of products and services nationwide through the
Student Advantage membership program, as well as our Web site and magazine. We
also offers marketing services to corporations seeking to communicate
effectively with the college student market. Through its FANSonly Network,
FANSonly.com, we provide sports fans with comprehensive online information and
analysis on college sports.
We began operations in 1992 as a sole proprietorship, converted to a
general partnership in 1995, converted to a limited liability company in 1996
and became a C Corporation in 1998. From inception through December 1997, our
revenue was derived primarily from annual membership fees. Since that time, we
have expanded our product and service offerings through internal growth as well
as acquisitions.
Our revenue is generated from subscription revenue and other revenue.
Subscription revenue is derived from membership sales. Memberships are sold in
three different ways. Most are sold to AT&T and distributed in conjunction with
an AT&T calling card. The membership cards associated with these membership
sales are co-branded and serve as both the Student Advantage membership
identification card and an AT&T calling card. In certain cases, renewal of a
co-branded membership card is subject to a minimum level of usage of AT&T
services during the prior twelve months. We earn a fee from AT&T for each of
these memberships, with a current minimum commitment by AT&T to purchase at
least 1.25 million memberships per academic year. During 1997 and 1998 and the
three and six months ended June 30, 1999, AT&T accounted for approximately 77%,
95%, 94% and 94% of subscription revenue, respectively. Memberships are also
sold by Student Advantage to colleges, universities and university organizations
for distribution free of charge to students. In the 1998-1999 academic year,
five colleges, universities and university organizations purchased memberships
for distribution free of charge to students. In addition, Student Advantage
sells memberships directly to students for a membership fee that is currently
$20 per year. Subscription revenue is recognized ratably from the date of
subscription to the end of the annual membership period, which ends on August 31
of each year.
Other revenue includes advertising, marketing service and commerce revenue.
Advertising revenue consists primarily of fees for advertisements placed in SAM,
the Student Advantage magazine, sponsorship fees paid by vendors for inclusion
in the member guide, a list of participating merchants, and fees for banner
advertisements and sponsorships on our Web site. Marketing services revenue is
derived primarily from providing tailored marketing services to businesses
seeking to market their products and services to college students. These
services include organizing and executing marketing tours that travel to college
campuses, staffing tables in college locations to solicit potential student
customers on behalf of businesses and providing media planning and placement.
Commerce revenue includes primarily transaction-based fees earned for reselling
products and services on behalf of other businesses. To date, commerce revenue
has included primarily fees that we receive from AT&T for obtaining completed
applications from students for AT&T calling cards. In connection with each
application accepted by AT&T, we also earn membership fees that are included in
subscription revenue.
9
<PAGE> 10
In December 1997, we completed our acquisition of The Main Quad, Inc. which
owned and operated Web sites focused on providing content for students. These
Web sites serve as the basis for Student Advantage's current online activities.
We acquired substantially all the assets of The Main Quad for $272,000 and the
issuance of 1,417,720 shares of common stock. In January 1998, we completed our
acquisition of Collegiate Advantage, Inc. a provider of marketing and
promotional services to businesses targeting college students. The acquisition
of Collegiate Advantage marked our entrance into the marketing services
business. We acquired substantially all the assets of Collegiate Advantage for
$651,000 and the assumption of $275,000 in liabilities. We are also required to
make payments totaling $715,000 to Collegiate Advantage in three installments
ending on January 31, 2001. These acquisitions were accounted for under the
purchase method of accounting, and the results of operations of each of the
acquired companies have been included in our financial statements since their
respective dates of acquisition. Goodwill and other intangible assets in the
aggregate amount of $1.4 million were recorded in connection with these and
other acquisitions and are being amortized over the economic lives of the
related assets, ranging from two to five years.
On April 1, 1999, we completed our acquisitions of The Travel Holding
Group, LLC and The Campus Agency, LLC in exchange for a promissory note in the
amount of $330,000. The Campus Agency provides media planning and strategy
consulting services to the U.S. student travel market. The Travel Holding Group
is a reseller of Eurail passes. The acquisitions have been accounted for under
the purchase method of accounting and the results of operations of each company
have been included in our results beginning on the acquisition date. Goodwill
and other intangible assets in the aggregate amount of $305,000 were recorded in
connection with these acquisitions and are being amortized over three years.
On May 27, 1999, we acquired substantially all of the assets of Mentor
Interactive Corp., a provider of Internet-based research tools and related
materials, in exchange for 18,056 shares of common stock and a warrant to
purchase 24,000 shares of common stock at a purchase price of $11.08 per share
with an aggregate estimated fair value of approximately $300,000. This
acquisition has been accounted for under the purchase method of accounting and
the results of Mentor Interactive Corp. have been included in our results
beginning on the acquisition date. Goodwill and other intangible assets in the
aggregate amount of $312,000 were recorded in connection with the acquisition
and are being amortized over a three year period.
On June 11, 1999, we acquired Transaction Service Providers, Inc., a
provider of debit card services to college students and local merchants, in a
transaction accounted for as a pooling of interests. Because the historical
results of operations and financial position of Transaction Services Providers
were immaterial to Student Advantage, prior period financial statements have not
been restated and TSP's results of operations have been included in our results
as of April 1, 1999. In connection with the acquisition, we issued 195,000
shares of common stock to the stockholders of Transaction Service Providers.
On June 18, 1999, we acquired all of the outstanding capital stock of UNI
in exchange for 2,439,680 shares of our common stock and the conversion of all
UNI outstanding common stock options for options to purchase 62,922 shares of
our common stock. University Netcasting is a leading operator of official
athletic Web sites for colleges, universities and college sports associations.
Through its FANSonly Network, FANSonly.com, University Netcasting provides
sports fans with comprehensive online information and analysis on college
sports. This acquisition was accounted for using the pooling-of-interests method
and, accordingly, the historic consolidated financial statements of Student
Advantage prior to the acquisition have been restated to reflect the financial
position, results of operations and cash flows of UNI.
On June 23, 1999, we completed an initial public offering ("IPO") of
6,000,000 shares of our common stock resulting in net proceeds to us of
approximately $44.6 million. Upon closing of the IPO, each outstanding share of
redeemable convertible preferred stock converted into shares of common stock at
a three to one ratio.
In the future we may pursue additional acquisitions to obtain complementary
products, services and technologies. There are no assurances that the
acquisitions we have already completed, or any acquisitions that we may complete
in the future, will produce the anticipated revenue, earnings or business
synergies.
We recorded deferred compensation of $4.2 million in the year ended
December 31, 1998 and $228,000 in the first six months of 1999, representing the
difference between the exercise price of stock options granted and the fair
market value of the underlying common stock at the date of grant. The difference
is recorded as a reduction of stockholders' equity and is being amortized over
the vesting period of the applicable options, typically four years. Of the total
deferred compensation amount, $808,000 had been amortized as of December 31,
1998 and an additional $554,000 had been amortized in the six months ended June
30, 1999. The amortization of deferred compensation is recorded as an operating
expense.
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<PAGE> 11
We have experienced substantial net losses since 1996 and, as of June 30,
1999, had an accumulated deficit of $34.6 million. We expect to increase our
expenditures in all areas in order to execute our business plan. As a result, we
believe that we will continue to incur operating losses and negative cash flows
from operations for the foreseeable future and that the rate at which such
losses will be incurred may increase from current levels.
We do not believe that we have any material market risk exposure with
respect to derivative or other financial instruments.
SUBSEQUENT EVENTS
On July 21, 1999 we entered into a marketing agreement with Lycos, Inc. In
connection with the transaction, Lycos was granted a warrant (the "Lycos
warrant") to purchase 550,000 shares of our common stock at a price of $10.875
per share in exchange for certain marketing rights and Lycos content. The Lycos
warrant terminates on July 21, 2002 and is exercisable on or after July 21,
2000. We have valued the Lycos warrant at $2.2 million which will be recognized
as a sales and marketing expense on a straight line basis over the term of the
agreement.
On July 21, 1999 an additional 900,000 shares of common stock were issued
as a result of the full exercise of the underwriters' over-allotment option in
our initial public offering. We received additional proceeds of $6.7 million as
the result of the exercise.
RESULTS OF OPERATIONS
The following table sets forth results of operations data for Student
Advantage as a percentage of total revenue for the periods presented:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
1999 1998 1999 1998
------------ ----------- ------------ -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Revenue
<S> <C> <C> <C> <C>
Subscription ............... 49.4% 62.3% 41.6% 55.3%
Other ...................... 50.6 37.7 58.4 44.7
------ ----- ----- -----
Total revenue ........... 100.0 100.0 100.0 100.0
------ ----- ----- -----
Costs and expenses
Cost of subscription revenue 10.1 11.3 8.3 9.8
Cost of other revenue ...... 44.8 25.9 49.7 35.0
Product development ........ 32.4 37.3 29.0 31.4
Sales and marketing ........ 59.2 44.4 51.1 38.4
General and administrative . 53.3 30.7 45.1 26.2
Depreciation and ........... 7.6 13.4 7.6 10.5
amortization
Stock-based compensation ... 5.9 -- 5.7 --
------ ----- ----- -----
Total costs and expenses 213.3 163.0 196.5 151.3
------ ----- ----- -----
Loss from operations ......... (113.3) (63.0) (96.5) (51.3)
Interest income (expense), net 1.0 0.6 1.3 1.0
------ ----- ----- -----
Net loss ..................... (112.3)% (62.4)% (95.2)% (50.3)%
====== ===== ===== =====
</TABLE>
COMPARISON OF QUARTER ENDED JUNE 30, 1999 WITH QUARTER ENDED JUNE 30, 1998
Revenue. Total revenues increased to $4.8 million for the second quarter of
1999 from $3.7 million for the second quarter of 1998, primarily due to an
increase in other revenue of $1.0 million. The increase in other revenue was
primarily due to $700,000 in revenue from the sale of Eurail passes as a result
of the Company's acquisition of the Travel Holding Group, LLC on April 1, 1999
and $200,000 in revenue related to the AT&T marketing agreement which was not in
effect until the third quarter of 1998.
AT&T accounted for approximately 56% and 60% of total revenue for the
second quarter of 1999 and the second quarter of 1998, respectively.
Additionally, AT&T accounted for approximately 94% and 96% of subscription
revenue and 19% and 0% of other revenue for the second quarter of 1999 and the
second quarter of 1998, respectively. No other single customer accounted for 10%
or more of total revenues for the second quarter of 1999 or the second quarter
of 1998.
Cost of Subscription Revenue. Cost of subscription revenue consists of the
costs associated with the fulfillment of membership subscriptions and customer
service. Cost of subscription revenue increased to $484,000 in the second
quarter of 1999 from $413,000 in the second quarter of 1998, due primarily to an
increase in costs related to the fulfillment of our membership subscriptions.
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<PAGE> 12
Cost of Other Revenue. Cost of other revenue consists of the cost of
advertising, marketing services and commerce. Advertising costs include
production and mailing costs for the magazine, as well as costs incurred for the
Student Advantage Web site. It also includes royalties paid to organizations,
primarily colleges, universities and athletic associations for the use of
organizational information and indicia (name and logo), and for supplying sports
activity content for the Company to include in the FANSonly.com web sites.
Marketing services costs include the direct and indirect costs associated with
planning and implementing events and promotions, media placement and other
marketing services. Commerce costs include personnel-related costs associated
primarily with acquiring calling card customers for AT&T and costs associated
with the sale of Eurail passes. Cost of other revenue increased to $2.1 million
in the second quarter of 1999 from $944,000 in the second quarter of 1998. This
increase is due primarily to costs incurred by The Travel Holding Group, LLC and
The Campus Agency, LLC, which were both acquired by Student Advantage, Inc.
during the second quarter of 1999. Additionally, the costs related to the AT&T
marketing agreement, entered into in the third quarter of 1998, contributed to
the increase.
Product Development. Product development expenses consist primarily of
personnel-related costs associated with the development and enhancement of the
membership products, which include the Student Advantage membership card, the
Student Advantage magazine, and the studentadvantage.com and FANSonly.com Web
sites. Product development expenses increased to $1.6 million in the second
quarter of 1999 from $1.4 million in the second quarter of 1998. The increase is
primarily due to Student Advantage's increased investment in enhancing and
improving the functionality of its Web sites.
Sales and Marketing. Sales and marketing expenses consist primarily of
personnel and other costs related to our sales and marketing programs. These
expenses increased to $2.8 million in the second quarter of 1999 from $1.6
million in the second quarter of 1998. The increase in sales and marketing
expenses was due, in large part, to increased expenditures related to building
brand awareness, expanding and servicing the customer base of partners, selling
more online advertising, and supporting the marketing services business.
General and Administrative. General and administrative expenses consist
primarily of costs related to general corporate functions, including executive
management, finance, human resources, facilities, and legal. General and
administrative expenses increased to $2.6 million in the second quarter of 1999
from $1.1 million in the second quarter of 1998. The increase in general and
administrative expenses is primarily due to non-recurring acquisition costs of
$1.3 million related to the acquisitions of University Netcasting, Inc. and
Transaction Service Providers and to a lesser extent increases in facilities and
personnel related costs.
Depreciation and Amortization. Depreciation and amortization expenses
decreased to $364,000 in the second quarter of 1999 from $488,000 in the second
quarter of 1998. Amortization expense decreased as a result of certain
intangible assets becoming completely amortized during the second quarter of
1999.
Stock-Based Compensation. We recorded deferred compensation of $4.2 million
in the year ended December 31, 1998, an additional $228,000 in the first quarter
of 1999, and none in the second quarter of 1999 in connection with the issuance
of stock options. Of this amount, $1.4 million has been amortized to expense to
date, of which $282,000 was recorded as an expense in the second quarter of
1999. The remainder is being amortized over the remaining vesting period of the
individual options.
Loss from Operations. We recorded a loss from operations of $5.4 million in
the second quarter of 1999 compared to a net loss of $2.3 million for the same
period in 1998. The increase in loss from operations is due to an increase in
total costs and expenses from $6.0 million in the second quarter of 1998 to
$10.2 million in the second quarter of 1999, which was offset in part by an
increase in total revenue from $3.7 million in the second quarter of 1998 to
$4.8 million in the second quarter of 1999.
Interest Income (Expense), Net. Interest income, net includes interest
income from cash balances and interest expense related to Student Advantage's
financing obligations. Interest income, net increased to $50,000 in the second
quarter of 1999 from $22,000 in the second quarter 1998. The increase is a
result of interest income earned on higher average cash and cash equivalents
balance during the second quarter of 1999 compared to that of the second quarter
of 1998. There was $60,000 outstanding on a line of credit at June 30, 1999.
12
<PAGE> 13
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1999 WITH THE SIX MONTHS ENDED JUNE
30, 1998
Revenue. Total revenues increased to $9.7 million for the six months ended
June 30, 1999 from $7.3 million for the six months ended June 30, 1998. This
increase was due primarily to an increase in other revenue from $3.2 million in
the first six months of 1998 to $5.7 million for the six months ended June 30,
1999. The increase in other revenue was primarily due to $1.1 million in revenue
related to the AT&T marketing agreement which was not in effect until the third
quarter of 1998, and $800,000 in web advertising revenue. Web advertising
revenue increased as a result of an increase in the number of impressions sold
and an increase in the number of sponsors advertising on Student Advantage's Web
sites. Other contributing factors were $800,000 in advertising revenue from two
issues of Student Advantage magazine which had not yet been published in the
first two quarters of 1998, and $700,000 in revenue from the sale of Eurail
passes as a result of the Company's acquisition of The Travel Holding Group, LLC
on April 1, 1999. These increases were offset in part by a decrease in other
revenue of $700,000 related to the expiration of a contract for marketing
services which was in effect during the first quarter of 1998.
AT&T accounted for approximately 58% and 53% of total revenue for the six
months ended June 30, 1999 and the six months ended June 30, 1998, respectively.
Additionally, AT&T accounted for approximately 94% and 96% of subscription
revenue and 32% and 0% of other revenue for the six months ended June 30, 1999
and the six months ended June 30, 1998, respectively. No other single customer
accounted for 10% or more of total revenues during these periods.
Cost of Subscription Revenue. Cost of subscription revenue increased to
$804,000 for the six months ended June 30, 1999 from $715,000 in the six months
ended June 30, 1998, due primarily to costs related to the fulfillment of our
membership subscriptions.
Cost of Other Revenue. Cost of other revenue increased to $4.8 million for
the six months ended June 30, 1999 from $2.5 million for the six months ended
June 30, 1998. This increase is due primarily to an increase of $1.0 million in
costs associated with the launch of the Student Advantage magazine, of which two
issues were distributed in the six months ended June 30, 1999. Additionally, an
increase of $800,000 in costs associated with the AT&T marketing agreement,
which were first incurred in the third quarter of 1998, contributed to the
increase. The acquisitions of The Travel Holding Group, LLC and The Campus
Agency, LLC during the six months ended June 30, 1999 were also contributing
factors. These increases were offset by a decrease of $854,000 in costs
associated with marketing services.
Product Development. Product development expenses increased to $2.8 million
for the six months ended June 30, 1999 from $2.3 million for the six months
ended June 30, 1998. The increase is primarily due to Student Advantage's
increased investment in enhancing and improving the functionality of its Web
sites.
Sales and Marketing. Sales and marketing expenses increased to $5.0 million
for the six months ended June 30, 1999 from $2.8 million for the six months
ended June 30, 1998. The increase in sales and marketing expenses was due, in
large part, to increased expenditures related to building brand awareness,
expanding and servicing the customer base of partners, selling more online
advertising, and supporting the marketing services business.
General and Administrative. General and administrative expenses increased
to $4.4 million for the six months ended June 30, 1999 from $1.9 million for the
six months ended June 30, 1998. The increase in general and administrative
expenses is primarily due to non-recurring acquisition costs of $1.3 million
related to the acquisitions of University Netcasting, Inc. and Transaction
Service Providers and increases in facilities and personnel related costs.
Depreciation and Amortization. Depreciation and amortization expenses
decreased to $734,000 for the six months ended June 30, 1999 from $759,000 for
the six months ended June 30, 1998. Amortization expense decreased as a result
of certain intangible assets becoming completely amortized during the period.
Stock-Based Compensation. We recorded deferred compensation of $4.2 million
in the year ended December 31, 1998 and an additional $228,000 for the six
months ended June 30, 1999. Of this amount, $1.4 million has been amortized to
expense to date, of which $554,000 is being recorded as an expense in the six
months ended June 30, 1999. The remainder is being amortized over the remaining
vesting period of the individual options.
Interest Income (Expense), Net. Interest income, net increased to $124,000
for the six months ended June 30, 1999 from $75,000 for the six months ended
June 30, 1998. The increase is a result of interest income earned on higher
average cash and cash equivalents balance during the six months ended June 30,
1999 compared to that of the six months ended June 30, 1998.
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<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
Student Advantage has financed its operations primarily through the private
and public placement of securities, cash from operations, borrowings under its
credit facilities and loans from LLC members. In October 1998, Student Advantage
completed a private placement of equity securities to new investors and received
$9.9 million in net proceeds. In June of 1999 the Company completed its initial
public offering selling 6.0 million shares and raising $44.6 million, net of
offering costs. As of June 30, 1999, Student Advantage had $46.8 million in cash
and cash equivalents and marketable securities.
Net cash used for operating activities was $2.5 million for the first six
months of 1999 and $2.0 million for 1998. The net cash used in the first six
months of 1999 was primarily a result of a net loss of $9.2 million, partially
offset by a decrease in accounts receivable of $1.0 million, an increase in
accounts payable and accrued expenses of $3.5 million and an increase in
deferred revenue and advanced payments of $1.5 million. Net cash used for
operations for 1998 resulted primarily from a net loss of $3.7 million and an
increase in accounts receivable of $686,000 in 1998. The increase was partially
offset by the timing of payments of accounts payable and accrued expenses.
Deferred revenue represents primarily payments for membership fees not yet
recognized as revenue and advance payments for purchases of memberships and
other services.
Net cash used for investing activities was $22.8 million in the first six
months of 1999 and $1.5 million in the first six months of 1998. The net cash
used for investing activities in the first six months of 1999 was primarily due
to the purchase of marketable securities of $20.6 million, the acquisitions of
the Travel Holdings Group, The Rail Connection, Mentor Interactive and the
settlement of a purchase contingency related to the acquisition of Collegiate
Advantage. This increase in 1998 was due primarily to the purchase of fixed
assets and the acquisition of Collegiate Advantage in 1998.
Net cash provided by financing activities was $43.8 million in the first
six months of 1999 and $1.3 million in the first six months of 1998. The net
cash provided by financing activities in the first six months of 1999 was
primarily the result of net cash proceeds of $43.3 million from the sale of
shares of Student Advantage common stock related to the initial public offering.
The increase in 1998 was primarily due to net cash proceeds of $2.0 million from
the sale of shares of Student Advantage preferred stock, $400,000 related to
borrowings from a related party and other equity transactions related to the
acquisition of businesses and the issuance of stock for services, partially
offset by a distribution of $1.0 million to LLC members.
Student Advantage has a $2.75 million bank line of credit and equipment
lease credit facility, which expires on June 30, 2000. The line of credit bears
interest at a rate of LIBOR plus 2% or the bank's base rate. The line of credit
and equipment lease credit facility are secured by all of the assets of Student
Advantage. As of June 30, 1999, no amount was outstanding under the line of
credit, and no amounts were outstanding under the equipment lease credit
facility.
Student Advantage has experienced a substantial increase in its
expenditures consistent with growth in operations and staffing, and anticipates
that this will continue for the foreseeable future. Additionally, Student
Advantage will continue to evaluate possible investments in businesses, products
and technologies, and plans to expand its Web infrastructure, sales and
marketing programs and aggressively promote its brand. Student Advantage
currently anticipates that its available cash resources will be sufficient to
meet its anticipated needs for working capital and capital expenditures for at
least the next 12 months.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and/or software used by many companies and governmental agencies may
need to be upgraded to comply with such Year 2000 requirements or risk system
failure or miscalculations causing disruptions of normal business activities.
State of Readiness. Student Advantage does not internally develop a
significant amount of software. Student Advantage has made a preliminary
assessment of the Year 2000 readiness of its operating financial and
administrative systems, including the hardware and software that support Student
Advantage's systems. Student Advantage's assessment plan consists of:
* contacting third-party vendors and licensors of material hardware, software
and services that are both directly and indirectly related to the delivery
of Student Advantage's services to its users,
* contacting vendors of third-party systems,
* assessing repair or replacement requirements,
* implementing repair or replacement, and
14
<PAGE> 15
* creating contingency plans in the event of Year 2000 failures.
Student Advantage is currently conducting an inventory of and reviewing all
software and other systems that it believes might be affected by Year 2000
issues. Since third parties developed and currently support many of the systems
that we use, a significant part of this effort will be to ensure that these
third-party systems are Year 2000 compliant. We plan to confirm this compliance
through a combination of the representation by these third parties of their
products' Year 2000 compliance, as well as reviews of Year 2000 readiness
documentation from our vendors. Student Advantage plans to complete this process
prior to the end of the third quarter of 1999. Until such reviews are completed
and such vendors and providers are contacted, Student Advantage will not be able
to completely evaluate whether its systems will need to be revised or replaced.
We currently expect to complete all required modifications and install necessary
replacement systems prior to December 31, 1999.
Costs. To date, Student Advantage has spent an immaterial amount on Year
2000 compliance issues but expects to incur an additional approximately $100,000
in connection with identifying, evaluating and addressing Year 2000 compliance
issues. We have not hired additional employees or retained consultants, and do
not currently expect to hire additional employees or retain consultants to work
on Year 2000 compliance matters. Most of Student Advantage's expenses have
related to, and are expected to continue to relate to, the operating costs
associated with time spent by existing employees in the evaluation process and
Year 2000 compliance matters generally. Such expenses, if higher than
anticipated, could have a material adverse effect on Student Advantage's
business, results of operations and financial condition.
Risks. Student Advantage is not currently aware of any Year 2000 compliance
problems relating to its systems that would have a material adverse effect on
Student Advantage's business, results of operations and financial condition,
without taking into account Student Advantage's efforts to avoid or fix such
problems. We have received certificates or reports from our significant third
party vendors indicating that their systems are Year 2000 compliant or
identifying remaining corrective actions. We cannot be certain that we will
discover all Year 2000 compliance problems in our systems. In addition, we
cannot be certain that none of the third-party software, hardware or services
incorporated into our material systems will need to be revised or replaced,
which could be time-consuming and expensive. The failure of Student Advantage to
fix or replace its internally developed proprietary software or third-party
software, hardware or services on a timely basis could result in lost revenues,
increased operating costs, the loss of customers and other business
interruptions, any of which could have a material adverse effect on Student
Advantage's business, results of operations and financial condition.
Student Advantage is heavily dependent on a significant number of
third-party vendors to provide both network services and equipment. A
significant Year 2000-related disruption of the network, services or equipment
that third-party vendors provide to Student Advantage could cause Student
Advantage's members and visitors to consider seeking alternate sites or cause an
unmanageable burden on its customer service, which in turn could materially and
adversely affect Student Advantage's business, financial condition and results
of operations.
In addition, there can be no assurance that governmental agencies, utility
companies, Internet access companies, third-party service providers and others
outside of Student Advantage's control will be Year 2000 compliant. The failure
by such entities to be Year 2000 compliant could result in a systemic failure
beyond the control of Student Advantage, such as a prolonged Internet,
telecommunications or electrical failure, which could also impair Student
Advantage's ability to deliver its services to its customers, decrease the use
of the Internet or prevent users from accessing its Web sites which could have a
material adverse effect on Student Advantage's business, results of operations
and financial condition.
Contingency Plan. As discussed above, Student Advantage is engaged in an
ongoing Year 2000 assessment and has not yet developed any contingency plans.
The results of Student Advantage's Year 2000 simulation testing and the
responses received from third-party vendors and service providers will be taken
into account in determining the nature and extent of any contingency plans.
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<PAGE> 16
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
WE HAVE EXPERIENCED LOSSES IN THE PAST AND EXPECT FUTURE LOSSES
We have not achieved profitability and expect to continue to incur
operating losses for the foreseeable future. We incurred net losses of $3.2
million in 1997, $5.1 million in 1998 and $9.2 million in the first six months
of 1999. As of June 30, 1999, our accumulated deficit was $34.6 million. We
expect to continue to incur significant operating and capital expenditures and,
as a result, we will need to generate significant revenue to achieve and
maintain profitability.
We cannot assure you that we will achieve sufficient revenue for
profitability. Even if we do achieve profitability, we cannot assure you that we
can sustain or increase profitability on a quarterly or annual basis in the
future. If revenue grows more slowly than we anticipate, or if operating
expenses exceed our expectations or cannot be adjusted accordingly, our
business, results of operations and financial condition will be materially and
adversely affected.
WE ARE DEPENDENT UPON AT&T FOR A LARGE PERCENTAGE OF OUR REVENUE AND A DECLINE
IN REVENUE FROM AT&T WOULD ADVERSELY AFFECT OUR RESULTS
We have an exclusive relationship with AT&T through which AT&T pays us for
a variety of goods and services, including:
* memberships provided free to students with an AT&T calling card,
* marketing services,
* advertising in our media products, such as our Web site and SAM, the
* Student Advantage magazine, and o sponsorship of certain of our products
and services, such as the Virtual Backpack.
In 1997, we derived $2.4 million, or 50%, of our total revenue from AT&T.
In 1998, we derived $11.8 million, or 61%, of our total revenue from AT&T. For
the six months ended June 30, 1999, we derived $5.6 million, or 58%, of our
total revenue from AT&T. Our relationship with AT&T has accounted for most of
our members to date. We obtain these members as a result of AT&T's distribution
of free Student Advantage memberships to students who enroll for an AT&T
telecommunications service. In addition, most of our commerce revenue is
currently attributable to fees that we earn from AT&T for obtaining completed
calling card applications from students. There can be no assurance that we will
be successful in expanding our membership base independent of our relationship
with AT&T.
The termination dates of our current agreements with AT&T have been
extended until June 2001. However, AT&T may terminate these agreements upon 120
days' prior notice, subject to payment of a termination fee in certain cases. In
addition, AT&T can terminate the current agreements if Raymond V. Sozzi, Jr. is
no longer employed as our president, or if he no longer owns at least five
percent of our capital stock. The termination of our relationship with AT&T
would have a material adverse effect on our business.
WE HAVE A LIMITED OPERATING HISTORY AND MAY FACE DIFFICULTIES ENCOUNTERED BY
EARLY STAGE COMPANIES IMPLEMENTING AN INTERNET STRATEGY
We have a limited operating history on which an investor can evaluate our
business. Our operations began in 1992. An investor in our common stock must
consider the risks and difficulties frequently encountered by early stage
companies implementing an Internet strategy. These risks include our possible
inability to:
* sustain historical revenue growth rates,
* generate sufficient revenue to achieve and maintain profitability,
* implement our business model,
* maintain the satisfaction of our members,
* introduce new and enhanced Web and offline content, products and
services, and
* respond to competitive developments.
If we do not successfully manage these risks, our business, results of
operations and financial condition will be materially adversely affected. We
cannot assure you that we will successfully address these risks or that our
business strategy will be successful.
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<PAGE> 17
OUR BUSINESS IS HIGHLY DEPENDENT UPON OUR PRESIDENT AND CHIEF EXECUTIVE OFFICER
We are highly dependent on our president and chief executive officer,
Raymond V. Sozzi, Jr., the loss of whom would adversely affect our future
success. If Mr. Sozzi is no longer employed as our president, AT&T can terminate
its agreements with us.
OUR RELATIONSHIP WITH AT&T COULD HINDER OUR ABILITY TO ATTRACT ADDITIONAL
SPONSORS
Our agreement with AT&T prevents us from providing our goods and services
to other telecommunications companies. Our agreement with AT&T also precludes us
from entering into a relationship with another sponsor that will distribute our
memberships free to students as an incentive or through any promotion. Our
relationship with AT&T could hinder our ability to attract additional national
sponsors, in particular sponsors who may be interested in purchasing memberships
for distribution to students.
WE MAY NOT SUCCESSFULLY IMPLEMENT OUR INTERNET STRATEGY
In order to successfully implement our Internet strategy, we must:
* establish our Web site as the primary vehicle for delivery of our
products and services, including member registration and renewal,
information regarding national and local sponsors, and customer service,
* expand our Web site to include more content and services for students and
encourage our members to use the site so that it becomes more attractive
for advertisers, and
* establish our Web site as an effective e-commerce platform.
Our failure to successfully implement our Internet strategy could have a
material adverse effect on our business.
OUR ABILITY TO GENERATE SIGNIFICANT REVENUES FROM ONLINE ACTIVITIES AND INTERNET
ADVERTISING IS UNCERTAIN
It is unclear whether companies implementing an Internet community business
model will generate sufficient revenues to achieve and maintain profitability.
Our ability to generate significant revenues from advertisers, sponsors and
other businesses in connection with online activities will depend, in part, on
our ability to generate sufficient user traffic with demographic characteristics
attractive to our advertisers. The intense competition among Web sites that sell
online advertising has led to the creation of a number of pricing alternatives
for online advertising. These alternatives make it difficult for us to project
future levels of advertising and other Internet-related revenue and applicable
gross margins related to our online offerings that can be sustained by us or the
online advertising industry in general. Although we do not currently derive a
substantial portion of our revenue from Internet advertising and other
Internet-related activities, our business model depends in part on increasing
the amount of such revenue.
OUR BUSINESS IS SUBJECT TO SEASONAL FLUCTUATIONS, WHICH MAY AFFECT OUR REVENUES
AND OPERATING RESULTS
Our operating results are dependent upon the college student market and we
expect them to vary seasonally based upon the typical school year. We tend to
sell most of our memberships in the beginning of the fall and winter academic
terms. All of these memberships expire on August 31 of each year. Because the
aggregate number of memberships within a school year increases as new members
are added beginning on September 1, and we recognize revenue from memberships
ratably over the period from the time of subscription until the end of our
membership year, our subscription revenue will typically be higher in the first
and second quarters than in the fourth quarter of each fiscal year. It is
difficult to determine how the third quarter will typically compare, since it
includes two calendar months from the end of a membership year and the first
month of the subsequent membership year.
Our limited operating history and rapid growth make it difficult for us to
more fully assess the impact of seasonal factors on our business. Nevertheless,
because our business is dependent upon the student market, we expect that our
other revenue may be subject to seasonal fluctuations associated with the
typical school year. In particular, other revenue can be expected to be higher
during the third and fourth quarters due to increased activity associated with
the commencement of the school year. Conversely, the second quarter may have the
least amount of other revenue since it includes the months at the end of a
school year.
OUR QUARTERLY REVENUES AND OPERATING RESULTS ARE NOT INDICATIVE OF FUTURE
PERFORMANCE AND ARE DIFFICULT TO FORECAST
In addition to the seasonal fluctuations described above, our revenues and
operating results may vary from quarter to quarter for a variety of other
reasons, such as the timing of revenues from corporate sponsors or non-recurring
charges incurred in connection with acquisitions.
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You should not rely on quarter-to-quarter comparisons of our operating
results or our operating results for any particular quarter as indicative of our
future performance. It is possible that in some future periods our operating
results may be below the expectations of public market analysts and investors.
In this event, the price of our common stock might fall.
OUR OPERATING RESULTS DEPEND ON SELLING NEW MEMBERSHIPS EVERY YEAR
A significant portion of our revenue is derived from membership fees.
Members must join our program each year. A significant percentage of our members
graduate each year and, therefore, do not renew their memberships. Our revenue
growth is highly dependent upon our ability to market the value of our
membership to college students and to retain members on a yearly basis. To date,
we have not maintained sufficient data to determine the specific number of
members who renew on a yearly basis. A failure to acquire new members or renew
current members could have a material adverse effect on our business.
OUR OPERATING RESULTS DEPEND ON OUR ABILITY TO MAINTAIN AND INCREASE BUSINESS
ALLIANCES AND UNIVERSITY RELATIONSHIPS
We are dependent upon our sponsors, both national and local, to provide our
members with discounts on their products and services. We are also dependent on
maintaining college and university relationships to market and sell our products
and services. Our ability to maintain these alliances and relationships and to
develop new alliances and relationships is critical to our ability to maintain
our members. A failure to acquire or maintain sponsors and relationships could
have a material adverse effect on our business. In addition, our agreements with
a number of our sponsors preclude us from entering into similar arrangements
with their competitors. This restriction may prevent us in some cases from
offering attractive additional discounts to our members.
COLLEGES AND UNIVERSITIES ARE INCREASINGLY RELUCTANT TO PERMIT BUSINESSES TO
MARKET PRODUCTS AND SERVICES ON CAMPUS
Colleges and universities are becoming increasingly wary of businesses
which market products and services to their students. Many colleges and
universities are seeking to decrease or eliminate such marketing. In particular,
colleges and universities are concerned that many students have incurred
substantial levels of credit card debt. As a result, colleges and universities
often attempt to prevent credit card companies and other companies that offer
credit from marketing to their students. We are sometimes mistaken for a credit
card company because we give students a plastic card and a unique identification
number to represent their membership. This sometimes makes it difficult for us
to gain access to college and university students, and we have been denied
access to certain college and university campuses. To date, we have not
maintained sufficient data to determine the specific number of colleges and
universities which have denied us access to their campuses. Any inability to
directly contact students on campus could have a material adverse effect on our
business.
WE FACE SIGNIFICANT COMPETITION ON THE INTERNET, WHICH COULD ADVERSELY AFFECT
OUR BUSINESS
Many Web sites compete for consumers' and advertisers' attention and
spending. We believe that our ability to compete depends upon many factors,
including the following:
* the market acceptance of our Web site and online services,
* the success of our brand building and sales and marketing efforts,
* the performance, price and reliability of services developed by us or our
competitors,
* the effectiveness of our customer service efforts,
* the ability of our competitors to maintain or establish cooperative
relationships among themselves or with strategically aligned third
parties, and
* the emergence of new competitors.
We compete for members and advertisers online with the following types of
companies:
* online services or Web sites targeted at college students, and
* Web search and retrieval and other online service companies, commonly
referred to as portals, such as Alta Vista, Excite, Infoseek, Lycos and
Yahoo!.
The number of Web sites competing for the attention and spending of
advertisers and consumers, including college students, has increased and we
expect it to continue to increase. This market is rapidly evolving and barriers
to entry are low, enabling newcomers to launch competing sites at relatively low
cost.
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OUR MEMBERSHIP PROGRAM EXPERIENCES SIGNIFICANT COMPETITION FROM OTHER MARKETING
ACTIVITIES
We compete for client marketing budget dollars with other marketing
activities and, in particular, other forms of direct marketing activities, such
as direct mail. In recent years, there have been significant advances in new
forms of direct marketing, such as the development of interactive shopping and
data collection through television, the Internet and other media. Many industry
experts predict that electronic interactive commerce, such as shopping and
information exchange via the Internet, will proliferate significantly in the
foreseeable future. To the extent such proliferation occurs, it could have a
material adverse effect on the demand for membership programs.
WE MAY BE UNABLE TO MAKE ATTRACTIVE ACQUISITIONS OR INTEGRATE ACQUIRED COMPANIES
As part of our business strategy, we plan to acquire or make investments in
complementary businesses, products, services or technologies to increase our
online traffic and obtain new technologies. However, we cannot assure you that
we will be able to identify suitable acquisition or investment candidates. Even
if we do identify suitable candidates, we cannot assure you that we will be able
to make such acquisitions or investments on commercially acceptable terms. If we
buy a business, we could have difficulty in assimilating that company's
personnel, operations, products, services or technologies into our operations.
These difficulties could disrupt our ongoing business, distract our management
and employees, increase our expenses and adversely affect our results of
operations. Furthermore, we may incur debt or issue equity securities to pay for
any future acquisitions. The issuance of equity securities could be dilutive to
our existing stockholders.
We recently acquired several businesses, including University Netcasting,
Inc., a leading operator of official athletic Web sites for colleges,
universities and college sports associations. Achieving the anticipated benefits
of these acquisitions will depend in part upon whether the integration of these
businesses is accomplished in an efficient, effective and timely manner. In some
cases, the difficulty associated with integrating these businesses may be
increased by the necessity of coordinating geographically separated
organizations. There can be no assurance that the anticipated benefits of these
acquisitions will be achieved.
WE MAY BE UNABLE TO SUCCESSFULLY MANAGE CHANGES IN OUR BUSINESS
We have experienced a period of significant growth. This growth has placed
significant demands on our management and strains on our resources. Revenue
increased from approximately $1.8 million in 1996 to $19.4 million in 1998.
During that same time period we increased from fewer than 50 to more than 225
employees.
Our ability to manage changes in our business will depend on our ability to
continue to enhance our operating, financial and management information systems.
We cannot assure you that our personnel, systems and controls will be adequate
to support our growth, if any. If we are unable to manage change effectively,
maintain the quality of our products and services and retain key personnel, our
operating results and financial condition could be significantly affected.
OUR CURRENT FINANCIAL AND MANAGEMENT INFORMATION SYSTEMS MAY BE INADEQUATE TO
SUPPORT FUTURE OPERATIONS
We do not expect our current financial and management information systems
to be adequate to support our operations in the future. We expect to replace our
current accounting system by the end of the current year. If we incur delays or
difficulties in implementing an appropriate accounting system, our business
could be adversely affected.
OUR MANAGEMENT TEAM HAS NO EXPERIENCE IN RUNNING A PUBLIC COMPANY
Our management team has not had any experience in a leadership role in a
public company. We cannot assure you that the management team as currently
configured will be able to successfully transition into the leadership role of a
public company. The failure of the management team to adequately handle this
challenge could have a material adverse effect on our business.
WE MUST ATTRACT AND RETAIN HIGHLY-QUALIFIED PERSONNEL IN A COMPETITIVE LABOR
MARKET
We need to hire additional members of our management team and other key
employees. Competition for such personnel is intense. We have experienced, and
we expect to continue to experience in the future, difficulty in hiring highly
skilled employees with the appropriate qualifications. If we do not succeed in
attracting new personnel or retaining and motivating our current personnel, our
business could be adversely affected.
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TO EXPAND OUR BUSINESS, WE MAY NEED ADDITIONAL CAPITAL, AND THE FUTURE FUNDING
OF THESE CAPITAL NEEDS IS UNCERTAIN
We require substantial working capital to fund our business. While we
believe that our initial public offering provided us with sufficient funding for
the next twelve months, if capital requirements vary materially from those
currently planned, we may require additional financing.
Additional funds raised through the issuance of equity securities may have
the following negative effects on the then current common stockholders:
* dilution in percentage of ownership in Student Advantage, and
* the rights, preferences or privileges of the new security holders may be
senior to those of the common stockholders.
Additional financing may not be available when needed on terms favorable to
us or at all. Our failure to raise additional funds, if needed, may result in
our inability to:
* develop or enhance our services,
* take advantage of future opportunities, or
* respond to competitive pressures.
OUR SYSTEMS MAY FAIL OR EXPERIENCE A SLOWDOWN
Substantially all of our communications hardware and certain of our other
computer hardware operations are located at USWeb Corporation's facilities in
New York. Fire, floods, earthquakes, power loss, telecommunications failures,
break-ins and similar events could damage these systems. Computer viruses,
electronic break-ins or other similar disruptive problems could also adversely
affect our Web site. Our business could be adversely affected if our systems
were affected by any of these occurrences. Our insurance policies may not
adequately compensate us for any losses that may occur due to any failures or
interruptions in our systems. We do not presently have any secondary "off-site"
systems or a formal disaster recovery plan.
Our Web site must accommodate a high volume of traffic and deliver
frequently updated information. Our Web site has in the past and may in the
future experience slower response times or decreased traffic for a variety of
reasons. These types of occurrences could cause users to perceive our Web site
as not functioning properly and therefore cause them to use another Web site or
other methods to obtain information.
In addition, our users depend on Internet service providers, online service
providers and other Web site operators for access to our Web site. Many of them
have experienced significant outages in the past, and could experience outages,
delays and other difficulties due to system failures unrelated to our systems.
WE ARE DEPENDENT ON THIRD PARTIES FOR SOFTWARE, SYSTEMS AND RELATED SERVICES
We are dependent on various third parties for software, systems and related
services. For example, a third party provides warehousing, distribution,
fulfillment, mail and data processing services for us. As a result, our ability
to deliver various services to our users may be adversely affected by the
failure of these third parties to provide reliable software, systems and related
services to us.
We have in the past and may in the future experience slower response times
or delays in the processing of applications for students and the delivery of
membership identification cards to our members. Many of these delays have been
caused by third parties upon which we rely for fulfillment services. If we are
unsuccessful in providing our members with membership identification cards or
delivering products and services on a timely basis, our business may be
adversely affected.
WE MAY BE SUED FOR INFORMATION RETRIEVED FROM THE INTERNET
Inappropriate use of our Internet services
We may be subjected to claims for defamation, negligence, copyright or
trademark infringement, personal injury or other legal theories relating to the
information we publish on our Web site or in our magazine. These types of claims
have been brought, sometimes successfully, against online services as well as
other print publications in the past. We could also be subjected to claims based
upon the content that is accessible from our Web site through links to other Web
sites or through content and materials that may
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be posted by members in chat rooms or bulletin boards. We also offer e-mail
services, which may subject us to potential risks, such as liabilities or claims
resulting from unsolicited e-mail, lost or misdirected messages, illegal or
fraudulent use of e-mail or interruptions or delays in e-mail service. Our
insurance may not adequately protect us against these types of claims.
Misappropriation of personal information
Any penetration of our network security or other misappropriation of our
members' personal or credit card information could subject us to liability. We
may be liable for claims based on unauthorized purchases with credit card
information, impersonation or other similar fraud claims. Claims could also be
based on other misuses of personal information, such as for unauthorized
marketing purposes. These claims could result in litigation. In addition, the
Federal Trade Commission and several states have investigated the use by certain
Internet companies of personal information. We could incur expenses if new
regulations regarding the use of personal information are introduced or if our
privacy practices were investigated.
THE INABILITY TO IDENTIFY OUR WEB SITE VISITORS MAY LIMIT THE EFFECTIVENESS OF
OUR SALES AND MARKETING EFFORTS
Web sites typically place certain "cookies" on a user's hard drive without
the user's knowledge or consent. Cookies are small files of information about an
Internet user's movement through the Internet that are stored on the hard drive
of the user's computer. Student Advantage and other Web sites use cookies for a
variety of reasons, including the collection of data derived from the user's
Internet activity. Most currently available Web browsers allow users to remove
cookies at any time or to prevent cookies from being stored on their hard drive.
In addition, some commentators, privacy advocates and governmental bodies have
suggested limiting or eliminating the use of cookies. Any reduction or
limitation in the use of cookies could limit the effectiveness of our sales and
marketing efforts. In addition, the European Union recently adopted a directive
addressing data privacy that may limit the collection and use of certain
information regarding Internet users. This directive may limit our ability to
target advertising or collect and use information in certain European countries.
WE MAY BE UNABLE TO RESPOND TO THE RAPID TECHNOLOGICAL CHANGE IN OUR INDUSTRY
Our market is characterized by rapidly changing technologies, frequent new
product and service introductions and evolving industry standards. The recent
growth of the Internet and intense competition in our industry exacerbates these
market characteristics. To achieve our goals, we need to effectively integrate
the various software programs and tools required to enhance and improve our
product offerings and manage our business. Our future success will depend on our
ability to adapt to rapidly changing technologies by continually improving the
performance features and reliability of our services. We may experience
difficulties that could delay or prevent the successful development,
introduction or marketing of new products and services. In addition, our new
enhancements must meet the requirements of our current and prospective members
and must achieve significant market acceptance. We could also incur substantial
costs if we need to modify our service or infrastructures to adapt to these
changes.
OUR INTELLECTUAL PROPERTY RIGHTS MAY BE VIOLATED OR SUBJECT TO LITIGATION AND WE
MAY INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS
We believe that protection of our copyrights, service marks, trademarks,
trade secrets, proprietary technology and similar intellectual property is
critical to our success. We rely on the following mechanisms to protect such
intellectual property:
* trademark and copyright law,
* trade secret protection, and
* confidentiality agreements with employees, customers, independent
contractors, sponsors and others.
Despite our best efforts, we cannot assure you that our intellectual
property rights will not be infringed, violated or legally imitated. Failure to
protect our intellectual property could have a material adverse effect on our
business.
We may be sued or named as a defendant in the future for infringement of
the trademark and other intellectual property rights of third parties. Any such
proceedings or claims could have a material adverse effect on our business,
financial condition and results of operations.
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THE FAILURE OF COMPUTER SYSTEMS AND SOFTWARE PROGRAMS TO BE YEAR 2000 COMPLIANT
COULD NEGATIVELY IMPACT OUR BUSINESS
Many currently installed computer systems and software products only accept
two digits to identify the year in any date. Thus, the year 2000 will appear as
"00", which the system might consider to be the year 1900 rather than the year
2000. This could result in system failures, delays or miscalculations causing
disruptions to our operations.
We are currently conducting an inventory of, and developing testing
procedures for, all software and other systems that we believe might be affected
by Year 2000 issues. Since third parties developed and currently support many of
the systems that we use, a significant part of this effort will be to ensure
that these third-party systems are Year 2000 compliant. We plan to confirm this
compliance through a combination of the representation by these third parties of
their products' Year 2000 compliance, as well as specific testing of these
systems. The failure of systems maintained by third parties to be Year 2000
compliant could cause us to incur significant expense to remedy any problems,
reduce our revenues from such third parties or otherwise seriously damage our
business. A significant Year 2000-related disruption of the network services or
equipment that third-party vendors provide to us could also cause our members or
other users to consider seeking alternate providers or cause an unmanageable
burden on our customer service and technical support.
Our failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, some of our normal business activities or
operations.
THE STOCK PRICE OF TECHNOLOGY COMPANIES, PARTICULARLY INTERNET-RELATED
COMPANIES, COULD BE EXTREMELY VOLATILE AND MAY RESULT IN LITIGATION AGAINST US
The stock market has experienced significant price and volume fluctuations,
and the market prices of technology companies, particularly Internet-related
companies, have been highly volatile. In the past, following periods of
volatility in the market price of a company's securities, securities class
action litigation has often been instituted. Litigation could result in
substantial costs and a diversion of management's attention and resources.
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ITEM III. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not believe that it has any material market risk
exposure with respect to derivatives or other financial
instruments.
PART II. OTHER INFORMATION.
ITEM 1. LEGAL PROCEEDINGS.
The Company is not currently involved in any material legal
proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
The effective date of the Company's first registration statement,
filed on Form S-1 under the Securities Act of 1933 (File No. 333-75807) relating
to Company's initial public offering of its Common Stock, was June 17, 1999. A
total of 6,000,000 shares of the Company's Common Stock were sold to an
underwriting syndicate. The managing underwriters were BancBoston Robertson
Stevens, Prudential Securities, Volpe Brown Whelan & Company and Wit Capital
Corporation. The offering commenced and completed on June 17, 1999, at an
initial public offering price of $8.00 per share. The initial public offering
resulted in gross proceeds of $48.0 million, $3.4 million of which was applied
to the underwriting discount and $1.4 million of which was applied to related
expenses. As a result, net proceeds of the offering to the Company were
approximately $43 million. From the date of receipt through June 30, 1999,
approximately $2.5 million of the net proceeds of the Company's initial public
offering was used pay off our line of credit, $1.3 million was used to pay
acquisition expenses related to the University Netcasting acquisition. None of
the net proceeds of the offering were paid by the Company, directly or
indirectly, to any director, officer or general partner of the Company or any of
their associates, or to any persons owning ten percent or more of any class of
the Company's equity securities, or any affiliates of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Pursuant to an Action by Written Consent of Stockholders in Lieu of a
Meeting dated April 29, 1999, the holders of 4,976,256 shares of the Company's
Common Stock (out of 5,417,964 shares outstanding) and 2,706,640 shares of the
Company's convertible preferred stock (out of 2,746,036 shares outstanding)
approved the Agreement and Plan of Merger by and among the Company, SA
Acquisition I, Inc., a Delaware corporation and a wholly-owned subsidiary of the
Company, and University Netcasting, Inc., a Delaware corporation.
Pursuant to a Consent, Waiver and Amendment Agreement executed by the
stockholders of the Company dated May 20, 1999, the following matters were
approved by the holders of 5,662,901 shares of the Company's Common Stock (out
of 5,667,901 shares outstanding) and 2,746,036 shares of the Company's
convertible preferred stock (out of 2,746,036 shares outstanding):
(a) An amendment to the Company's Certificate of Incorporation to
increase the number of authorized shares of Common Stock of the
Company;
(b) The Company's Amended and Restated Certificate of Incorporation,
subject to the completion of the Company's initial public
offering;
(c) The Company's Amended and Restated By-Laws, subject to the filing
of the Amended and Restated Certificate of Incorporation and the
completion of the Company's initial public offering;
(d) Waiver of notice requirement in connection with the adoption of
(a) - (c) above;
(e) An increase in the number of directors constituting the entire
Board of Directors from four to five;
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(f) The election of the following persons to the Board of Directors
of the Company, to hold office until the 2000 Annual Meeting of
Stockholders and thereafter until their successors are duly
qualified:
John Connolly
William S. Kaiser
John Katzman
Raymond V. Sozzi, Jr.
Marc Turtletaub
(g) Classification of the then current members of the Board of
Directors of the Company into three classes, subject to the
filing of the Amended and Restated Certificate of Incorporation
and the completion of the Company's initial public offering;
(h) Adoption of the Company's 1998 Stock Incentive Plan;
(i) Adoption of the Company's 1999 Employee Stock Purchase Plan;
(j) Ratification of the independent auditors; and
(k) Corporate clean-up.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.19 Common Stock Purchase Warrant, dated July 21, 1999, issued to
Lycos, Inc.
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended June
30, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Student Advantage, Inc.
(Registrant)
Dated: August 10, 1999 BY: /s/ Christopher B. Andrews
------------------------------------------
Christopher B. Andrews, Vice President,
Finance and Administration and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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EXHIBIT INDEX
EXHIBITS
10.19 Common Stock Purchase Warrant, dated July 21, 1999, issued to
Lycos, Inc.
27 Financial Data Schedule
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<PAGE> 1
10.19 COMMON STOCK PURCHASE WARRANT, DATED JULY 21, 1999, ISSUED TO LYCOS, INC.
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUED UPON ITS EXERCISE ARE SUBJECT
TO THE RESTRICTIONS ON TRANSFER SET FORTH IN SECTION 5 OF THIS WARRANT
- --------------------------------------------------------------------------------
Warrant No. 5 Number of Shares: 550,000
Date of Issuance: July 21, 1999 (subject to adjustment)
STUDENT ADVANTAGE, INC.
Common Stock Purchase Warrant
(Void after July 21, 2002)
Student Advantage, Inc., a Delaware corporation (the "Company"), for value
received, hereby certifies that Lycos, Inc., a Delaware Corporation (the
"Registered Holder"), is entitled, subject to the terms set forth below, to
purchase from the Company, at any time or from time to time on or after July 21,
2000 and on or before July 21, 2002 at not later than 5:00 p.m. (Boston,
Massachusetts time), 550,000 shares of Common Stock, $.01 par value per share,
of the Company, at a purchase price of $10.875 per share. The shares
purchasable upon exercise of this Warrant, and the purchase price per share,
each as adjusted from time to time pursuant to the provisions of this Warrant,
are hereinafter referred to as the "Warrant Shares" and the "Purchase Price,"
respectively.
1. EXERCISE
(a) This Warrant may be exercised by the Registered Holder, in whole
or in part, by surrendering this Warrant, with the purchase form appended hereto
as EXHIBIT I duly executed by such Registered Holder or by such Registered
Holder's duly authorized attorney, at the principal office of the Company, or at
such other office or agency as the Company may designate, accompanied by payment
in full, in lawful money of the United States, of the Purchase Price payable in
respect of the number of Warrant Shares purchased upon such exercise.
(b) The Registered Holder may elect to exercise this Warrant, in whole
or in part, by way of cashless exercise by surrendering this Warrant, with the
purchase form appended hereto as EXHIBIT I duly executed by such Registered
Holder or by such Registered Holder's duly authorized attorney, at the principal
office of the Company,
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or at such other office or agency as the Company may designate, in which event
the Company shall issue to the Registered Holder a number of Warrant Shares as
is determined using the following formula:
CS equals(WS multiplied by(FMV minus PP))divided by FMV
Where:
"CS" equals the number of Warrant Shares to be issued to the Registered
Holder;
"WS" equals the number of Warrant Shares purchasable under the Warrant or,
if only a portion of the Warrant is being exercised, the portion of the Warrant
being exercised (as of the effective date of exercise (the "Exercise Date"));
"FMV" equals the Fair Market Value per share of Common Stock as of the
Exercise Date, as determined below pursuant to this subsection 1(b); and
"PP" equals the Purchase Price per share.
The Fair Market Value per share of Common Stock shall be determined as follows:
(i) If the Common Stock is listed on a national securities exchange,
the Nasdaq National Market or another nationally recognized exchange or trading
system (including the over-the-counter market as reported by the National
Quotation Bureau) as of the Exercise Date, the Fair Market Value per share of
Common Stock shall be deemed to be the last reported sale price per share of
Common Stock thereon on the Exercise Date; or, if no such price is reported on
such date, such price on the next preceding business day (provided that if no
such price is reported on the next preceding business day, the Fair Market Value
per share of Common Stock shall be determined pursuant to clause (ii) below).
(ii) If the Common Stock is not listed on a national securities
exchange, the Nasdaq National Market or another nationally recognized exchange
or trading system (including the over-the-counter market as reported by the
National Quotation Bureau) as of the Exercise Date, the Fair Market Value per
share of Common Stock shall be deemed to be the amount most recently determined
by the Board of Directors to represent the fair market value per share of the
Common Stock (including without limitation a determination for purposes of
granting Common Stock options or issuing Common Stock under an employee benefit
plan of the Company); and, upon request of the Registered Holder, the Board of
Directors (or a representative thereof) shall promptly notify the Registered
Holder of the Fair Market Value per share of Common Stock. Notwithstanding the
foregoing, if the Board of Directors has not made such a determination within
the three-month period prior to the Exercise Date, then
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(A) the Fair Market Value per share of Common Stock shall be the amount next
determined by the Board of Directors to represent the fair market value per
share of the Common Stock (including without limitation a determination for
purposes of granting Common Stock options or issuing Common Stock under an
employee benefit plan of the Company), (B) the Board of Directors shall make
such a determination within 15 days of a request by the Registered Holder that
it do so, and (C) the exercise of this Warrant pursuant to this subsection 1(b)
shall be delayed until such determination is made.
(c) Each exercise of this Warrant shall be deemed to have been effected
immediately prior to the close of business on the day on which this Warrant
shall have been surrendered to the Company as provided in subsection 1(a) above.
At such time, the person or persons in whose name or names any certificates for
Warrant Shares shall be issuable upon such exercise as provided in subsection
1(d) below shall be deemed to have become the holder or holders of record of the
Warrant Shares represented by such certificates.
(d) As soon as practicable after the exercise of this Warrant in full or in
part, and in any event within 3 days thereafter, the Company, at its expense,
will cause to be issued in the name of, and delivered to, the Registered Holder,
or as such Holder (upon payment by such Holder of any applicable transfer taxes)
may direct:
(i) a certificate or certificates for the number of full Warrant
Shares to which such Registered Holder shall be entitled upon such exercise
plus, in lieu of any fractional share to which such Registered Holder would
otherwise be entitled, cash in an amount determined pursuant to Section 3
hereof; and
(ii) in case such exercise is in part only, a new warrant or warrants
(dated the date hereof) of like tenor, calling in the aggregate on the face or
faces thereof for the number of Warrant Shares equal (without giving effect to
any adjustment therein) to the number of such shares called for on the face of
this Warrant minus the sum of (a) the number of such shares purchased by the
Registered Holder upon such exercise plus (b) the number of Warrant Shares (if
any) covered by the portion of this Warrant cancelled in payment of the Purchase
Price payable upon such exercise pursuant to subsection 1(b) above.
(e) To the extent this Warrant has not been previously exercised, and if
the Fair Market Value per share of Common Stock (as determined pursuant to
subsection 1(b) above) on the date of expiration of this Warrant is greater than
the Purchase Price then in effect, this Warrant shall be deemed automatically
exercised pursuant to subsection 1(b) above immediately before its expiration.
Following such exercise, and promptly after the Registered Holder surrenders
this Warrant to the Company, the Company shall deliver to the Registered Holder
a certificate or
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certificates for the number of Warrant Shares to which such Registered Holder
shall be entitled upon such exercise.
2. ADJUSTMENTS
(a) If outstanding shares of the Company's Common Stock shall be
subdivided into a greater number of shares or a dividend in Common Stock shall
be paid in respect of Common Stock, the Purchase Price in effect immediately
prior to such subdivision or at the record date of such dividend shall
simultaneously with the effectiveness of such subdivision or immediately after
the record date of such dividend be proportionately reduced. If outstanding
shares of Common Stock shall be combined into a smaller number of shares, the
Purchase Price in effect immediately prior to such combination shall,
simultaneously with the effectiveness of such combination, be proportionately
increased. When any adjustment is required to be made in the Purchase Price, the
number of Warrant Shares purchasable upon the exercise of this Warrant shall be
changed to the number determined by dividing: (1) an amount equal to the number
of shares issuable upon the exercise of this Warrant immediately prior to such
adjustment multiplied by the Purchase Price in effect immediately prior to such
adjustment, by (ii) the Purchase Price in effect immediately after such
adjustment.
(b) If there shall occur any capital reorganization or
reclassification of the Company's Common Stock (other than a change in par value
or a subdivision or combination as provided for in subsection 2(a) above), or
any consolidation or merger of the Company with or into another corporation, or
a transfer of all or substantially all of the assets of the Company, then, as
part of any such reorganization, reclassification, consolidation, merger or
sale, as the case may be, lawful provision shall be made so that the Registered
Holder of this Warrant shall have the right thereafter to receive upon the
exercise hereof the kind and amount of shares of stock or other securities or
property which such Registered Holder would have been entitled to receive if,
immediately prior to any such reorganization, reclassification, consolidation,
merger or sale, as the case may be, such Registered Holder had held the number
of shares of Common Stock which were then purchasable upon the exercise of this
Warrant. In any such case, appropriate adjustment (as reasonably determined in
good faith by the Board of Directors of the Company) shall be made in the
application of the provisions set forth herein with respect to the rights and
interests thereafter of the Registered Holder of this Warrant, such that the
provisions set forth in this Section 2 (including provisions with respect to
adjustment of the Purchase Price) shall thereafter be applicable, as nearly as
is reasonably practicable, in relation to any shares of stock or other
securities or property thereafter deliverable upon the exercise of this Warrant.
(c) When any adjustment is required to be made in the Purchase Price,
the Company shall promptly mail to the Registered Holder a certificate setting
forth the Purchase Price after such adjustment and setting forth a brief
statement of the facts
-4-
<PAGE> 5
requiring such adjustment. Such certificate shall also set forth the kind and
amount of stock or other securities or property into which this Warrant shall be
exercisable following the occurrence of any of the events specified in
subsection 2(a) or (b) above.
3. FRACTIONAL SHARES. The Company shall not be required upon the
exercise of this Warrant to issue any fractional shares, but shall make an
adjustment therefor in cash on the basis of the Fair Market Value per share of
Common Stock, as determined pursuant to subsection 1(b) above.
4. REPRESENTATIONS AND WARRANTIES.
(a) The Company represents and warrants to the Registered Holder that:
(i) The Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware and has all
requisite corporate power and authority to conduct its business as presently
conducted and as proposed to be conducted by it.
(ii) The authorized capital stock of the Company consists of (a)
15,000,000 shares of Common Stock, par value $.01 per share, of which 34,797,546
shares were issued and outstanding as of the close of business on July 21, 1999,
and (b) 5,000,000 shares of Preferred Stock, $.01 par value per share, none of
which shares were issued or outstanding as of the close of business on July 21,
1999.
(iii) The execution, delivery and performance by the Company of
this Warrant have been duly authorized by all necessary corporate action. This
Warrant, when executed and delivered by all parties hereto, shall constitute a
valid and binding obligation of the Company enforceable against the Company in
accordance with its terms, subject as to enforcement of remedies to applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
generally the enforcement of creditors' rights and subject to a court's
discretionary authority with respect to the granting of a decree ordering
specific performance or other equitable remedies.
(iv) The issuance and delivery of this Warrant, and the issuance
and delivery of the Warrant Shares upon exercise of this Warrant, have been duly
authorized by all necessary corporate action on the part of the Company. The
Warrant Shares when so issued and delivered against payment therefor in
accordance with the provisions of this Warrant will be duly and validly issued,
fully paid and nonassessable.
-5-
<PAGE> 6
(v) The execution, delivery and performance by the Company of
this Warrant will not (a) violate any provision of the Certificate of
Incorporation or By-laws of the Company, (b) conflict with, result in a breach
of, constitute (with due notice or lapse of time or both) a default under any
material contract to which the Company is a party or by which the Company is
bound or (c) violate any order, writ, injunction or decree of any court or other
governmental agency applicable to the Company.
(vi) Based in part on the representations made by the Registered
Holder in this Warrant, no consent or approval of, or registration or filing
with, any governmental agency is required on the part of the Company in
connection with the execution and delivery of this Warrant or the issuance and
delivery of the Warrant Shares upon exercise of this Warrant in accordance with
the provisions hereof.
(b) The Registered Holder represents and warrants to the Company that
it is acquiring this Warrant and the Warrant Shares for its own account for
investment and not with a view to, or for sale in connection with, any
distribution thereof, nor with any present intention of distributing or selling
the same; and that the Registered Holder has no present or contemplated
agreement, undertaking, arrangement, obligation, indebtedness or commitment
providing for the disposition thereof. The Registered Holder has made detailed
inquiry concerning the Company, its business and its personnel; the officers of
the Company have made available to the Registered Holder any and all written
information which is requested and have answered to the Registered Holder's
satisfaction all inquiries made by the Registered Holder; and the Registered
Holder has sufficient knowledge and experience in investing in companies similar
to the Company so as to be able to evaluate the risks and merits of its
investment in the Company and is able financially to bear the risks thereof. The
Registered Holder represents and warrants that it is an Accredited Investor
within the definition set forth in Rule 501(a) of the Securities Act.
5. REQUIREMENTS FOR TRANSFER:
(a) Neither this Warrant nor the Warrant Shares shall be sold or
transferred unless the Company first shall have been furnished with an opinion
of legal counsel, reasonably satisfactory to the Company, to the effect that
such sale or transfer is exempt from the registration requirements of the
Securities Act of 1933, as amended (the "Act").
(b) Each certificate representing Warrant Shares shall bear a legend
substantially in the following form:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and
-6-
<PAGE> 7
may not be offered, sold or otherwise transferred, pledged or
hypothecated unless and until such securities are registered under
such Act or an opinion of counsel satisfactory to the Company is
obtained to the effect that such registration is not required."
The foregoing legend shall be removed from the certificates representing any
Warrant Shares, at the request of the holder thereof, at such time as they
become eligible for resale pursuant to Rule 144(k) under the Act.
(c) Neither this Warrant nor any rights hereunder shall be assigned or
transferred by the Registered Holder, in whole or in part, voluntarily or by
operation of law. Notwithstanding the preceding sentence, this Warrant may be
transferred to a successor to the business or assets of the Registered Holder in
connection with the sale of all or substantially all of the assets or business
of the Registered Holder. Except as specifically provided in this subsection
5(c), any attempted assignment or transfer shall be void. This subsection 5(c)
shall not prohibit the Registered Holder from transferring the Warrant Shares in
accordance with subsection 5(a) hereof.
6. NO IMPAIRMENT. The Company will not, by amendment of its charter of
through reorganization, consolidation, merger, dissolution, sale of assets or
any other voluntary action, avoid or seek to avoid the observance or performance
of any of the terms of this Warrant, but will at all times in good faith assist
in the carrying out of all such terms and in the taking of all such action as
may be necessary or appropriate in order to protect the rights of the holder of
this Warrant against impairment.
7. LIQUIDATING DIVIDENDS. If the Company pays a dividend or makes a
distribution on the Common Stock payable otherwise than in cash out of earnings
or earned surplus (determined in accordance with generally accepted accounting
principles) except for a stock dividend payable in shares of Common Stock (a
"Liquidating Dividend"), then the Company will pay or distribute to the
Registered Holder of this Warrant, upon the exercise hereof, in addition to the
Warrant Shares purchased upon such exercise, the Liquidating Dividend which
would have been paid to such Registered Holder if he had been the owner of
record of such Warrant Shares immediately prior to the date on which a record is
taken for such Liquidating Dividend or, if no record is taken, the date as of
which the record holders of Common Stock entitled to such dividends or
distribution are to be determined.
8. NOTICES OF RECORD DATE, ETC. In case:
(a) the Company shall take a record of the holders of its Common Stock
(or other stock or securities at the time deliverable upon the exercise of this
Warrant) for the purpose of entitling or enabling them to receive any dividend
or other
-7-
<PAGE> 8
distribution, including without limitation a Liquidating Dividend, or to receive
any right to subscribe for or purchase any shares of stock of any class or any
other securities, or to receive any other right; or
(b) of any capital reorganization of the Company, any reclassification of
the capital stock of the Company, any consolidation or merger of the Company
with or into another corporation (other than a consolidation or merger in which
the Company is the surviving entity), or any transfer of all substantially all
of the assets of the Company; or
(c) of the voluntary or involuntary dissolution, liquidation or winding-up
of the Company,
then, and in each such case, the Company will mail or cause to be mailed to the
Registered Holder of this Warrant a notice specifying, as the case may be, (i)
the date on which a record is to be taken for the purpose of such dividend,
distribution or right, and stating the amount and character of such dividend,
distribution or right, or (ii) the effective date on which such reorganization,
reclassification, consolidation, merger, transfer, dissolution, liquidation or
winding-up is to take place, and the time, if any is to be fixed, as of which
the holders or record of Common Stock (or such other stock or securities at the
time deliverable upon the exercise of this Warrant) shall be entitled to
exchange their shares of Common Stock (or such other stock or securities) for
securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, transfer, dissolution, liquidation, or
winding-up. Such notice shall be mailed at least ten (10) days prior to the
record date or effective data for the event specified in such notice.
9. RESERVATION OF STOCK; NASDAQ. The Company will at all times reserve
and keep available, solely for issuance and delivery upon the exercise of this
Warrant, such number of Warrant Shares and other stock, securities and property,
as from time to time shall be issuable upon the exercise of this Warrant. If
the Common Stock is listed on a national securities exchange, the Nasdaq
National Market or another nationally recognized exchange or trading system
(including the over-the-counter market as reported by the National Quotation
Bureau) as of the Exercise Date, the Company shall use its best efforts to list
the Warrant Shares on such exchange, the Nasdaq National Market or other
nationally recognized exchange or trading system.
10. EXCHANGE OF WARRANTS. Upon the surrender by the Registered Holder of
any Warrant or Warrants, properly endorsed, to the Company at the principal
office of the Company, the Company will, subject to the provisions of Section 5
hereof, issue and deliver to or upon the order of such Holder, at the Company's
expense, a new Warrant or Warrants of like tenor, in the name of such Registered
Holder or as such Registered Holder (upon payment by such Registered Holder of
any applicable transfer taxes) may
-8-
<PAGE> 9
direct, calling in the aggregate on the face or faces thereof for the number of
shares of Common Stock called for on the face or faces of the Warrant or
Warrants so surrendered.
11. REPLACEMENT OF WARRANTS. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and (in the case of loss, theft or destruction) upon delivery of an
indemnity agreement (with surety if reasonably required) in an amount reasonably
satisfactory to the Company, or (in the case of mutilation) upon surrender and
cancellation of this Warrant, the Company will issue, in lieu thereof, a new
Warrant of like tenor.
12. WARRANT REGISTER. The Company will maintain a register containing the
names and addresses of the Registered Holders of this Warrant. Any Registered
Holder may change its or his address as shown on the warrant register by written
notice to the Company requesting such change. The Company may treat the
Registered Holder of this Warrant as the absolute owner hereof for all purposes.
13. MAILING OF NOTICES, ETC. All notices and other communications from the
Company to the Registered Holder of this Warrant shall be mailed by first-class
certified or registered mail, postage prepaid, to the address furnished to the
Company in writing by the last Registered Holder of this Warrant who shall have
furnished an address to the Company in writing. All notices and other
communications from the Registered Holder of this Warrant or in connection
herewith to the Company shall be mailed by first-class certified or registered
mail, postage prepaid, to the Company at its principal office set forth below.
If the Company should at any time change the location of its principal office to
a place other than as set forth below, it shall give prompt written notice to
the Registered Holder of this Warrant and thereafter all references in this
Warrant to the location of its principal offices at the particular time shall be
as so specified in such notice.
14. NO RIGHTS AS STOCKHOLDER. Until the exercise of this Warrant, the
Registered Holder of this Warrant shall not have or exercise any rights by
virtue hereof as a stockholder of the Company.
15. CHANGE OR WAIVER. Any term of this Warrant may be changed or waived
only by an instrument in writing signed by the party against which enforcement
of the change of waiver is sought.
16. HEADINGS. The headings in this Warrant are for purposes of reference
only and shall not limit or otherwise affect the meaning of any provision of
this Warrant.
-9-
<PAGE> 10
17. GOVERNING LAW. This Warrant will be governed by and construed in
accordance with the internal laws (and not the law of conflicts) of the State of
Delaware.
STUDENT ADVANTAGE, INC.
By: /s/ Raymond V. Sozzi, Jr.
---------------------------------
Raymond V. Sozzi, Jr., President
LYCOS, INC.
By: /s/ Edward M. Philip
--------------------------------
Name: Edward M. Philip
Title: COO/CFO
-10-
<PAGE> 11
EXHIBIT I
PURCHASE FORM
To: Dated:
---------------------------- ----------------------
The undersigned, pursuant to the provisions set forth in the attached Warrant
(No. , hereby irrevocably elects to purchase shares of the Common
Stock covered by such Warrant. The undersigned herewith makes payment of
$ representing the full purchase price for such shares at the
price per share provided for in such Warrant. Such payment takes the form of
(check payable box or boxes):
[ ] $ in lawful money of the United States, and/or
[ ] the cancellation of such portion of the attached Warrant as is
exercisable for a total of Warrant Shares (using a Fair
Market Value of $ per share for purposes of this
calculation).
Signature:
-------------------------------
Address: -------------------------------
-------------------------------
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
AND IS QUALIFIED IN ITS ENTIRETY TO SUCH FINANCIAL STATEMENTS (IN THOUSANDS,
EXCEPT PER SHARE DATA)
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 26,235
<SECURITIES> 20,582
<RECEIVABLES> 2,190
<ALLOWANCES> 74
<INVENTORY> 0
<CURRENT-ASSETS> 49,795
<PP&E> 2,887
<DEPRECIATION> (682)
<TOTAL-ASSETS> 53,636
<CURRENT-LIABILITIES> 16,622
<BONDS> 0
0
0
<COMMON> 338
<OTHER-SE> 36,246
<TOTAL-LIABILITY-AND-EQUITY> 53,636
<SALES> 9,699
<TOTAL-REVENUES> 9,699
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 19,055
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 124
<INCOME-PRETAX> (9,232)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,232)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,232)
<EPS-BASIC> (0.47)
<EPS-DILUTED> (0.47)
</TABLE>
