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Filed Pursuant to Rule 424(b)(4)
Registration No. 333-75807
[STUDENT ADVANTAGE LOGO]
6,000,000 SHARES
COMMON STOCK
Student Advantage, Inc. is offering 6,000,000 shares of its common stock.
This is Student Advantage's initial public offering and no public market
currently exists for its shares. The common stock has been approved for
quotation on the Nasdaq National Market under the symbol "STAD".
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INVESTING IN THE COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
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PER SHARE TOTAL
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Public Offering Price....................................... $8.00 $48,000,000
Underwriting Discounts and Commissions...................... $0.56 $ 3,360,000
Proceeds to Student Advantage............................... $7.44 $44,640,000
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THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Student Advantage has granted the underwriters a 30-day option to purchase
up to an additional 900,000 shares of common stock to cover over-allotments.
BancBoston Robertson Stephens Inc. expects to deliver the shares of common stock
to purchasers on June 23, 1999.
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BANCBOSTON ROBERTSON STEPHENS
PRUDENTIAL SECURITIES
VOLPE BROWN WHELAN & COMPANY
WIT CAPITAL CORPORATION
The date of this Prospectus is June 17, 1999.
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The inside front cover has the Student Advantage logo at the top of the
page with the heading "Student Advantage" beneath the logo. The caption beneath
the logo is "A leading resource and advocate for students, creating access for
businesses by working with universities." Beneath the caption is the heading
"studentadvantage.com". Beneath "student advantage.com" is a scroll containing
the quote "The COOLEST College Lifestyle Web Hub" from Yahoo! Internet Life, May
1999. Below the scroll are six computer screen shots in two rows of three of
Student Advantages' Website, studentadvantage.com. The top center computer
screen shot depicts the home page of www.studentadvantage.com. The top left
computer screen depicts "e-commerce" provided by the Website and the top right
computer screen depicts certain "content" provided by the Website. The bottom
left screen depicts "college sports" content provided by the FANSonly Website
with "(Acquisition Pending)" below the graphic. The bottom center screen depicts
content from the "Bulletin Board." The bottom right screen depicts content
provided by "College News" through the U-Wire news feed.
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The graphic covering the gatefold pages depicts various products and
services provided to the three communities served by Student Advantage. The
heading "Student [logo] Advantage" is centered across the top of the two pages.
Directly below the heading are six computer screen shots of Student Advantage's
Web-site, studentadvantage.com. The six screen shots are the same as the ones on
the previous page. In the center of the six screen shots is the heading
"studentadvantage.com" and a scroll containing the quote "The COOLEST College
Lifestyle Web Hub" from Yahoo! Internet Life, May 1999. In the upper left hand
corner of the page is the heading "Universities" and the text "Colleges can
generate goodwill and help reduce the cost of student life by making the Student
Advantage Membership Program readily available to students." Beneath this is a
graphic of the U-Wire logo and the text "A daily electronic news service of
college news, sports, opinion and entertainment content collected from over 400
college newspapers.". Centered below the computer screen shots is the heading
"Students" and the text "Over 1,000,000 students receive ongoing discounts from
over 40 national sponsors and 12,000 sponsors in 115 local markets." To the left
of this heading is a graphic depicting four covers of SAM, Student Advantage
Magazine and the text "The Student Advantage membership includes a subscription
to SAM - Student Advantage Magazine. Mailed directly to our members, SAM
includes lifestyle and practical content for students, and updates on new
discounts and privileges available to members". To the right of the heading is a
graphic of a Student Advantage membership card and the text "Student Advantage
members display this hard-plastic card or provide their membership number online
to receive discounts from national and local sponsors. In the upper right hand
corner is the heading "Businesses" and the text "Businesses gain access to a
marketing platform which connects them with a large, demographically attractive
market." Beneath this are logos for the following corporate sponsors: Amtrak,
AT&T, Tower Records, Staples, Foot Locker, Greyhound, 1-800-Flowers, IBM, The
Princeton Review and Dollar Rent A Car.
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS. IN THIS PROSPECTUS, "STUDENT ADVANTAGE," "WE," "US"
AND "OUR" REFER TO STUDENT ADVANTAGE, INC.
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TABLE OF CONTENTS
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PAGE
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Summary..................................................... 4
Risk Factors................................................ 7
Forward-Looking Statements.................................. 16
Use of Proceeds............................................. 17
Dividend Policy............................................. 17
Capitalization.............................................. 18
Dilution.................................................... 19
Selected Financial Data..................................... 20
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 21
Business.................................................... 33
Management.................................................. 45
Certain Transactions........................................ 52
Principal Stockholders...................................... 55
Description of Capital Stock................................ 57
Shares Eligible for Future Sale............................. 59
Underwriting................................................ 61
Legal Matters............................................... 63
Experts..................................................... 63
Additional Information...................................... 63
Index to Financial Statements............................... F-1
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SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary may not contain all of the information that you should consider
before investing in our common stock. You should read the entire prospectus
carefully, including "Risk Factors" and the financial statements and the related
notes.
STUDENT ADVANTAGE
Our Business............Student Advantage is dedicated to serving the needs of
college students through our leading membership program
and studentadvantage.com Web site. With our national
fee-based membership program, we have created a
community of over 1,000,000 student members. Our members
receive a variety of services and benefits, including
ongoing discounts on products and services offered by
national and local vendors. With studentadvantage.com,
we seek to enhance our brand online and provide
additional services to our members, businesses and
colleges with the objective of becoming the leading
online destination for college students.
We believe that Student Advantage appeals to students,
businesses and schools because we provide a combination
of the following benefits:
- For students, a valuable program that offers ongoing
discounts, as well as online content, community and
e-commerce targeted at their particular needs,
- For businesses, targeted online and offline access to
an attractive demographic group through a trusted
brand, and
- For schools, a useful resource that they may offer to
their students.
Our position at the intersection of these three groups
has enabled us to create a powerful vehicle for
advertising and commerce directed at the student market.
We generated total revenue of $17.4 million in 1998 and
$4.2 million in the first quarter of 1999, and incurred
a net loss of $5.1 million in 1998 and $2.2 million in
the first quarter of 1999.
Our Products and
Services..............Membership in Student Advantage provides students with
discounts on products and services offered by over 40
national sponsors, including Amtrak, AT&T, Foot Locker,
Greyhound, Staples and Tower Records, and over 12,000
local sponsors in 115 local markets. Student members
also receive SAM, the Student Advantage magazine.
A key component of our strategy is to make our Web site
the centerpiece of our membership program. We currently
offer content and services to all students through
studentadvantage.com, including our proprietary U-WIRE
news feed and the Virtual Backpack, a service which
includes free e-mail, an online calendar, and online
document storage; community through online bulletin
boards and articles offering advice on student life; and
e-commerce through sponsors including Egghead.com,
1-800-FLOWERS.com and Rockport Company. In order to
receive discounts on the products offered through our
Web site, students must join our membership program. We
believe that our primary role as a provider of
information and services to students, along with the
Web-savvy nature of our student membership base, makes
the Internet ideally suited for our business.
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We also provide tailored marketing services for
businesses seeking to market their products to college
students. Through our membership program and Web site,
we provide businesses a platform through which they can
reach a large, demographically attractive market. These
businesses benefit from targeted and continued access to
the student market, as well as our expertise in
designing and implementing effective marketing programs
to reach college students.
Our Market............. College students represent an attractive market
opportunity for businesses because of their significant
purchasing power and their tendency to retain brand
loyalties after graduation. According to Student Monitor
LLC, a market research company, total discretionary
spending by college students in the 1997-1998 academic
year exceeded $105 billion.
In the United States, there are over 15 million
full-time and part-time undergraduate and graduate
students at more than 3,500 university and college
campuses. This population is expected to grow as there
are currently 40 million children and young adults from
ages 10 to 19.
Our Strategy........... Our objective is to be the leading online and offline
resource for college students. The key elements of our
strategy include the following:
- Strengthen our online destination for students,
- Continue to build the Student Advantage brand,
- Aggressively grow our membership,
- Enhance relationships with students, businesses and
schools, and
- Continue to pursue strategic acquisitions and
alliances.
Recent Developments.... On May 7, 1999, we entered into an agreement to acquire
University Netcasting, Inc. in a transaction that will
be accounted for as a pooling of interests. 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. University Netcasting operates the
official athletic Web sites of over 30 universities and
college sports associations, including universities from
the PAC-10, ACC, SEC, Big 10, Big 12 and Big East
conferences. In connection with the acquisition, we will
issue 2,427,603 shares of common stock to the
stockholders of University Netcasting. We believe that
the acquisition of University Netcasting will enable us
to strengthen our online destination.
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Student Advantage's principal executive offices are located at 280 Summer
Street, Boston, Massachusetts 02210 and our telephone number at that location is
(617) 912-2011. Our Web site is located at www.studentadvantage.com. Information
contained on our Web site is not part of this prospectus.
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THE OFFERING
Common stock offered.................... 6,000,000 shares
Common stock to be outstanding after the
offering................................ 30,497,061 shares(1)
Use of proceeds......................... To fund continued growth and
expansion of its business, capital
expenditures, product development,
potential acquisitions and other
general corporate purposes. See
"Use of Proceeds."
Nasdaq National Market symbol........... STAD
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Set forth below are summary statements of operations data for the years
ended December 31, 1994, 1995, 1996, 1997 and 1998, and for three months ended
March 31, 1998 and 1999, and summary balance sheet data as of March 31, 1999, on
an actual basis and on a pro forma basis as adjusted to give effect to (1) the
sale by Student Advantage of shares of common stock in this offering at an
initial offering price of $8.00 per share, after deducting the underwriting
discounts and commissions and estimated offering expenses payable by Student
Advantage, and the application of the net proceeds from this offering, and (2)
the conversion of our convertible preferred stock upon completion of this
offering. This information should be read in conjunction with the Financial
Statements and Notes thereto appearing elsewhere in this prospectus. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
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1994 1995 1996 1997 1998 1998 1999
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(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
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STATEMENT OF OPERATIONS DATA
Total revenue................... $ 155 $ 448 $ 1,730 $ 3,792 $17,443 $ 3,396 $ 4,225
Total costs and expenses........ 230 412 2,386 6,973 22,560 3,716 6,496
Net income (loss)............... (75) 36 (657) (3,152) (5,115) (305) (2,209)
Basic and diluted net income
(loss) per share.............. $ (0.01) $ 0.00 $ (0.05) $ (0.21) $ (0.32) $ (0.02) $ (0.14)
Shares used in computing basic
and diluted net income (loss)
per share..................... 14,184 14,184 14,184 15,295 15,957 15,424 16,143
Unaudited pro forma basic and
diluted net loss per
share(2)...................... $ (0.24) $ (0.09)
Shares used in computing
unaudited pro forma basic and
diluted net loss per share.... 21,128 24,384
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MARCH 31, 1999
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PRO FORMA
ACTUAL AS ADJUSTED
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(UNAUDITED) (UNAUDITED)
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BALANCE SHEET DATA
Cash and cash equivalents................................... $ 3,491 $ 47,031
Working capital............................................. (4,143) 39,397
Total assets................................................ 7,779 51,319
Deferred revenue............................................ 5,455 5,455
Redeemable convertible preferred stock...................... 10,196 --
Stockholders' equity (deficit).............................. (12,637) 41,099
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(1) This information is based on the number of shares outstanding as of April
30, 1999. Excludes 2,225,736 shares subject to outstanding options as of
April 30, 1999 at a weighted average exercise price of $0.36 per share. Also
excludes 2,427,603 shares of common stock expected to be issued, and options
to purchase 62,922 shares of common stock expected to be assumed, in
connection with the acquisition of University Netcasting. Also excludes an
aggregate of 1,875,751 shares of common stock issuable upon exercise of
options granted, or expected to be granted, after April 30, 1999 to new
employees and employees of University Netcasting, Mentor Interactive (a
company we acquired on May 27, 1999), and Transaction Service Providers (a
company we acquired on June 11, 1999), and 24,000 shares of common stock
issuable upon exercise of a warrant issued in connection with the
acquisition of Mentor Interactive.
(2) Pro forma information is based on the conversion of all outstanding shares
of our convertible preferred stock into shares of common stock.
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RISK FACTORS
You should carefully consider the following risks before making an
investment decision. The risks described below are not the only ones that we
face. Additional risks that are not yet identified or that we currently think
are immaterial may also impair our business operations. Our business, operating
results and financial condition could be adversely affected by any of the
following risks. The trading price of our common stock could decline due to any
of these risks, and you could lose all or part of your investment. You should
also refer to the other information set forth in this prospectus, including our
financial statements and the related notes.
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 $2.2 million in the first quarter of
1999. As of March 31, 1999, our accumulated deficit was $13.8 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
- sponsorship of certain of our products and services, such as the Virtual
Backpack.
In 1997, we derived $2.4 million, or 62%, of our total revenue from AT&T.
In 1998, we derived $11.8 million, or 68%, of our total revenue from AT&T. In
the first quarter of 1999, we derived $2.9 million, or 69%, 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.
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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.
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
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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.
In 1998, our other revenue was higher in the third and fourth quarters than
in other quarters due in part to the seasonality factor noted above and in part
to the commencement of activities under the AT&T marketing agreement, under
which we receive fees for obtaining calling card applications from students. The
Student Advantage Magazine, SAM, began publication in the fourth quarter of
1998. Other revenue and the cost of other revenue were each affected in the
fourth quarter of 1998 and the first quarter of 1999 by the publication of two
issues of SAM in each of those quarters.
Partly because of the seasonality factor noted above and partly because the
next issue of SAM will not be published until the third quarter, other revenue
in the second quarter of 1999 should be significantly less than it was in the
third and fourth quarters of 1998 and the first quarter of 1999.
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.
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.
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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.
Increased competition could result in price reductions, reduced margins or
loss of market share, any of which could adversely affect our business. Please
see "Business -- Competition."
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
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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 entered into an agreement to acquire University Netcasting,
Inc., a leading operator of official athletic Web sites for colleges,
universities and college sports associations. Consummation of the acquisition is
subject to various conditions, including approval of the acquisition by the
stockholders of University Netcasting. We cannot be certain that the acquisition
will be completed. Achieving the anticipated benefits of the acquisition will
depend in part upon whether the integration of University Netcasting's business
is accomplished in an efficient, effective and timely manner. The difficulty
associated with integrating University Netcasting's business may be increased by
the necessity of coordinating geographically separated organizations. There can
be no assurance that the anticipated benefits of the acquisition 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 $1.7 million in 1996 to $17.4 million in 1998.
During that same time period we increased from fewer than 50 to more than 150
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 within the next 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.
11
<PAGE> 13
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.
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 this offering will provide us with sufficient funding for the
foreseeable future, 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.
12
<PAGE> 14
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 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
13
<PAGE> 15
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 have been, and expect to 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.
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.
WE WILL HAVE BROAD DISCRETION OVER USE OF PROCEEDS FROM THIS OFFERING
A significant portion of the anticipated net proceeds to Student Advantage
from this offering have not been designated for specific uses. Accordingly, we
will have broad discretion with respect to the use of these funds.
14
<PAGE> 16
CERTAIN CURRENT STOCKHOLDERS OWN A LARGE PERCENTAGE OF OUR VOTING STOCK
Following the closing of this offering, based on the number of shares
outstanding on April 30, 1999, our officers, directors and affiliated entities
together will beneficially own approximately 79% of our outstanding common stock
(77% if the underwriters' over-allotment option is exercised in full). As a
result, these stockholders will be able to control all matters requiring
stockholder approval and, thereby, our management and affairs. Matters that
typically require stockholder approval include:
- election of directors,
- merger or consolidation, and
- sale of substantially all of our assets.
This concentration of ownership may delay, deter or prevent acts that would
result in a change of control, which in turn could reduce the market price of
our common stock.
THE STOCK PRICE OF TECHNOLOGY COMPANIES, PARTICULARLY INTERNET-RELATED
COMPANIES, COULD BE EXTREMELY VOLATILE AND MAY RESULT IN LITIGATION AGAINST US
We cannot predict the extent to which investor interest in Student
Advantage will lead to the development of a trading market or how liquid that
market might become. The initial public offering price for the shares will be
determined by negotiations between us and the underwriters' representatives and
may not be indicative of prices that will prevail in the trading market. 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. Investors may not be able to resell their shares at
or above the initial public offering price.
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.
SHARES ELIGIBLE FOR PUBLIC SALE AFTER THIS OFFERING COULD ADVERSELY AFFECT OUR
STOCK PRICE
After this offering, based on the number of shares outstanding on April 30,
1999, there will be outstanding 30,497,061 shares of our common stock
(32,924,664 shares if the merger with University Netcasting is completed). There
will be an additional 900,000 shares outstanding if the underwriters' over-
allotment option is exercised in full. Of these shares, the shares sold in this
offering will be freely tradeable except for any shares purchased by our
"affiliates" as defined in Rule 144 under the Securities Act. The remaining
24,497,061 shares of common stock held by existing stockholders (26,924,664
shares if the merger with University Netcasting is completed) will be
"restricted securities" and all of such shares will become eligible for public
sale when registered or when they qualify for an exemption from registration
under the Securities Act. Upon expiration of lock-up agreements with the
underwriters, 180 days after the date of this prospectus, 24,408,561 shares of
common stock will be eligible for resale in accordance with the provisions of
the Securities Act. We have agreed to register for public sale up to 1,213,802
shares of common stock that will be issued to the University Netcasting
stockholders. We have agreed to use our reasonable best efforts to register such
shares on the earlier of: (1) the 180th day after the date of this prospectus,
and (2) the date any of Raymond V. Sozzi, Jr., Greylock IX Limited Partnership,
Marc Turtletaub or Princeton Review Publishing, L.L.C. sells greater than 1% of
the then outstanding shares of common stock (other than in an underwritten
secondary offering of common stock). Upon the effectiveness of any such
registration, all shares covered by the registration statement would be freely
transferable. In addition, certain stockholders holding an aggregate of
16,454,895 shares of common stock can require us to register their shares for
public sale.
If our stockholders sell substantial amounts of our common stock, including
shares issuable upon the exercise of outstanding options, in the public market
following this offering, the market price of our
15
<PAGE> 17
common stock could fall. These sales also might make it more difficult for us to
sell equity securities in the future at a time and price that we deem
appropriate.
OUR CHARTER DOCUMENTS MAY INHIBIT A TAKEOVER
Provisions in our charter and bylaws may have the effect of delaying or
preventing a change of control or changes in our management that a stockholder
might consider favorable. These provisions include, among others:
- the division of the Board of Directors into three separate classes,
- the right of the Board to elect a director to fill a vacancy created by
the expansion of the Board, and
- the requirement that a special meeting of stockholders be called by the
Chairman of the Board, President or Board of Directors.
FORWARD-LOOKING STATEMENTS
Some of the statements under "Summary," "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business" and elsewhere in this prospectus constitute forward-looking
statements. These statements relate to future events or our future performance,
and are identified by terminology such as "may," "will," "should," "expects,"
"scheduled," "plans," "intends," "anticipates," "believes," "estimates,"
"potential" or "continue" or the negative of such terms or other comparable
terminology. These statements are only predictions. Actual events or results may
differ materially. In evaluating these statements, you should specifically
consider various factors, including the risks outlined under "Risk Factors."
These factors may cause our actual results to differ materially from any
forward-looking statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements.
------------------------
Except as otherwise noted, all information in this prospectus:
- Reflects the automatic conversion of all of our outstanding shares of
convertible preferred stock into an aggregate of 8,241,108 shares of
common stock upon completion of this offering,
- Reflects a three-for-one stock split of all of our outstanding shares of
common stock to be effected before completion of this offering, and
- Assumes no exercise of the underwriters' over-allotment option.
16
<PAGE> 18
USE OF PROCEEDS
The net proceeds we will receive from the sale of 6,000,000 shares of
common stock offered by us are estimated to be $43.5 million ($50.2 million if
the underwriters' over-allotment option is exercised in full) after deducting
the underwriting discounts and commissions and estimated offering expenses
payable by us.
We expect to use the net proceeds from this offering for working capital
and general corporate purposes, including capital expenditures for the expansion
of our facilities and other infrastructure (approximately $7.2 million), growth
and expansion of our business (approximately $14.4 million), product development
(approximately $7.2 million) and acquisitions (approximately $14.4 million). We
currently expect to use approximately $2.5 million to repay outstanding
indebtedness under our bank line of credit, which bears interest at 7.75% and is
due on June 30, 2000, shortly after completion of this offering. As of April 30,
1999, the outstanding balance of the line of credit was approximately $2.5
million. We have not identified other specific uses for such proceeds and
management will have discretion over their use and investment. Pending such
uses, we intend to invest the net proceeds from this offering in investment
grade, interest-bearing securities or guaranteed obligations of the U.S.
Government.
We intend to seek acquisitions of businesses, products and technologies
that are complementary to us, and a portion of the net proceeds may be used for
such acquisitions. While we discuss potential acquisitions from time to time, we
currently have no commitments or agreements, other than the agreement and plan
of merger for the University Netcasting merger, for any such acquisitions and
there can be no assurances that any acquisitions will be made.
DIVIDEND POLICY
We currently intend to retain earnings, if any, to fund the development and
growth of our business and do not anticipate paying cash dividends in the
foreseeable future. Payment of future dividends, if any, will be at the
discretion of our Board of Directors after taking into account various factors,
including our financial condition, operating results, current and anticipated
cash needs and plans for expansion. Our credit facility contains restrictive
covenants that limit our ability to pay cash dividends or make stock repurchases
without the prior written consent of the lender.
17
<PAGE> 19
CAPITALIZATION
The following table sets forth the capitalization of Student Advantage as
of March 31, 1999:
- on an actual basis,
- on a pro forma basis giving effect to the conversion of all outstanding
shares of convertible preferred stock into common stock upon completion
of the offering, and
- on a pro forma as adjusted basis to reflect the sale by Student Advantage
of 6,000,000 shares of common stock offered hereby at the initial public
offering price of $8.00 per share, after deducting underwriting discounts
and commissions and estimated offering expenses.
<TABLE>
<CAPTION>
MARCH 31, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(UNAUDITED, IN THOUSANDS)
<S> <C> <C> <C>
Borrowings under line of credit............................. $ 1,000 $ 1,000 $ --
-------- -------- --------
Redeemable convertible preferred stock, $1.00 par value:
4,000,000 shares authorized: 2,747,036 shares issued
and outstanding actual; no shares issued and
outstanding pro forma and pro forma as adjusted...... 10,196 -- --
-------- -------- --------
Stockholders' equity (deficit):
Common stock, $0.01 par value; 15,000,000 shares
authorized actual and pro forma and 150,000,000
shares authorized pro forma as adjusted; and
16,253,892 shares issued and outstanding actual;
24,495,000 shares issued and outstanding pro forma;
30,495,000 shares issued and outstanding pro forma as
adjusted............................................. 184 273 333
Additional paid-in capital............................. 4,959 15,066 58,546
Accumulated deficit.................................... (13,832) (13,832) (13,832)
Treasury stock (at cost)............................... (630) (630) (630)
Deferred compensation.................................. (3,318) (3,318) (3,318)
-------- -------- --------
Total stockholders' equity (deficit)........................ (12,637) (2,441) 41,099
-------- -------- --------
Total capitalization........................................ $ (1,441) $ (1,441) $ 41,099
======== ======== ========
</TABLE>
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<PAGE> 20
DILUTION
The pro forma net tangible book value of Student Advantage at March 31,
1999 was $(2,882,000), or $(0.12) per share of common stock. Pro forma net
tangible book value per share represents the amount of total tangible assets
less total liabilities, divided by the number of pro forma shares of common
stock outstanding after giving effect to the conversion of all shares of
preferred stock. After giving effect to the sale of 6,000,000 shares of common
stock offered hereby at the initial offering price of $8.00 per share and after
deducting underwriting discounts and commissions and estimated offering
expenses, the pro forma net tangible book value as of March 31, 1999 would have
been $40,658,000 or $1.33 per share. This represents an immediate increase in
pro forma net tangible book value of $1.45 per share to existing stockholders
and an immediate dilution of $6.67 per share to new investors purchasing shares
of common stock in the offering. The following table illustrates this dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share................ $8.00
Pro forma net tangible book value per share at March
31, 1999............................................ $(0.12)
Increase attributable to the offering................ 1.45
------
Pro forma net tangible book value per share after the
offering.............................................. 1.33
-----
Net tangible book value dilution per share to new
investors in the offering............................. $6.67
=====
</TABLE>
The following table summarizes as of March 31, 1999 on the pro forma basis
described above, the total number of shares and consideration paid to Student
Advantage and the average price per share paid by the existing stockholders and
by new investors purchasing shares of common stock in the offering at the
initial public offering price of $8.00 per share (before deducting the
underwriting discounts and commissions and estimated offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.................... 24,495,000 80.3% $15,339,999 24.2% $ 0.63
New investors............................ 6,000,000 19.7 48,000,000 75.8 $ 8.00
---------- ----- ----------- -----
Totals......................... 30,495,000 100.0% $63,339,999 100.0%
========== ===== =========== =====
</TABLE>
None of the foregoing tables or calculations assumes that any options
outstanding as of March 31, 1999 will be exercised. If all such outstanding
options were exercised on the date of the closing of this offering, investors
purchasing shares in the offering would suffer total dilution of $6.76 per
share.
19
<PAGE> 21
SELECTED FINANCIAL DATA
The following selected financial data are derived from the financial
statements of Student Advantage, Inc. The selected financial data as of December
31, 1997 and 1998, and for each of the three years in the period ended December
31, 1998, are derived from financial statements which have been audited by
PricewaterhouseCoopers LLP, independent accountants. These financial statements
are included elsewhere in this prospectus. The selected financial data as of
December 31, 1996 are derived from financial statements which have been audited
by PricewaterhouseCoopers LLP, and the balance sheet data for these financial
statements are not included elsewhere in this prospectus. The selected financial
data as of December 31, 1994 and 1995 and for each of the two years in the
period ended December 31, 1995 are derived from unaudited financial statements,
which are not included in this prospectus. The selected financial data as of
March 31, 1999, and for the three months ended March 31, 1998 and 1999 are
derived from unaudited financial statements included elsewhere in this
prospectus. In the opinion of management, the unaudited financial statements
have been prepared on a basis consistent with the audited financial statements
which appear elsewhere in this prospectus and include all adjustments, which are
only normal recurring adjustments, necessary for a fair presentation of the
financial position and results of operations for the unaudited periods. The
historical results presented are not necessarily indicative of future results.
The data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Financial Statements and the related Notes included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------------------- -------------------------
1994 1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenue
Subscription.................. $ 131 $ 420 $ 1,093 $ 2,971 $ 7,174 $ 1,738 $ 1,668
Other......................... 24 28 637 821 10,269 1,658 2,557
------ ------ ------- ------- ------- ------- -------
Total revenue............... 155 448 1,730 3,792 17,443 3,396 4,225
------ ------ ------- ------- ------- ------- -------
Costs and expenses
Cost of subscription
revenue..................... 126 160 543 2,628 2,442 302 320
Cost of other revenue......... -- -- 506 309 7,331 1,515 2,503
Product development........... 19 62 507 1,469 2,588 485 573
Sales and marketing........... 57 110 356 843 4,717 746 1,366
General and administrative.... 27 79 437 1,485 3,647 508 1,193
Depreciation and
amortization................ 1 1 37 239 1,027 160 268
Stock-based compensation...... -- -- -- -- 808 -- 273
------ ------ ------- ------- ------- ------- -------
Total costs and expenses.... 230 412 2,386 6,973 22,560 3,716 6,496
------ ------ ------- ------- ------- ------- -------
Income (loss) from operations... (75) 36 (656) (3,181) (5,117) (320) (2,271)
Interest income (expense),
net........................... -- -- (1) 29 2 15 62
------ ------ ------- ------- ------- ------- -------
Net income (loss)............... $ (75) $ 36 $ (657) $(3,152) $(5,115) $ (305) $(2,209)
====== ====== ======= ======= ======= ======= =======
Basic and diluted net income
(loss) per share.............. $(0.01) $ 0.00 $ (0.05) $ (0.21) $ (0.32) $ (0.02) $ (0.14)
====== ====== ======= ======= ======= ======= =======
Shares used in computing basic
and diluted net income (loss)
per share..................... 14,184 14,184 14,184 15,295 15,957 15,424 16,143
====== ====== ======= ======= ======= ======= =======
Unaudited pro forma basic and
diluted net loss per share.... $ (0.24) $ (0.09)
======= =======
Shares used in computing
unaudited pro forma basic and
diluted net loss per share.... 21,128 24,384
======= =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------- MARCH 31,
1995 1996 1997 1998 1999
---- ---- ---- ---- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents................................... $ 8 $ 26 $ 1,904 $ 5,048 $ 3,491
Working capital............................................. (389) (667) (4,836) (2,247) (4,143)
Total assets................................................ 97 256 2,745 9,934 7,779
Deferred revenue............................................ 183 276 5,668 6,666 5,455
Redeemable convertible preferred stock...................... -- 54 111 10,196 10,196
Stockholders' deficit....................................... (302) (702) (4,335) (10,741) (12,637)
</TABLE>
20
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following should be read in conjunction with Student Advantage's
financial statements and related notes and the other financial information
appearing elsewhere in this prospectus. In addition to historical information,
the following discussion and other parts of this prospectus contain
forward-looking information that involves risks and uncertainties. Student
Advantage's actual results could differ materially from those anticipated by
such forward-looking information due to factors discussed under "Risk Factors"
and elsewhere in this prospectus.
OVERVIEW
Student Advantage is dedicated to serving the needs of college students
through its leading membership program and Web site. 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 of 1.25 million
memberships per academic year. During 1997 and 1998 and the first quarter of
1999, AT&T accounted for approximately 77%, 95% and 94% of subscription revenue.
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, 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.
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.
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 totalling $715,000 to Collegiate Advantage in three installments
ending on January 31, 2001. These acquisitions were accounted
21
<PAGE> 23
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. As of March 31, 1999, a
balance of approximately $441,000 remained to be amortized. The amortization of
goodwill and other intangibles will have a negative impact on our future
earnings.
On April 1, 1999, Student Advantage completed its acquisitions of The
Travel Holding Group, LLC and The Campus Agency, LLC. 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. We acquired
substantially all of the assets of The Campus Agency and The Travel Holding
Group for a promissory note in the amount of $330,000. These acquisitions have
been accounted for under the purchase method of accounting, and the results of
operations of each company will be 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 will be
amortized over three years. The amortization of goodwill and other intangibles
will have a negative impact on our future earnings. Because the historical
results of Campus Agency and Travel Holding Group are not material, pro forma
financial information has not been presented.
In the future we may pursue additional acquisitions to obtain complementary
products, services and technologies. There are no assurances that the
acquisitions we already have 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 quarter 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 $273,000 had been amortized as of March 31, 1999. The
amortization of deferred compensation is recorded as an operating expense. We
currently expect to amortize the following remaining amounts of deferred
compensation as of March 31, 1999 in the periods indicated:
<TABLE>
<S> <C>
April 1, 1999 -- December 31, 1999..................... $ 888,000
January 1, 2000 -- December 31, 2000................... 1,073,000
January 1, 2001 -- December 31, 2001................... 1,015,000
January 1, 2002 -- December 31, 2002................... 388,000
</TABLE>
Student Advantage has experienced substantial net losses since 1996 and, as
of March 31, 1999, had an accumulated deficit of $13.8 million. Student
Advantage expects to increase its expenditures in all areas in order to execute
its business plan. As a result, Student Advantage believes that it 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.
Student Advantage does not believe that it has any material market risk
exposure with respect to derivative or other financial instruments.
RECENT EVENTS
On May 7, 1999, we entered into an agreement to acquire University
Netcasting, Inc. in a transaction that will be accounted for as a pooling of
interests. 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. In connection
with the acquisition, we will issue 2,427,603 shares of common stock to the
stockholders of University Netcasting. The agreement provides that 242,760
22
<PAGE> 24
of the shares of common stock will be held in escrow to secure the
indemnification obligations of the University Netcasting stockholders for a
period ending on the earlier of the date one year after the closing of the
merger and the date of issuance of the first independent audit report of Student
Advantage after the closing of the merger. In addition, all outstanding options
to purchase University Netcasting common stock will be converted into options to
purchase an aggregate of 62,922 shares of Student Advantage common stock. In
connection with the employment by us of certain employees of University
Netcasting, we expect to grant options to purchase an aggregate of approximately
678,250 shares of common stock to such employees. We also agreed to pay
expenses, in an amount not to exceed $825,000, incurred by University Netcasting
in connection with the transaction. We have agreed to use our reasonable best
efforts to register for public sale up to 1,213,802 shares of common stock that
will be issued to the stockholders of University Netcasting such shares on the
earlier of: (1) the 180th day after the date of this prospectus, and (2) the
date any of Raymond V. Sozzi, Jr., Greylock IX Limited Partnership, Marc
Turtletaub or Princeton Review Publishing, L.L.C. sells greater than 1% of the
then outstanding shares of common stock (other than in an underwritten secondary
offering of common stock).
The consummation of the acquisition is subject to various conditions,
including approval by the stockholders of University Netcasting, the ability of
the parties to treat the transaction as a pooling of interests for accounting
purposes and other customary conditions.
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.
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 Service Providers
were immaterial to Student Advantage, prior period financial statements will not
be restated. In connection with the acquisition, we issued 195,000 shares of
common stock to the stockholders of Transaction Service Providers. The merger
agreement provides that 19,499 of such shares of common stock will be held in
escrow for a period of one year to secure the indemnification obligations of the
stockholders of Transaction Service Providers.
23
<PAGE> 25
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
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------- --------------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue
Subscription........................... 63.2% 78.3% 41.1% 51.2% 39.5%
Other.................................. 36.8 21.7 58.9 48.8 60.5
----- ----- ----- ----- -----
Total revenue....................... 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Costs and expenses
Cost of subscription revenue........... 31.4 69.3 14.0 8.9 7.6
Cost of other revenue.................. 29.2 8.2 42.0 44.6 59.2
Product development.................... 29.3 38.7 14.8 14.2 13.6
Sales and marketing.................... 20.6 22.2 27.1 22.0 32.3
General and administrative............. 25.3 39.2 20.9 15.0 28.2
Depreciation and amortization.......... 2.1 6.3 5.9 4.7 6.4
Stock-based compensation............... -- -- 4.6 -- 6.5
----- ----- ----- ----- -----
Total costs and expenses............ 137.9 183.9 129.3 109.4 153.8
----- ----- ----- ----- -----
Loss from operations..................... (37.9) (83.9) (29.3) (9.4) (53.8)
Interest income (expense), net........... (0.1) 0.8 0.0 0.4 1.5
----- ----- ----- ----- -----
Net loss................................. (38.0)% (83.1)% (29.3)% (9.0)% (52.3)%
===== ===== ===== ===== =====
</TABLE>
COMPARISON OF QUARTER ENDED MARCH 31, 1999 WITH QUARTER ENDED MARCH 31, 1998
Revenue. Total revenue increased from $3.4 million in the first quarter of
1998 to $4.2 million in the first quarter of 1999. This increase was due
primarily to an increase in other revenue from $1.7 million in the first quarter
of 1998 to $2.6 million in the first quarter of 1999. The increase in other
revenue was due primarily to $700,000 in revenue from advertising in two issues
of the Student Advantage magazine, which had not yet been published in the first
quarter of 1998, and $800,000 in revenue related to the AT&T marketing agreement
which was not in effect in the first quarter of 1998. These increases were
offset 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 49% and 69% of total revenue for the first
quarter of 1998 and the first quarter of 1999. Additionally, AT&T accounted for
approximately 96% and 94% of subscription revenue in the first quarter of 1998
and 1999, and 53% of other revenue for the first quarter of 1999. No other
single customer accounted for 10% or more of total revenues for the first
quarter of 1998 or the first quarter of 1999.
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 from $302,000 in the first
quarter of 1998 to $320,000 in the first quarter of 1999, due primarily to an
increase in material and personnel costs related to fulfilling membership
subscriptions and providing customer service.
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. Marketing services costs include the direct and
indirect
24
<PAGE> 26
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. Cost of other
revenue increased from $1.5 million in the first quarter of 1998 to $2.5 million
in the first quarter of 1999. This increase was due primarily to an increase of
$964,000 in costs associated with the launch of the Student Advantage magazine,
of which two issues were distributed in the first quarter of 1999. Additionally,
an increase of $955,000 in costs associated with activities under the AT&T
marketing agreement, which were first incurred in the third quarter of 1998,
under which Student Advantage visits college campuses to acquire calling card
customers for AT&T, contributed in part to the increase. These increases were
offset by a decrease of $890,000 in costs associated with marketing services.
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 Web site. Product
development expenses increased from $485,000 in the first quarter of 1998 to
$573,000 in the first quarter of 1999. The increase was primarily due to
increased investment in enhancing and improving the functionality of our Web
site.
Sales and Marketing. Sales and marketing expenses consist primarily of
personnel and other costs related to our sales and marketing programs. These
expenses increased from $746,000 in the first quarter of 1998 to $1.4 million in
the first quarter of 1999. 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 sponsors, 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 from $508,000 in the first quarter of 1998 to
$1.2 million in the first quarter of 1999. The increase in general and
administrative expenses was primarily due to greater facilities and
personnel-related costs.
Depreciation and Amortization. Depreciation and amortization expenses
increased from $160,000 in the first quarter of 1998 to $268,000 in the first
quarter of 1999. Amortization expense was virtually unchanged quarter over
quarter. Depreciation expense increased primarily as a result of fixed asset
purchases in the later part of 1998.
Stock-Based Compensation. As described above, we recorded additional
deferred compensation of $228,000 in the first quarter of 1999 and amortized
$273,000 of total deferred compensation as an expense in the first quarter of
1999. The remaining total deferred compensation is being amortized over the
vesting period of the individual options.
Loss from Operations. Loss from operations increased from $320,000 in the
first quarter of 1998 to $2.3 million in the first quarter of 1999. The increase
in loss from operations is due to an increase in total costs and expenses from
$3.7 million in the first quarter of 1998 to $6.5 million in the first quarter
of 1999, which was offset in part by an increase in total revenue from $3.4
million in the first quarter of 1998 to $4.2 million in the first 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 from $15,000 in the first
quarter of 1998 to $62,000 in the first quarter of 1999. The increase is a
result of interest income earned on a higher average cash and cash equivalents
balance during the first quarter of 1999 compared to such balance during the
first quarter of 1998. Borrowings under a line of credit were $1.0 million at
March 31, 1999.
COMPARISON OF YEAR ENDED DECEMBER 31, 1998 WITH YEAR ENDED DECEMBER 31, 1997
Revenue. Total revenue increased from $3.8 million in 1997 to $17.4 million
in 1998. The increase in revenue was due in part to the significant increase in
subscription revenue from $3.0 million in 1997 to
25
<PAGE> 27
$7.2 million in 1998, mostly due to memberships purchased by AT&T. The increase
in other revenue was attributable primarily to both: (1) the addition of Student
Advantage's marketing services business, which was acquired from Collegiate
Advantage on January 1, 1998, and (2) an increase in commerce revenue due
primarily to fees for obtaining calling card applications for AT&T, which began
in the third quarter of 1998. The increase in other revenue was attributable to
a lesser extent to increased advertising revenues related to the Student
Advantage magazine and the Student Advantage Web site. The first two issues of
the Student Advantage magazine shipped in the fourth quarter of 1998.
AT&T accounted for approximately 62% and 68% of total revenue for 1997 and
1998. Additionally, AT&T accounted for approximately 77% and 95% of subscription
revenue for 1997 and 1998, and 9% and 49% of other revenue for 1997 and 1998. No
other single customer accounted for 10% or more of total revenues for 1997 or
1998.
Cost of Subscription Revenue. Cost of subscription revenue decreased from
$2.6 million in 1997 to $2.4 million in 1998, due primarily to decreased costs
associated with fulfilling membership subscriptions.
Cost of subscription revenue as a percentage of subscription revenue
decreased from 88.5% in 1997 to 34.1% in 1998. This decrease was due primarily
to the timing of the recognition of revenue and expenses associated with the
commencement of activities under the AT&T membership agreement in 1997.
Membership fulfillment costs, which are recorded when the membership is
fulfilled, increased significantly as the volume of memberships increased in the
Fall of 1997. However, because the revenue associated with these memberships is
recognized over the remaining term of the memberships, much of the revenue
associated with the memberships fulfilled in the Fall of 1997 was not recognized
until 1998.
Cost of Other Revenue. Cost of other revenue increased from $309,000 in
1997 to $7.3 million in 1998. The increase in cost of other revenue was due
primarily to the addition of Collegiate Advantage and its marketing services
business in 1998 and the commencement of activities under the AT&T marketing
agreement, entered into in the third quarter of 1998, under which Student
Advantage visits college campuses to acquire calling card customers for AT&T.
Costs associated with the production of SAM, which shipped for the first time in
the fourth quarter of 1998, also contributed to the increase.
Cost of other revenue as a percentage of other revenue increased from 37.6%
in 1997 to 71.4% in 1998. This increase was due primarily to a larger portion of
other revenue consisting of lower margin activities associated with the
marketing services business acquired from Collegiate Advantage and the services
delivered under the AT&T marketing agreement. The increase in cost of other
revenues as a percentage of total revenue is also due to costs associated with
the production of SAM, which exceeded revenue from the production of SAM.
Product Development. Product development expenses increased from $1.5
million in 1997 to $2.6 million in 1998. The increase was primarily due to
increased investment in enhancing and improving the functionality of our Web
site and other related costs.
Sales and Marketing. Sales and marketing expenses increased from $843,000
in 1997 to $4.7 million in 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 sponsors, selling more
online advertising, and supporting the marketing services business. In 1998, we
incurred additional sales and marketing expenses as a result of the acquisition
of the Collegiate Advantage business.
General and Administrative. General and administrative expenses increased
from $1.5 million in 1997 to $3.6 million in 1998. The increase in general and
administrative expenses was primarily due to facilities and personnel-related
costs.
Depreciation and Amortization. Depreciation and amortization expenses
increased from $239,000 in 1997 to $1.0 million in 1998. Amortization expense
increased as a result of the amortization over five years of goodwill and other
intangible assets related to the acquisitions of Collegiate Advantage and The
Main Quad. Depreciation expense increased primarily as a result of fixed asset
purchases in 1998.
26
<PAGE> 28
Stock-Based Compensation. We recorded deferred compensation of $4.2
million in the year ended December 31, 1998. Of this amount, $808,000 was
recorded as an expense in 1998. The remainder is being amortized over the
remaining vesting period of the individual options.
Loss from Operations. Loss from operations increased from $3.2 million in
1997 to $5.1 million in 1998. The increase in loss from operations is due to an
increase in total costs and expenses from $7.0 million in 1997 to $22.6 million
in 1998, which was offset in part by an increase in total revenue from $3.8
million in 1997 to $17.4 million in 1998.
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 decreased from $29,000 in 1997 to
$2,000 in 1998. The decrease was a result of interest due on borrowings under
our line of credit which was offset later in the year by interest income earned
on cash balances as a result of the issuance of convertible preferred stock in
October 1998, as well as interest from a promissory note to a stockholder.
Additionally, Student Advantage incurred interest expense related to loans from
the Chief Executive Officer, which were repaid in full in 1998.
Income Taxes. On October 20, 1998, Student Advantage converted from a
limited liability company to a C Corporation. Operating losses originating while
Student Advantage was a limited liability company do not carry over to the C
Corporation, although certain other timing items as a result of differences
resulting from accrual to cash basis adjustments will be available to Student
Advantage. For the period October 21, 1998 to December 31, 1998 Student
Advantage generated a net operating loss carryforward of $2.0 million. Student
Advantage's net operating loss carryforwards expire beginning in 2018. Certain
future changes in the share ownership of Student Advantage, as defined in the
Tax Reform Act of 1996, may restrict the utilization of carryforwards. A
valuation allowance has been recorded for the entire deferred tax asset as a
result of uncertainties regarding the utilization of the asset due to Student
Advantage's lack of earnings history.
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 WITH YEAR ENDED DECEMBER 31, 1996
Revenue. Total revenue increased from $1.7 million in 1996 to $3.8 million
in 1997. The increase in revenue was due primarily to an increase in
subscription revenue from $1.1 million in 1996 to $3.0 million in 1997. The
increase in subscriptions was due to the commencement of Student Advantage's
membership agreement with AT&T, under which AT&T purchased membership
subscriptions for distribution to students. Other revenue increased from
$637,000 in 1996 to $821,000 in 1997, due primarily to increased advertising
revenue and, to a lesser extent, an increase in commerce revenue.
AT&T accounted for approximately 62% of total revenues in 1997. No other
single customer accounted for 10% or more of revenues in 1996 or 1997.
Cost of Subscription Revenue. Cost of subscription revenue increased from
$543,000 in 1996 to $2.6 million in 1997. This increase was due primarily to the
increased costs associated with fulfilling new membership subscriptions, as well
as costs related to the addition of personnel to support the growth in revenues.
Cost of subscription revenue as a percentage of subscription revenue
increased from 49.6% in 1996 to 88.5% in 1997. This increase was due primarily
to the timing of the recognition of revenue and expenses associated with the
commencement of activities under the AT&T membership agreement in 1997.
Cost of Other Revenue. Cost of other revenue decreased from $506,000 in
1996 to $309,000 in 1997, due primarily to lower advertising costs.
Cost of other revenue as a percentage of other revenue decreased slightly
from 79.4% in 1998 to 71.4% in 1997 due primarily to the costs associated with
the increased commerce revenue.
Product Development. Product development expenses increased from $507,000
in 1996 to $1.5 million in 1997. The increase was primarily due to the continued
investment in the membership subscription
27
<PAGE> 29
business. During 1997, Student Advantage continued to develop new products to
offer to support the membership subscription business as well as enhance and
grow the base of corporate sponsors.
Sales and Marketing. Sales and marketing expenses increased from $356,000
in 1996 to $843,000 in 1997. The increase in sales and marketing was due to
increased expenditures to support the membership subscription business, which
grew significantly in 1997 with the addition of the AT&T membership agreement.
General and Administrative. General and administrative expenses increased
from $437,000 in 1996 to $1.5 million in 1997. The increase in general and
administrative expenses was primarily due to the increase in facilities costs
and an increase in the number of personnel hired during the year to support the
growth in Student Advantage's business.
Depreciation and Amortization. Depreciation and amortization expenses
increased from $37,000 in 1996 to $239,000 in 1997, primarily due to the
amortization of goodwill and other intangible assets resulting from
acquisitions.
Loss from Operations. Loss from operations increased from $656,000 in 1996
to $3.2 million in 1997. The increase in loss from operations is due to an
increase in total costs and expenses from $2.4 million in 1996 to $7.0 million
in 1997, which was offset in part by an increase in total revenue from $1.7
million in 1996 to $3.8 million in 1997.
Interest Income (Expense), Net. Interest income (expense), net includes
interest income from Student Advantage's cash balances and interest expense
related to Student Advantage's financing obligations. Interest income increased
from $1,000 of net interest expense in 1996 to $29,000 of net interest income in
1997. The increase was primarily due to a higher average cash and cash
equivalents balance during 1997.
28
<PAGE> 30
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly statement of operations
data for each of the four quarters in the year ended December 31, 1998 and the
quarter ended March 31, 1999. In the opinion of management, the unaudited
financial statements have been prepared on a basis consistent with the audited
financial statements which appear elsewhere in this prospectus and include all
adjustments, which are only normal recurring adjustments, necessary for a fair
presentation of the financial position and results of operations for the
unaudited periods. The quarterly data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and the notes thereto appearing
elsewhere in this prospectus. The results of operations for any quarter are not
necessarily indicative of the results of operations for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------
MARCH JUNE SEPT.
31, 30, 30, DEC. 31, MARCH 31,
1998 1998 1998 1998 1999
----- ----- ----- ----------- -----------
(UNAUDITED, IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenue
Subscription........................... $1,738 $2,274 $1,856 $ 1,306 $ 1,668
Other.................................. 1,658 1,124 3,826 3,661 2,557
------ ------ ------ ------- -------
Total revenue.................. 3,396 3,398 5,682 4,967 4,225
------ ------ ------ ------- -------
Costs and expenses
Cost of subscription revenue........... 302 413 951 776 320
Cost of other revenue.................. 1,515 854 1,572 3,390 2,503
Product development.................... 485 812 596 695 573
Sales and marketing.................... 746 1,069 1,281 1,621 1,366
General and administrative............. 508 776 1,067 1,296 1,193
Depreciation and amortization.......... 160 377 233 257 268
Stock-based compensation............... -- -- -- 808 273
------ ------ ------ ------- -------
Total costs and expenses....... 3,716 4,301 5,700 8,843 6,496
------ ------ ------ ------- -------
Loss from operations..................... (320) (903) (18) (3,876) (2,271)
------ ------ ------ ------- -------
Interest income (expense), net........... 15 (25) (33) 45 62
------ ------ ------ ------- -------
Net loss................................. $ (305) $ (928) $ (51) $(3,831) $(2,209)
====== ====== ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUE
--------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue
Subscription................. 51.2% 66.9% 32.7% 26.3% 39.5%
Other........................ 48.8 33.1 67.3 73.7 60.5
------ ------ ------ ------- -------
Total revenue........ 100.0 100.0 100.0 100.0 100.0
------ ------ ------ ------- -------
Costs and expenses
Cost of subscription
revenue................... 8.9 12.2 16.7 15.6 7.6
Cost of other revenue........ 44.6 25.1 27.7 68.2 59.3
Product development.......... 14.2 23.9 10.5 14.0 13.6
Sales and marketing.......... 22.0 31.5 22.5 32.6 32.3
General and administrative... 15.0 22.8 18.8 26.1 28.2
Depreciation and
amortization.............. 4.7 11.1 4.1 5.2 6.4
Stock-based compensation..... -- -- -- 16.3 6.5
------ ------ ------ ------- -------
Total costs and
expenses........... 109.4 126.6 100.3 178.0 153.8
------ ------ ------ ------- -------
Loss from operations........... (9.4) (26.6) (0.3) (78.0) (53.8)
------ ------ ------ ------- -------
Interest income (expense),
net.......................... 0.4 (0.7) (0.6) 0.9 1.5
------ ------ ------ ------- -------
Net loss....................... (9.0)% (27.3)% (0.9)% (77.1)% (52.3)%
====== ====== ====== ======= =======
</TABLE>
29
<PAGE> 31
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.
In 1998, our other revenue was higher in the third and fourth quarters than
in other quarters due in part to the seasonality factor noted above and in part
to the commencement of activities under the AT&T marketing agreement, under
which we receive fees for obtaining calling card applications from students. The
Student Advantage Magazine, SAM, began publication in the fourth quarter of
1998. Other revenue and the cost of other revenue were each affected in the
fourth quarter of 1998 and the first quarter of 1999 by the publication of two
issues of SAM in each of those quarters.
Partly because of the seasonality factor noted above and partly because the
next issue of SAM will not be published until the third quarter, other revenue
in the second quarter of 1999 should be significantly less than it was in the
third and fourth quarters of 1998 and the first quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
Student Advantage has financed its operations primarily through the private
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. As of March 31, 1999, Student Advantage had
approximately $3.5 million in cash and cash equivalents.
Net cash used for operating activities was $2.3 million for the first
quarter of 1999 and $2.7 million for 1998, and net cash provided by operating
activities was $3.0 million for 1997. The net cash used in the first quarter of
1999 was primarily a result of a net loss of $2.2 million and a decrease in
deferred revenue of $1.2 million and partially offset by a decrease in accounts
receivable of $841,000. The increase in net cash used for operations for 1998
resulted primarily from an increase in accounts receivable of $2.7 million in
1998 and an increase net loss for 1998. The increase was partially offset by the
timing of payments of accounts payable and accrued expenses and increased
depreciation and amortization expense. Net cash provided by operations in 1997
was affected by an increase in deferred revenue of $5.4 million. Deferred
revenues increased $1.0 million in 1998 over those of 1997. 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 $650,000 in 1997, $1.7 million
in 1998 and $268,000 in the first quarter of 1999. This increase in 1998 was due
primarily to the purchase of fixed assets and the acquisition of Collegiate
Advantage in 1998. The net cash used for investing activities in the first
quarter of 1999 was primarily due to the purchase of fixed assets.
Net cash used for financing activities was $453,000 in 1997, and net cash
provided by financing activities was $7.5 million in 1998 and $1.0 million in
the first quarter of 1999. The net cash provided by financing
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activities in the first quarter of 1999 was primarily the result of borrowings
of $1.0 million under our line of credit. The increase in 1998 was primarily due
to net cash proceeds of $9.9 million from the sale of shares of Student
Advantage preferred stock, partially offset by a distribution of $2.3 million to
LLC members. In 1997, Student Advantage repurchased a member's LLC interest for
$630,000.
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 is secured by all of the assets of Student
Advantage. As of April 30, 1999, $2.5 million 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 combined with the net
proceeds from this offering will be sufficient to meet its anticipated needs for
working capital and capital expenditures for at least 24 months following this
offering.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 is effective for
financial statements for years beginning after December 15, 1998. SOP 98-1
provides guidance for accounting for costs of software products developed or
purchased for internal use, including when costs should be capitalized. Student
Advantage does not expect the adoption of this standard to have a material
effect on Student Advantage's results of operation, financial position or cash
flows.
In April 1998, AcSEC issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities" ("SOP 98-5"). SOP 98-5, which is effective for fiscal years
beginning after December 15, 1998, provides guidance on the financial reporting
of start-up costs and organization costs. It requires costs of start up
activities and organization costs to be expensed as incurred. As Student
Advantage has expensed these costs historically, the adoption of this standard
is not expected to have a significant impact on Student Advantage's results of
operations, financial position or cash flows.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities" ("SFAS No. 133"), which
establishes accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts, (collectively
referred to as derivatives) and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
The adoption of SFAS No. 133 is not expected to have an impact on Student
Advantage's results of operations, financial position or cash flows.
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,
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- assessing repair or replacement requirements,
- implementing repair or replacement, and
- 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 second 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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BUSINESS
OVERVIEW
Student Advantage, Inc. is dedicated to serving the needs of college
students through our leading membership program and studentadvantage.com Web
site. With our national fee-based membership program, we have created a
community of over 1,000,000 student members who receive benefits including
ongoing discounts on products and services offered by over 40 national sponsors
and 12,000 sponsors in 115 local markets. Student Advantage offers the only
ongoing discount available to college students for the products and services of
many of our sponsors. With studentadvantage.com, we seek to enhance our brand
online and provide additional services to our members, sponsors and colleges
with the objective of becoming the leading online destination for students. The
studentadvantage.com Web site currently offers content, community and e-commerce
targeted to college students.
INDUSTRY BACKGROUND
College students represent a large audience with needs and interests that
are specific to their group. These students are exposed, often for the first
time, to lifestyle decisions and other challenges unique to the college
experience. With so many new experiences to manage, these students seek
information and guidance from a trusted resource able to assist them in matters
such as:
- purchasing and budgeting decisions,
- selecting a major or a career, or finding a job,
- conducting academic research,
- making lifestyle and extracurricular decisions,
- finding economical travel arrangements for breaks or holidays, and
- understanding financial aid alternatives.
To meet the needs of this audience, businesses are offering an increasing
variety of products and services designed to capture their interest. College
students represent an attractive market opportunity for businesses because of
their significant spending power and their tendency to retain brand loyalties
after graduation. According to Student Monitor LLC, a market research company,
total discretionary spending by college students in the 1997-1998 academic year
exceeded $105 billion. In the United States, there are over 15 million full-time
and part-time undergraduate and graduate students at more than 3,500 university
and college campuses. The college student population is also expected to grow as
there are currently 40 million children and young adults from ages 10 to 19.
Businesses have recognized the importance of college students and have
dedicated significant advertising and marketing expenditures towards this group.
However, college students have been difficult to reach in a targeted fashion
because:
- they are transient, frequently changing their addresses,
- the college student population has significant turnover,
- colleges are increasingly seeking to limit direct marketing to students
on campus, and
- few national advertising vehicles are directed toward the college student
population.
The Internet has emerged as an attractive medium for advertisers because it
offers a level of targetability, flexibility, interactivity and measureability
not available in traditional media. College students are active users of the
Internet, highly computer literate and active in e-commerce. According to
Student Monitor, 90% of students use the Internet and 52% of these students use
the Internet at least daily. Student Monitor estimates that in 1998, 21% of
students made online purchases representing $890 million in e-commerce.
According to Jupiter Communications, students will spend close to $2.6 billion
through e-commerce by the year 2002.
Student Advantage believes that businesses are seeking a nationally-focused
vehicle for targeting the attractive college demographic. Many businesses that
have tried to target college students have been
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unsuccessful, due to the inherent difficulties in reaching this group. Marketing
organizations seeking to help businesses reach this market have had only limited
success because they are either restricted in their geographic scope or are not
able to offer a wide range of services and channels to reach students.
Furthermore, Student Advantage believes that while the Internet creates an
opportunity to reach targeted audiences, it has not been used effectively to
target college students. The major Internet navigational portal sites are
generally designed to appeal to a broad audience. These portals do not focus on
the issues that are relevant to college students, such as financial and
budgeting assistance, economical travel, lifestyle decisions and careers.
Student Advantage believes that there is a need for a comprehensive student
destination focused on the specific requirements of students for information,
guidance and other services.
THE STUDENT ADVANTAGE SOLUTION
Student Advantage is a leading resource and trusted advocate dedicated to
serving the needs of college students. As a result, we are positioned to serve
as a point of access to this market. Through our national membership program, we
have created a community of over 1,000,000 college student members who receive
benefits including ongoing discounts on products and services offered by over 40
national sponsors and 12,000 local sponsors. Student Advantage has also created
a comprehensive online destination for college students, studentadvantage.com.
College students can join the Student Advantage membership program:
- by obtaining, free of charge subject to credit approval by AT&T, a
co-branded card that serves as both a Student Advantage membership
identification card and an AT&T calling card,
- by paying an annual membership fee of $20, or
- through programs under which universities, colleges or university
organizations purchase memberships in bulk for distribution free of
charge to their students.
While our primary constituency is our student members, we also enable
businesses to reach the student market and enable colleges and universities to
provide a highly useful resource to students.
<TABLE>
<S> <C>
STUDENTS
A Community of over 1,000,000 student members receive a
variety of services and benefits, including ongoing
discounts on products and services
[STUDENT
ADVANTAGE
LOGO]
<CAPTION>
<S> <C>
UNIVERSITIES BUSINESSES
Students at over 3,000 Over 40 national sponsors
colleges and universities and 12,000 sponsors
are members of the in 115 local markets
Student Advantage
program
</TABLE>
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Benefits to Student Members. The Student Advantage membership program
provides college students with ongoing discounts on products and services from
national sponsors including Amtrak, AT&T, Foot Locker, Greyhound, Staples and
Tower Records. For example, in 1998, our members spent $10.9 million on Amtrak
fares and saved over $1.9 million by using the Student Advantage discount. The
membership program also enables students to receive discounts for products and
services in 115 local markets.
Through our Web site, studentadvantage.com, we provide content, community
and e-commerce. The Web site offers services and information of particular
interest to college students, including discount purchasing, travel
alternatives, career and job searches, lifestyle and extracurricular decisions
and financial aid. Our Web site:
- enables access to college news from over 400 colleges and universities,
- provides online bulletin boards,
- provides free e-mail and an online address book, calendar and document
storage,
- offers an e-commerce marketplace, and
- includes a searchable directory of sponsors who offer discounts for
Student Advantage members.
Student Advantage members also receive a subscription to SAM, the Student
Advantage magazine. SAM includes lifestyle and practical content for students
and updates on new discounts available to Student Advantage members.
Benefits to Sponsors. We provide a platform for our sponsors to market
their products and services to a large, demographically attractive market.
Student Advantage appeals to sponsors and advertisers because it combines:
- a large and attractive demographic group,
- database marketing capabilities,
- a trusted brand,
- program usage tracking,
- quality online content, and
- community interaction.
By maintaining contact with students throughout their college experience
and by establishing relationships with universities, we also benefit businesses
by allowing targeted and continued access for advertising and marketing efforts.
In addition, businesses that offer products and services through Student
Advantage benefit by being associated with the Student Advantage brand. For
example, according to Egghead.com, during a two to three month marketing test
period in 1998, Student Advantage members who bought products from Egghead.com
spent 59% more per order than the average Egghead customer.
Sponsors also benefit from our direct marketing knowledge and the expertise
of our management team in designing and implementing effective marketing
techniques to reach college students. AT&T, for example, utilizes Student
Advantage for a variety of marketing programs, primarily to increase the number
of students carrying AT&T calling cards. In part by contracting with us, AT&T
during the 1998-99 school year exceeded its prior year's sales of calling cards
to college students by more than 300%.
We maintain eight regional offices throughout the United States in order to
more effectively reach students and provide services in local markets. These
offices, which are managed by our headquarters in Boston, provide us with a
broad geographical presence and enable us to implement effective nationwide
marketing programs.
Benefits to Colleges and Universities. Colleges and universities can
generate goodwill and help reduce the cost of student life by making the Student
Advantage program readily available to students. Colleges, universities and
university organizations can endorse the membership program, co-market with us
and
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share in associated revenues. Schools can also purchase memberships in bulk and
offer them to their students free of charge. As colleges seek additional revenue
streams, Student Advantage can establish off-campus debit card programs for
students and enable colleges and universities to participate in debit-card
transaction revenue from off-campus transactions by their students. We also
fund, and enlist other businesses to sponsor, on-campus student activities and
events. For example, Student Advantage co-sponsored Midnight Madness at the
University of North Carolina--Charlotte, an event that marks the beginning of
the university's college basketball season.
STRATEGY
Our objective is to be the leading online and offline resource for college
students. We intend to broaden and deepen our relationship with students by
serving the needs of our three key constituencies--students, businesses and
schools. The key elements of our strategy include the following:
Strengthen Online Destination for Students. We believe that our existing
1,000,000 members provide a platform for building the leading online destination
for students. Our goal is to establish our Web site, studentadvantage.com, as
the primary vehicle for delivery of our products and services to students. We
believe that the Internet is ideally suited for providing our products and
services and is a natural extension of our current business. Our Web site
currently offers content, community and e-commerce services targeted
specifically to college students. The Web site also allows students to enroll in
our membership program, receive customer service, and search our directory of
national and local sponsors who offer discounts. We intend to enhance our online
offerings by making additional content available and by expanding our e-commerce
marketplace with additional sponsors. We also expect to offer additional online
programming in order to personalize the Web site for particular college
campuses.
Continue to Build Brand. We believe that building our brand is critical to
attracting and expanding our membership and Internet user base. Our market
leadership position has been driven by our membership program and by partnering
with leading national and local sponsors and universities. We believe that
aggressive brand-building will become increasingly important to sustain our
leadership position. We have started to allocate some of our branding
expenditures toward online branding through partnerships and distribution
agreements with leading Internet-based companies and strategic alliances with
leading advertisers. We will also continue to enhance our offline branding both
directly and through co-marketing arrangements with our sponsors. Student
Advantage believes that it can build online brand awareness and attract traffic
by utilizing the reach of its student membership base.
Aggressively Grow Membership. We intend to continue to grow our membership
through a variety of initiatives including:
- increasing the rate of new memberships through our Web site by promoting
online membership sales and by increasing the number of e-commerce
sponsors to attract Web site visitors,
- increasing our number of corporate sponsors,
- expanding our relationships with colleges and universities, including
selling them memberships in bulk,
- expanding our on-campus tabling and marketing services,
- providing members-only premium services on our Web site by introducing
new content and services and transitioning portions of our existing
services and content to members-only status, and
- offering our program to high school students and college graduates.
Enhance Relationships with Students, Businesses and Schools. We intend to
continue to enhance our value to students by offering new products and services,
including online offerings for content, community and e-commerce. In addition to
increasing the number of national and local sponsors, Student Advantage will
provide additional services to sponsors, such as visitor tracking and membership
data which will allow Student Advantage to better target advertising, make
recommendations and provide for a more
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personalized and engaging experience. Student Advantage will continue to
establish and strengthen its relationships with colleges and universities by
continuing to provide marketing services and by enabling schools to outsource
certain online services, such as e-mail.
Continue to Pursue Strategic Acquisitions and Alliances. Since inception,
we have acquired and integrated eight complementary businesses in order to
expand and strengthen our offerings to students. We plan to continue to acquire
companies or enter into alliances that offer opportunities to increase our
online traffic and obtain new technologies.
PRODUCTS AND SERVICES
We provide college students with discounts on a broad range of products and
services through our Student Advantage membership program, as well as valuable
resources through our Web site and other student-focused content and services
offerings. We also offer marketing services to businesses seeking to effectively
communicate with the college student population.
STUDENT ADVANTAGE MEMBERSHIP PROGRAM
Our membership program provides valuable savings opportunities, services
and information to college students. During the 1998-99 academic year, over
1,000,000 students at over 3,000 colleges and universities were members of the
Student Advantage program. Members typically subscribe for one-year memberships
that coincide with the academic year. Memberships are sold in three different
ways. Most are sold to AT&T and distributed in conjunction with an AT&T calling
card. These membership cards are co-branded and serve as both a Student
Advantage membership identification card and an AT&T calling card. Memberships
are also sold to colleges, universities and university organizations 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.
Upon enrollment, Student Advantage members receive a Student Advantage
membership identification card and a member guide describing the program and its
benefits. By presenting the Student Advantage card at participating retail
locations, or by providing their membership number online, Student Advantage
members receive attractive discounts throughout the year for products and
services from both national and local sponsors. We receive payments from certain
of our national sponsors when Student Advantage members purchase products and
services from them. Student Advantage currently offers discounts from over 40
national sponsors and 12,000 local sponsors in 115 local markets.
National discounts available to Student Advantage members include:
- 15% off Amtrak rail fares
- 15% off Greyhound bus fares
- 15% off purchases from Foot Locker, Lady Foot Locker and Kids Foot Locker
- $50 off any graduate school test preparation course at The Princeton
Review
STUDENT-FOCUSED CONTENT AND SERVICES
studentadvantage.com
Our Web site, studentadvantage.com, addresses the needs of college students
for content, community and e-commerce.
Content. Student Advantage's content offering includes up-to-date
information on topics of interest to students, including purchasing and
budgeting decisions, travel, career, education, entertainment, health,
lifestyles and financial aid. For example, students may access articles
that provide information on studying abroad or purchasing renters'
insurance. Our content is both developed by our editors and collected
from over 400 colleges using our U-WIRE news feed. In addition, our Web
site provides students with information customized for their local
market or
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college campus and a searchable online directory of national and local
discounts offered by our sponsors. Our Web site also includes maps and
directions to retail locations that offer discounts.
Community. The studentadvantage.com Web site offers students a number
of community-building services. Student Advantage's online bulletin
boards give students the opportunity to discuss topics such as
interviewing techniques and campus life. Our Virtual Backpack service
allows students to set up their own e-mail account, organize contact
information in an online address book, store documents and keep track of
important dates on an online calendar. We also enable students to send
online greeting cards.
e-Commerce. Students can purchase a variety of products online with a
Student Advantage discount. Members can purchase products directly from
vendors through our marketplace or link to a Web page that is co-branded
with a sponsor. Products offered online include books, software, music,
footwear, magazines and flowers. In order to receive discounts on the
products offered through our Web site, students must join our membership
program. Companies whose products can be purchased online through links
from our Web site include Egghead.com, Rockport Company and
1-800-FLOWERS.com.
U-WIRE (University Wire)
U-WIRE is a daily electronic news service providing college news, sports,
opinion and entertainment content collected from over 400 college newspapers.
U-WIRE can be accessed at studentadvantage.com. U-WIRE editors select news,
sports, opinion and entertainment articles from its member newspapers and
distribute content among the college newspapers for inclusion in their print and
online editions. Student Advantage has the exclusive right to syndicate most of
the U-WIRE content electronically, and to sell content from the college
newspapers to syndication clients, which currently include Yahoo!, Excite,
USAToday.com, Lexis-Nexis and Digital City, an affiliate of America Online.
SAM, The Student Advantage Magazine
The Student Advantage membership includes a subscription to SAM, the
Student Advantage magazine. SAM is a magazine that is mailed directly to our
members. SAM includes lifestyle and practical content for students, updates on
new discounts and privileges available to Student Advantage members and
interactive features, such as member surveys and contests. Articles are provided
primarily by freelance writers. We use feedback from our readers to tailor
future articles and offerings to their particular interests and needs.
Rail Connection
Through an arrangement with CIT Tours, Corp., a representative of the
Italian State Railways, we offer Eurail passes to student members and others. We
promote our Eurail passes to Student Advantage members in travel guide books,
through direct mail and in advertisements in campus publications.
CORPORATE MARKETING SERVICES
We provide tailored marketing services for businesses seeking to market
their products and services to college students. Our in-depth knowledge of the
college student market, our expertise in marketing to college students and our
extensive university relationships enable us to help businesses effectively and
efficiently reach college students. Student Advantage currently provides a
variety of marketing services to businesses, including the following:
- organizing and executing marketing tours that travel campus to campus,
- staffing tables at on-campus college locations, such as student unions,
to solicit potential student customers,
- developing and managing programs that recruit, train and supervise
students to represent businesses on campus,
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- assisting marketers who desire to sponsor on-campus events, such as movie
screenings and concerts, and
- helping marketers place advertisements in college newspapers.
We also provide staffing for on-campus events and other activities for
businesses that have already designed a marketing program but lack
implementation resources and expertise at the campus level.
Our marketing services are typically offered to businesses on a fixed-cost
basis or hourly rate basis.
Our marketing services group utilizes eight regional offices across the
United States. The broad geographical reach of our marketing services group
allows us to execute our services nationwide. In 1998, clients who purchased our
marketing services included Amtrak, AT&T, Coca-Cola and Visa.
ACQUISITION OF UNIVERSITY NETCASTING
On May 7, 1999, we entered into an agreement to acquire University
Netcasting, Inc. in a transaction that will be accounted for as a pooling of
interests. 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. University
Netcasting operates the official athletic Web sites of over 30 universities and
college sports associations, including universities from the PAC-10, ACC, SEC,
Big 10, Big 12 and Big East conferences.
We believe that the acquisition of University Netcasting will enable us to
strengthen our online destination.
ALLIANCES
An important element of our strategy is to form alliances to assist us in
offering products and services to students and in offering businesses and
advertisers an effective channel for reaching college students.
AT&T
Our relationship with AT&T has enabled us to rapidly expand our membership
base and strengthen our presence on college campuses as a resource associated
with quality brand products and services.
In February 1997, Student Advantage and AT&T entered into a membership
agreement under which Student Advantage earns a fee from AT&T for each
membership issued in connection with a Student Advantage AT&T Calling Card, with
a minimum commitment by AT&T for 1.25 million Student Advantage memberships per
academic year. Student Advantage agreed that it would not enter into any
promotional or marketing activities with any credit card, telecommunications or
multipurpose college student identification card provider, other than AT&T. The
agreement provides that we will not allow any third party, other than certain
colleges, universities and university organizations based on their size, to
offer a Student Advantage membership to college students free of charge.
In February 1998, we entered into a marketing agreement with AT&T under
which we agreed to promote and market AT&T's calling card services to college
students. We also agreed to provide certain marketing services focused on the
college market to AT&T. AT&T appointed Student Advantage as the exclusive
provider, at certain colleges and universities designated by AT&T, of tabling
and non-tabling activities (which require a physical presence by its employees
on the college campus) with respect to the solicitation of college students for
the AT&T calling card service. In return, AT&T agreed to pay us for the
solicitation of each application for such service. In addition, AT&T agreed to
pay for additional marketing activities and to be the exclusive sponsor of
certain online offerings. We also granted AT&T a right of first and last refusal
to be the exclusive telecommunications advertiser for the first four issues of
the Student Advantage magazine. AT&T agreed to promote and market the Student
Advantage membership through television, mass media marketing or other mass
media advertising. We are also providing other marketing services to AT&T in the
college student market.
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In July 1998, AT&T exercised an option to extend the original termination
dates of the membership agreement and the marketing agreement to June 1, 2001.
However, AT&T may terminate these agreements prior to such date upon 120 days
prior notice, subject to payment of a termination fee under certain
circumstances. AT&T may also terminate the agreements if Raymond V. Sozzi, Jr.
is no longer employed as President of Student Advantage, or if he no longer owns
a minimum five percent ownership interest in Student Advantage. AT&T accounted
for 62% of our total revenues in 1997, 68% of our total revenues in 1998 and 69%
of our total revenues in the first quarter of 1999. While we are not aware of
plans by AT&T to terminate its use of our services, the termination of our
relationship with AT&T, or a material reduction in the use of our services by
AT&T, would have a material adverse effect on our business.
Sponsors
Student Advantage offers its members discounts on products and services
from over 40 national sponsors and over 12,000 local sponsors in 115 local
markets, including rail fares, bus fares, CDs, books and clothing.
Representative national sponsors and local markets include:
<TABLE>
<S> <C>
REPRESENTATIVE NATIONAL SPONSORS REPRESENTATIVE LOCAL MARKETS
1-800-FLOWERS.com Ann Arbor, Michigan
Amtrak Auburn, Alabama
Blimpie International Austin, Texas
Choice Hotels Berkeley, California
Dollar Rent A Car Boston, Massachusetts
Egghead.com Boulder, Colorado
Foot Locker Chapel Hill, North Carolina
Greyhound Chicago, Illinois
Hostelling International Columbus, Ohio
IBM Lawrence, Kansas
Jostens Los Angeles, California
Linens 'n Things Madison, Wisconsin
Pearle Vision New York, New York
The Princeton Review Philadelphia, Pennsylvania
Rockport Company Princeton, New Jersey
Staples San Diego, California
The Wall Street Journal Tallahassee, Florida
Tower Records Washington, D.C.
</TABLE>
For many of our national sponsors, the Student Advantage discount is the
only ongoing discount offered specifically to college students. Many of our
national sponsors engage in co-marketing activities with Student Advantage.
Student Advantage seeks to identify and attract additional sponsors whose
products and services complement its offerings and who offer valuable ongoing
discounts to its members.
Advertisers
We provide advertisers with access to a large, demographically attractive
college student audience. We also provide advertisers with direct marketing
knowledge and expertise in designing and implementing effective advertising to
reach college students. Businesses which have purchased advertising from us,
such as advertising in SAM, sponsorship of portions of our Web site and banner
advertising, include Barnes & Noble, Ford Motor Company, Microsoft and Visa.
Unlike many competitors, we are able to combine print, on-campus and Web
site advertisements. We intend to expand our in-house sales force during 1999
and offer additional banner advertising and sponsorship opportunities on our Web
site.
UNIVERSITY RELATIONSHIPS
We believe that university relationships are critical to our success. An
important element of our strategy is to continue to develop relationships with
colleges, universities and university organizations to assist us in marketing
and selling our products and services. The Student Advantage membership program
has been endorsed by more than 30 colleges, universities and university
organizations. These schools and organizations typically agree to co-market the
Student Advantage membership program to their students, which includes sending
students a letter explaining the program and enclosing an application, and
receive a percentage of the associated membership fees.
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Colleges and universities, or university organizations from these schools,
that have endorsed the Student Advantage membership program include:
Arkansas State University Northwestern University
Auburn University University of Pennsylvania
Boston University University of Utah
Emory University Villanova University
University of California--Berkeley University of Nevada--Las Vegas
University of North Carolina--Charlotte University of Virginia
In addition, colleges and universities that have purchased Student
Advantage memberships in bulk, at varying discounts depending on volume, and
distributed the memberships to their students free of charge, include:
Albany Medical College DeVry Institute of Technology
The Boston Conservatory Oglethorpe University
Brandeis University Santa Fe Community College
Student Advantage has also established an off-campus debit card program for
New York University and American University. For these universities, we enroll
off-campus local merchants to participate in a debit card program maintained by
the university. Students purchase goods and services from these local merchants,
and the amount of their purchase is deducted from the balance in their
university debit card account. In connection with these purchases, participating
merchants pay a transaction fee, which is shared by Student Advantage and the
university. As a result of our recent acquisition of Transaction Service
Providers, a provider of debit card services to college students and local
merchants, we have strengthened our off-campus debit card program.
SALES AND MARKETING
As of March 31, 1999, Student Advantage had a direct sales organization
consisting of 27 professionals. Five of these professionals are dedicated to the
AT&T relationship with an additional four professionals dedicated primarily to
managing our other significant sponsor relationships. The remaining 18
professionals are engaged in a variety of sales functions, including:
- selling advertising in SAM,
- selling banner advertising and sponsorships on studentadvantage.com,
- enlisting additional national sponsors for its discount program,
- seeking opportunities for corporate-sponsored events and promotions
targeted at college students, and
- managing existing sponsor relationships
In addition, we maintain a regional sales organization of 37 professionals
in eight regional offices focused primarily on enlisting and managing local
sponsors and providing marketing services. These offices, which are managed by
our headquarters in Boston, provide us with a broad geographical presence and
enable us to implement effective nationwide marketing programs.
Student Advantage uses a variety of online and traditional marketing
programs to increase brand awareness. Our marketing goals are to create and
enhance awareness of Student Advantage as the leading resource and trusted
advocate dedicated to serving the needs of college students, the most effective
way for marketers and advertisers to reach students, and a trusted and effective
resource for colleges and universities. Our marketing strategy for each contains
a mix of online advertising, programs which drive members to our Web site,
in-store advertising in local retail locations, on-campus direct solicitation of
students, outbound e-mail, co-marketing with colleges and universities through
on-campus posters and student mailbox drops, print advertising, new media banner
campaigns, and direct mail. Student Advantage's marketing department consisted
of 14 marketing professionals as of March 31, 1999.
TECHNOLOGY
Student Advantage has implemented a broad array of site management,
advertising management, customer interaction, registration systems,
transaction-processing and fulfillment systems using a
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combination of its own proprietary technologies and commercially available,
licensed technologies. Our current strategy is to license commercially available
technology whenever possible rather than seek internally developed solutions. We
use contractors to develop the specialized software necessary for our business,
such as the software required to register members online.
Consistent with our preference for off-the-shelf software components, the
hardware systems that we utilize also consist of commercially available
components. Student Advantage believes that this architecture provides the
ability to increase scale quickly and reliably, and at a relatively low cost.
Although our existing infrastructure currently exceeds present demand, we have
plans for additional upgrades in anticipation of increased demand.
Our membership database is hosted at AERO Fulfillment Services and utilizes
Microsoft SQL database software. Our production servers utilize Sun
Microsystems, Inc. hardware and use Netscape Web server software. Student
Advantage's system hardware is hosted at USWeb Corporation (doing business as
USWeb/CKS), a third-party facility in New York. A group of systems
administrators and network managers at USWeb/CKS operate our Web site, network
operations and transaction-processing systems and monitor our systems 24 hours a
day.
Our operations are dependent upon USWeb/CKS's and AERO's ability to
maintain their systems in effective working order and to protect their systems
against damage from fire, natural disaster, power loss, telecommunications
failure or similar events. Student Advantage's servers are powered by an
uninterruptible power supply to provide a safeguard against unexpected power
loss. Our systems are copied to backup tapes each night and stored at an
off-site storage facility for one year. In addition, the servers are equipped
with redundant file systems, which allows for prompt replacement of defective
disks without interruption of service.
COMPETITION
The market for student members and Internet services and products is
relatively new, intensely competitive and rapidly changing. With no substantial
barriers to entry in the Web site market, we believe that competition will
continue to intensify. We compete, directly and indirectly, for members,
advertisers, sponsors and viewers with the following categories of companies:
- general purpose consumer online services such as America Online and
Microsoft Network, each of which provides access to student-related
content and services,
- Web search and retrieval services, such as AltaVista, Excite, Infoseek,
Lycos, and Yahoo!, and other high-traffic Web sites,
- Web sites targeted to students generally or to students of a particular
school, such as Web sites developed by College Club, Student.Net
Publishing and CommonPlaces,
- membership programs, such as programs offered by Memberworks and Cendant,
- publishers and distributors of traditional off-line media (such as
television, radio and print), including those targeted to college
students, many of which have established or may establish Web sites, and
- vendors of college student information, merchandise, products and
services distributed through other means, including retail stores, mail
and schools.
We believe that the principal competitive factors in attracting and
retaining members are:
- brand recognition,
- quality of content and service,
- critical mass of members and sponsors,
- number and type of discounts,
- relationships with universities,
- comprehensive geographic coverage,
- breadth of offerings, and
- cost of service.
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We believe that the principal competitive factor in attracting and
retaining sponsors, merchandisers and content providers is our ability to offer
sufficient incremental revenue from online and offline sales of products and
services. We believe that the principal competitive factors in attracting
advertisers include the demographics of our membership and user base, the number
of readers of our magazine, the number of members and users of our Web site,
cost of advertising and creative implementation of advertisement placements
across our products and services. There can be no assurance that we will be able
to compete favorably with respect to these factors.
We believe that the strong Student Advantage brand combined with our
ability to deliver a targeted, demographically-attractive audience to
advertisers and sponsors, our existing base of over 1,000,000 members, our
national and local sponsors and our relationships with colleges and universities
are principal competitive advantages. We are not able to reliably estimate the
number of our direct competitors. However, many of our competitors, current and
potential, have significantly greater financial, technical or marketing
resources. In addition, providers of Internet tools and services may be acquired
by, receive investments from, or enter into other commercial relationships with
larger, well-established and well-financed companies, such as Microsoft or
America Online. Greater competition resulting from such relationships could have
a material adverse effect on our business.
INTELLECTUAL PROPERTY AND PROPERTY RIGHTS
Student Advantage regards its copyrights, service marks, trademarks, trade
dress, trade secrets, proprietary technology and similar intellectual property
as critical to its success, and relies on trademark and copyright law, trade
secret protection and confidentiality and/or license agreements with its
employees, customers, independent contractors, sponsors, and others to protect
its proprietary rights. Student Advantage strategically pursues the registration
of its trademarks and service marks. However, effective trademark, service mark,
copyright and trade secret protection may not be available. There can be no
assurance that the steps taken by us to protect our proprietary rights will be
adequate or that third parties will not infringe or misappropriate our
copyrights, trademarks, trade secrets, trade dress and similar proprietary
rights. In addition, there can be no assurance that other parties will not
independently develop substantially equivalent intellectual property. A failure
by us to protect our intellectual property in a meaningful manner could have a
material adverse effect on our business, financial condition and results of
operations. In addition, litigation may be necessary in the future to enforce
our intellectual property rights, to protect our trade secrets or to determine
the validity and scope of the proprietary rights of others. Such litigation
could result in substantial costs and diversion of financial and managerial
resources, which could have a material adverse effect on our business.
Student Advantage has been subject to claims and expects to be subject to
legal proceedings and claims from time to time in the ordinary course of its
business, including claims of alleged infringement of the trademarks and other
intellectual property rights of third parties. Such claims, even if not
meritorious, could result in the expenditure of significant financial and
managerial resources. Further, if such claims are successful, Student Advantage
may be required to change its trademarks, alter its content and pay financial
damages. There can be no assurance that such changes of trademarks, alteration
of content or payment of financial damages will not adversely affect our
business.
We may be required to obtain licenses from others to refine, develop,
market and deliver new products and services. There can be no assurance that we
will be able to obtain any such license on commercially reasonable terms or at
all or that rights granted pursuant to any licenses will be valid and
enforceable.
"Student Advantage", "U-WIRE", "Virtual Backpack" and "The Main Quad" are
trademarks and service marks of Student Advantage. All other trademarks, service
marks or trade names referred to in this prospectus are the property of their
respective owners.
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GOVERNMENT REGULATION
Student Advantage is subject to various laws and regulations relating to
its business. Although there are currently few laws or regulations directly
governing access to or commerce on the Internet, due to the increasing
popularity and use of the Internet, a number of laws and regulations may be
adopted regarding user privacy, pricing, acceptable content, taxation and
quality of products and services. In addition, several telecommunications
providers have petitioned the Federal Communications Commission to regulate and
impose fees on Internet service providers and online service providers in a
manner similar to long distance telephone carriers. The adoption of any such
laws or regulations could adversely affect the costs of communicating on the
Internet and adversely affect the growth in use of the Internet, or decrease the
acceptance of the Internet as a communications and commercial medium. Moreover,
it may take years to determine the extent to which existing laws relating to
issues such as property ownership, libel and personal privacy are applicable to
the Internet. Any new laws or regulations relating to the Internet could
decrease demand for our products and services or otherwise have a material
adverse effect on our business.
EMPLOYEES
As of March 31, 1999, Student Advantage had a total of 175 full-time
employees. Student Advantage also hires temporary employees, particularly at the
beginning of each school semester, and contract service providers as necessary.
As we continue to grow and introduce additional products and services, we expect
to hire additional employees, particularly in online product development and
sales and marketing. None of our employees is represented by a labor union or is
the subject of a collective bargaining agreement. We believe that relations with
our employees are generally good. Competition for qualified personnel in our
industry is intense, particularly among sales, online product development and
technical staff. We believe that our future success will depend in part on our
continued ability to attract, hire and retain qualified personnel.
FACILITIES
Student Advantage is headquartered at 280 Summer Street in Boston,
Massachusetts, where it presently leases an aggregate of approximately 30,000
square feet. Our current leases for this facility expire at various times
through 2005. We also maintain regional offices and lease space in Atlanta,
Georgia; Berkeley, California; Chicago, Illinois; Dallas, Texas; Lawrence,
Kansas; Los Angeles, California; New York, New York and Washington, D.C.
We believe that our current facilities and other facilities that will be
available to us will be adequate to accommodate our needs for the foreseeable
future. There can be no assurance that we will be successful in obtaining
additional space, if required, or if such space is obtained that it will be on
terms acceptable to us.
LEGAL PROCEEDINGS
We are not presently subject to any material legal proceedings. We may from
time to time become a party to various legal proceedings arising in the ordinary
course of our business.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The directors, executive officers and other key employees of Student
Advantage, and their ages as of May 17, 1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Raymond V. Sozzi, Jr.*.................... 31 Chairman of the Board of Directors, President and
Chief Executive Officer
Andrea K. Abegglen*....................... 32 Vice President, Marketing Communications
Christopher B. Andrews*................... 44 Vice President, Finance and Administration, and
Chief Financial Officer
G. Todd Eichler*.......................... 31 Executive Vice President, Member Management
Ronald J. Kos*............................ 58 Chief Operating Officer
David M. Liniado*......................... 28 Vice President, Campus Development
Daniel G. Siegel*......................... 30 Vice President, Product Development
Michael T. Fuller......................... 37 Vice President, Market Development
Mason Myers............................... 28 Vice President, Business Development
Kevin Watters............................. 27 Vice President, Marketing
John M. Connolly.......................... 47 Director
William S. Kaiser+........................ 43 Director
John Katzman+............................. 39 Director
Marc Turtletaub+.......................... 53 Director
</TABLE>
- ---------------
* Executive Officer.
+ Member of the Audit Committee and the Compensation Committee.
Raymond V. Sozzi, Jr. founded Student Advantage in 1992 and has served as
Chairman of the Board of Directors, President and Chief Executive Officer of
Student Advantage since its inception. Before founding Student Advantage, Mr.
Sozzi was employed by Bain & Company, a consulting company, as an associate
consultant. Mr. Sozzi received a B.A. from Dartmouth College in 1990.
Andrea K. Abegglen has served as Vice President, Marketing Communications,
of Student Advantage since May 1998. From November 1997 to April 1998, Ms.
Abegglen served as Vice President, Strategic Partnerships, of Student Advantage.
From May 1996 to October 1997, Ms. Abegglen served as Chief Operating Officer of
Student Advantage. From June 1993 to April 1996, Ms. Abegglen served as
President of Crimson & Brown Associates, a recruiting firm for minority students
and professionals, and as its Vice President from June 1991 to June 1993. Ms.
Abegglen received a B.A. from the University of Pennsylvania in 1989.
Christopher B. Andrews has served as Vice President and Chief Financial
Officer of Student Advantage since September 1998 and as Vice President, Finance
and Administration, of Student Advantage since January 1999. From January 1992
to August 1998, Mr. Andrews served as Vice President, Finance and
Administration, and from July 1996 to December 1996 also served as interim
President and Chief Executive Officer of Advanced Visual Systems Inc., a
visualization software company. Mr. Andrews received a J.D. from Boston College
Law School in 1981 and a B.A. from Harvard College in 1977.
G. Todd Eichler has served as Executive Vice President, Member Management,
of Student Advantage since January 1997 and served as Vice President, Marketing,
of Student Advantage from January 1995 to December 1996. From January 1991 to
December 1994, Mr. Eichler was employed by Bronner Slosberg Humphrey Inc., a
direct marketing and advertising agency, as an account supervisor. From 1989 to
1991 Mr. Eichler was employed by Bain & Company as an associate consultant. Mr.
Eichler received a B.A. from Duke University in 1989.
Ronald J. Kos has served as Chief Operating Officer of Student Advantage
since May 1999. From February 1998 to May 1999, Mr. Kos was Senior Vice
President, Marketing and Operations, of iVillage,
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Inc., an online women's network. From September 1994 to February 1998, Mr. Kos
was President of the Signal Ridge Group, a national consulting practice that he
founded. From April 1991 to August 1994, Mr. Kos was Senior Vice President in
charge of marketing and sales services activities at Hasbro, Inc., a toy
designer and manufacturer. Mr. Kos received a M.B.A. from the University of
Southern California and a B.S. from the United States Air Force Academy.
David M. Liniado has served as Vice President, Campus Development, of
Student Advantage since January 1996. From September 1994 to December 1995, Mr.
Liniado was Director of the Southern Region of Student Advantage. In May 1992
Mr. Liniado founded College Discount Association, a student membership company,
and served as its President from May 1992 to August 1994. Mr. Liniado received a
B.A. from Emory University in 1993.
Daniel G. Siegel has served as Vice President, Product Development, of
Student Advantage since May 1997, and served as Director of Marketing of Student
Advantage from November 1992 to July 1995. From May 1996 to August 1996, Mr.
Siegel was employed by Microsoft Corporation, a software company, to conduct a
worldwide original equipment manufacturer market study. Mr. Siegel received an
M.B.A. from the Wharton School of Business at the University of Pennsylvania in
1997 and a B.A. from the University of Michigan in 1990.
Michael T. Fuller has served as Vice President, Market Development, of
Student Advantage since January 1999. From July 1995 to March 1999, Mr. Fuller
was President of both The Campus Agency, LLC, an advertising and custom
publishing company, and The Travel Holding Group, LLC, a travel marketing
company. From 1991 to June 1995, Mr. Fuller was Director, Sales and Marketing,
of Travel CUTS, a student travel company.
Mason Myers has served as Vice President, Business Development, of Student
Advantage since January 1999 and served as Senior Director, New Media, of
Student Advantage from December 1997 to December 1998. Mr. Myers co-founded The
Main Quad, Inc., a student-focused Internet site, in May 1995 and served as its
Co-President from May 1995 to December 1997. From August 1994 to May 1995, Mr.
Myers was employed as a project manager by Smart Valley, Inc., a non-profit
organization using the Internet to improve the community of Silicon Valley. From
January 1994 to July 1994, Mr. Myers was employed by MFS Communications, Inc., a
telecommunications company, in various public relations roles. Mr. Myers
received a B.A. from Duke University in 1993.
Kevin Watters has served as Vice President, Marketing, of Student Advantage
since April 1999 and served as Senior Director, New Media, of Student Advantage
from December 1997 to March 1999. Mr. Watters co-founded The Main Quad, Inc. in
May 1995 and served as its Co-President from May 1995 to December 1997. From
September 1993 to April 1995, Mr. Watters was employed by The Procter & Gamble
Company, a consumer products company, in its sales management program. Mr.
Watters received a B.A. from Duke University in 1993.
John M. Connolly has served as a Director of Student Advantage since May
1999. Mr. Connolly founded Mainspring, Inc., an Internet e-strategy service
firm, and has served as its President and Chief Executive Officer since June
1996. In July 1989, Mr. Connolly founded Course Technology, Inc., a publishing
company focused on the higher education market, and served as its President and
Chief Executive Officer from July 1989 to April 1996. From August 1994 to April
1996, Mr. Connolly was also employed by the International Thomson Publishing
Company, a publishing company, as Chief Executive Officer of its Media Group.
William S. Kaiser has served as a Director of Student Advantage since
October 1998. Since 1986, Mr. Kaiser has been an employee of Greylock Management
Corporation, a venture capital company, and he is a general partner of several
venture capital funds affiliated with Greylock. Mr. Kaiser currently serves as a
Director of Clarus Corporation and Open Market, Inc.
John Katzman has served as a Director of Student Advantage since March
1996. Mr. Katzman founded Princeton Review Publishing, L.L.C., a provider of
test preparation and admission services, and has served as its President since
1981.
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Marc Turtletaub has served as a Director of Student Advantage since October
1998. Mr. Turtletaub has served as Chief Executive Officer of The Money Store,
Inc., a financial services company, since 1979.
Each executive officer serves at the discretion of the Board of Directors
and holds office until his or her successor is elected and qualified or until
his or her earlier resignation or removal. There are no family relationships
among any of the Directors or executive officers of Student Advantage. All of
the Directors were originally elected to the Board of Directors pursuant to
agreements that will terminate upon the consummation of this offering.
BOARD COMPOSITION
Following this offering, the Board of Directors of Student Advantage will
be divided into three staggered classes, each of whose members will serve for a
three-year term. The Board will consist of one Class I Director (Mr. Katzman),
two Class II Directors (Messrs. Connolly and Sozzi) and two Class III Directors
(Messrs. Kaiser and Turtletaub). At each annual meeting of stockholders, a class
of directors will be elected for a three-year term to succeed the directors of
the same class whose terms are then expiring. The terms of the Class I Director,
Class II Directors and Class III Directors will expire upon the election and
qualification of successor directors at the annual meeting of stockholders to be
held during calendar years 2000, 2001 and 2002.
BOARD COMMITTEES
The Board of Directors has a Compensation Committee composed of Messrs.
Kaiser, Katzman and Turtletaub, which makes recommendations concerning salaries
and incentive compensation for employees of Student Advantage and administers
and grants stock options under Student Advantage's stock option plans. The Board
also has an Audit Committee composed of Messrs. Kaiser, Katzman and Turtletaub,
which reviews the results and scope of the audit and other services provided by
Student Advantage's independent public auditors.
DIRECTOR COMPENSATION
We do not currently compensate directors for attending meetings of the
Board of Directors or committee meetings of the Board of Directors. Directors
are reimbursed for reasonable expenses incurred in attending board meetings.
On June 10, 1999, we granted John M. Connolly an option under our 1998
Stock Incentive Plan to purchase 5,000 shares of common stock at an exercise
price of $9.90 per share, in connection with his joining our Board of Directors.
The option vests as to 25% of the shares on each of May 19, 2000, 2001, 2002 and
2003.
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EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation
during the year ended December 31, 1998 of Student Advantage's Chief Executive
Officer and all other executive officers whose salary and bonus for 1998 equaled
or exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------- ALL OTHER
NAME AND PRINCIPAL POSITIONS SALARY BONUS(1) COMPENSATION
- ---------------------------- -------- --------- ------------
<S> <C> <C> <C>
Raymond V. Sozzi, Jr........................................ $93,798 $150,000 $6,000(2)
Chairman of the Board of Directors,
President and Chief Executive Officer
G. Todd Eichler............................................. 106,475 50,000 --
Executive Vice President,
Member Management
</TABLE>
- ---------------
(1) Represents the bonus earned for services performed in 1998 based upon
Student Advantage's operating performance during 1998. Such amounts have not
yet been paid.
(2) Represents an automobile allowance of $6,000.
OPTION GRANTS DURING FISCAL 1998
Student Advantage did not grant any options or stock appreciation rights
during 1998 to either of the executive officers named in the Summary
Compensation Table.
OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
Neither of the executive officers named in the Summary Compensation Table
exercised any options to purchase securities of Student Advantage during 1998 or
held any such options as of December 31, 1998.
STOCK PLANS
1998 Stock Incentive Plan
Student Advantage's 1998 Stock Incentive Plan and a related plan for
California employees, collectively referred to as the Incentive Plan, were
adopted by the Board of Directors and approved by the stockholders of Student
Advantage on December 10, 1998. As of April 30, 1999, 122,061 shares of common
stock had been issued upon exercise of options granted under the Incentive Plan.
As of that date, options to purchase 2,225,736 shares of common stock at a
weighted average exercise price of $0.36 per share were outstanding.
The Incentive Plan provides for the grant of incentive stock options
intended to qualify under Section 422 of the Internal Revenue Code of 1986, as
amended, non-statutory stock options, restricted stock awards and other
stock-based awards, collectively referred to as Awards. As of April 30, 1999, a
total of 5,152,203 shares of common stock were reserved for future grants under
the Incentive Plan.
All officers, employees, directors, consultants and advisors of Student
Advantage and its subsidiaries are eligible to receive Awards under the
Incentive Plan. Under present law, however, incentive stock options may only be
granted to employees.
Student Advantage may grant options at an exercise price less than, equal
to or greater than the fair market value of the common stock on the date of
grant. Under present law, incentive stock options and options intended to
qualify as performance-based compensation under Section 162(m) of the Internal
Revenue Code may not be granted at an exercise price less than the fair market
value of the common stock on the date of grant (or less than 110% of the fair
market value in the case of incentive stock options granted to optionees holding
more than 10% of the voting power of Student Advantage). The
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Incentive Plan permits the Board of Directors to determine how optionees may pay
the exercise price of their options, including by cash, check or in connection
with a "cashless exercise" through a broker, by surrender to Student Advantage
of shares of common stock, by delivery to Student Advantage of a promissory
note, or by any combination of the permitted forms of payment.
The Board of Directors has the authority to adopt, amend and repeal the
administrative rules, guidelines and practices relating to the Incentive Plan.
It may delegate authority under the Incentive Plan to one or more committees of
the Board of Directors and, subject to certain limitations, to one or more
executive officers of Student Advantage. The Board of Directors has authorized
the Compensation Committee to administer the Incentive Plan, including the
granting of options to executive officers. Subject to any applicable limitations
contained in the Incentive Plan, the Board of Directors, the Compensation
Committee or any other committee or executive officer to whom the Board of
Directors delegates authority, as the case may be, selects the recipients of
awards and determines:
- the number of shares of common stock covered by options and the dates
upon which such options become exercisable,
- the exercise price of options,
- the duration of options, and
- the number of shares of common stock subject to any restricted stock or
other stock-based awards and the terms and conditions of such awards,
including the conditions for repurchase, issue price and repurchase
price.
In the event of a merger or other acquisition event, the Board of Directors
is authorized to provide for outstanding options or other stock-based Awards to
be assumed or substituted for by the acquiror and if not so assumed the Board
shall provide for the acceleration of the vesting of awards. The option and
restricted stock agreements evidencing grants of Awards under the Incentive Plan
generally provide in the event of a change in control of Student Advantage for
the acceleration of the vesting of options and other stock-based Awards with
respect to the number of shares that would have vested on a monthly vesting
schedule through the date of the change in control and 50% of the remaining
unvested shares.
No Award may be granted under the Incentive Plan after December 2008, but
the vesting and effectiveness of Awards previously granted may extend beyond
that date. The Board of Directors may amend, suspend or terminate the Incentive
Plan or any portion thereof at any time.
1999 Employee Stock Purchase Plan
The Board of Directors adopted Student Advantage's 1999 Employee Stock
Purchase Plan in April 1999, subject to stockholder approval. The Purchase Plan
authorizes the issuance of up to a total of 450,000 shares of common stock to
participating employees.
All employees of Student Advantage, including directors of Student
Advantage who are employees, and all employees of any participating
subsidiaries:
- whose customary employment is more than 20 hours per week for more than
five months in a calendar year,
- who have been employed by Student Advantage for at least three months
prior to enrolling, and
- who are employed on the first day of a designated payroll deduction
period (the "offering period")
are eligible to participate in the Purchase Plan. Employees who would
immediately after the grant own five percent or more of the total combined
voting power or value of the stock of Student Advantage or any subsidiary are
not eligible to participate.
On the first day of an offering period, Student Advantage will grant to
each eligible employee who has elected to participate in the Purchase Plan an
option to purchase shares of common stock as follows: the employee may authorize
an amount (up to 10%, or such lesser amount as shall be determined by the Board,
of such employee's base pay) to be deducted by Student Advantage from such
employee's base pay during the offering period. On the last day of the offering
period, the employee is deemed to have exercised the option, at the option
exercise price, to the extent of accumulated payroll deductions. Under
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<PAGE> 51
the terms of the Purchase Plan, the option exercise price is an amount equal to
85% of the closing price per share of the common stock on either the first day
or the last day of the offering period, whichever is lower. In no event may an
employee purchase in any one offering period a number of shares which exceeds
the number of shares determined by dividing the product of (1) $2,083 and (2)
the number of full months in the offering period by the closing market price of
a share of common stock on the first business day of the offering period or such
other number as may be determined by the Board prior to the commencement date of
the offering period. The Compensation Committee may, in its discretion, choose
an offering period of 12 months or less for each offering and may choose a
different offering period for each offering.
An employee who is not a participant on the last day of the offering
period, as a result of voluntary withdrawal or termination of employment or for
any other reason, is not entitled to exercise any option, and the employee's
accumulated payroll deductions will be refunded. However, upon termination of
employment because of death, the employee's beneficiary has certain rights to
elect to exercise the option to purchase the shares that the accumulated payroll
deductions in the participant's account would purchase at the date of death.
Because participation in the Purchase Plan is voluntary, Student Advantage
cannot now determine the number of shares of common stock to be purchased by any
particular current executive officer, by all current executive officers as a
group or by non-executive employees as a group.
401(k) PLAN
Student Advantage has a 401(k) plan, which is intended to qualify under
Sections 401(a) and 401(k) of the Internal Revenue Code. Generally, all
employees are eligible to participate in the 401(k) plan after they complete one
year of service.
Eligible employees electing to participate in the 401(k) plan may defer a
portion of their compensation, on a pre-tax basis, by making a contribution to
the 401(k) plan. The maximum contribution is fixed in Section 401(k) of the
Internal Revenue Code. The contribution limit for 1998 was $10,000. In April
1998, Student Advantage began matching employee contributions to the 401(k)
plan. Student Advantage made matching contributions of $0.50 for each $1.00
contributed by the employee to the plan, up to 6% of the employee's gross
earnings in 1998, subject to the foregoing limit. Eligible employees who elect
to participate in the 401(k) plan are generally vested in Student Advantage's
matching contribution after four years of service. Student Advantage contributed
an aggregate of $61,000 in 1998 to the 401(k) plan.
EMPLOYMENT AGREEMENTS
In March 1996, Student Advantage entered into an employment agreement with
Mr. Sozzi, which was amended in October 1998. The employment agreement provides
for an initial term of employment expiring on January 1, 1999 and automatically
renews for successive one-year terms, unless terminated by either party prior to
such renewal. The employment agreement provides for a base salary of $150,000 in
1999, and a bonus at a target level of $75,000 to be determined in the
discretion of the Board of Directors. Pursuant to the employment agreement, if
we terminate Mr. Sozzi's employment without cause, Mr. Sozzi is entitled to
receive severance benefits, for a period of 18 months following his termination,
equal to (1) his base salary, (2) bonus payments at the fixed rate of $75,000
per year for each year or portion thereof, (3) continued participation in all
employee benefits, and (4) outplacement services. In addition, Mr. Sozzi has
agreed to certain confidentiality, noncompetition and nonsolicitation
provisions. Student Advantage has purchased and presently maintains a key person
life insurance policy in the amount of $20.0 million on the life of Mr. Sozzi.
In May 1999, Student Advantage entered into a letter agreement with Ronald
J. Kos and agreed to employ him as its Chief Operating Officer. Student
Advantage agreed to pay Mr. Kos an annual base salary of $150,000 and an annual
performance bonus with a target of $75,000, based upon the achievement of
certain performance objectives. We granted Mr. Kos options to purchase an
aggregate of 650,001 shares of common stock at an exercise price of $9.90 per
share. If we terminate the employment of Mr. Kos
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without cause prior to December 1, 1999, we will continue to pay him his base
salary until December 1, 1999 and the vesting of options to purchase 162,500
shares held by him will accelerate. The option agreements for Mr. Kos provide
for the acceleration of vesting in the event of a change in control of Student
Advantage with respect to the number of shares that would have vested on a
monthly vesting schedule through the date of the change in control and 50% of
the remaining unvested shares. If, following a change in control, the successor
terminates the employment of Mr. Kos without cause, vesting of the shares will
accelerate in full.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors consists of Messrs.
Kaiser, Katzman and Turtletaub, none of whom has been an officer or employee of
Student Advantage at any time since our inception. No executive officer of
Student Advantage serves as a member of the board of directors or compensation
committee (or other committee serving an equivalent function) of any other
entity that has one or more executive officers serving as a member of our Board
of Directors or compensation committee. Prior to the formation of the
Compensation Committee, the Board of Directors made decisions relating to the
compensation of executive officers.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Our amended and restated certificate of incorporation limits the liability
of directors to the maximum extent permitted by Delaware law. Delaware law
provides that a corporation's certificate of incorporation may contain a
provision eliminating or limiting the personal liability of a director for
monetary damages for breach of their fiduciary duties as directors, except for
liability (1) for any breach of their duty of loyalty to the corporation or its
stockholders, (2) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (3) for unlawful payments
of dividends or unlawful stock repurchases or redemptions as provided in Section
174 of the Delaware General Corporation Law, or (4) for any transaction from
which the director derived an improper personal benefit.
Our amended and restated certificate of incorporation provides that we
shall indemnify our directors, officers and employee benefit plan fiduciaries to
the fullest extent permitted by law. Our amended and restated certificate of
incorporation permits us to advance expenses incurred by an indemnified director
or officer in connection with the defense of any action or proceeding arising
out of such director's or officer's status or service as a director or officer
of Student Advantage upon an undertaking by such director or officer to repay
such advances if it is ultimately determined that such director or officer is
not entitled to such indemnification.
We have entered into agreements to indemnify our directors and officers, in
addition to the indemnification provided for in our amended and restated
certificate of incorporation. These agreements, among other things, indemnify
our directors and officers for certain expenses (including attorneys' fees and
associated legal expenses), judgments, fines and amounts paid in settlement
amounts, actually and reasonably incurred by any such person's services as a
director or officer of Student Advantage or any other company or enterprise to
which the person provides services at the request of Student Advantage, if such
officer or director acted in good faith and in a manner which he or she
reasonably believed to be in, or not opposed to the best interests of Student
Advantage or with respect to any criminal proceeding, had no reasonable cause to
believe that his or her conduct was unlawful. We believe that these provisions
and agreements are necessary to attract and retain qualified directors and
officers.
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CERTAIN TRANSACTIONS
EQUITY FINANCING
On October 20, 1998, Greylock IX Limited Partnership and Marc Turtletaub
each purchased an aggregate of 625,000 preferred membership units (which
converted into 625,000 shares of Series A convertible preferred stock) for which
each of them paid $5.0 million. Greylock IX Limited Partnership and Mr.
Turtletaub purchased these membership units from certain members of Student
Advantage LLC, our predecessor LLC, including Messrs. Sozzi, Eichler, Siegel and
Liniado and Ms. Abegglen, each of whom is an executive officer of Student
Advantage, and The Main Quad, Inc., a holder of more than five percent of our
outstanding capital stock. Messrs. Sozzi, Eichler, Siegel, Liniado and
Turtletaub, Ms. Abegglen, The Main Quad and Greylock IX Limited Partnership then
exchanged the membership units held by each of them for convertible preferred
stock and common stock of Student Advantage. On October 20, 1998, Student
Advantage also sold 625,000 shares of convertible preferred stock to each of
Greylock IX Limited Partnership and Marc Turtletaub, for an aggregate purchase
price of $10.0 million. Mr. Kaiser, who is a General Partner of the General
Partner of Greylock IX Limited Partnership, and Mr. Turtletaub each became a
Director of Student Advantage in October 1998. Upon completion of this offering,
these outstanding shares of convertible preferred stock will automatically be
converted into an aggregate of 7,500,000 shares of common stock.
PRINCETON REVIEW PUBLISHING
In March 1996, we entered into an Investment Agreement with Princeton
Review Publishing, L.L.C. Pursuant to this agreement, Princeton Review purchased
2,479 membership units in the predecessor LLC for an aggregate purchase price of
$250,000. Mr. Katzman, a director of Student Advantage, is the President of
Princeton Review. In connection with this transaction, the predecessor LLC also:
- borrowed $75,000 and issued Princeton Review a convertible promissory
note bearing interest at 8.5% per year, which was paid in September 1997,
and
- borrowed $100,000 and issued Princeton Review a secured promissory note
bearing interest at 8.5% per year, which was paid in September 1998.
In September 1997, Student Advantage redeemed 1,498 of Princeton Review's
2,479 membership units in the predecessor LLC for an aggregate purchase price of
$630,000. In addition, Student Advantage borrowed $125,000 from Princeton
Review, which was repaid on October 23, 1998. In October 1998, Princeton
Review's remaining 981 membership units were converted into 1,450,587 shares of
common stock and 134,597 shares of convertible preferred stock (convertible into
403,791 shares of common stock).
In October 1998, Mr. Sozzi entered into an agreement with Princeton Review
requiring Mr. Sozzi to purchase up to 78,125 shares of convertible preferred
stock of Student Advantage at $8.00 per share upon the election of Princeton
Review. Princeton Review exercised this put option on November 24, 1998 and
consented to the purchase of the 78,125 shares of convertible preferred stock by
Mr. Siegel and Mr. Eichler, in addition to Mr. Sozzi.
Student Advantage entered into an agreement in March 1996 with Princeton
Review, pursuant to which:
- Princeton Review provides space on its Web site for Student Advantage to
market its programs,
- Princeton Review agreed to certain non-compete restrictions,
- Student Advantage agreed to promote certain of Princeton Review's
products, and
- Student Advantage agreed not to permit competitors of Princeton Review to
participate in certain Student Advantage programs.
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OTHER AGREEMENTS
In February 1995, Student Advantage entered into an agreement with David M.
Liniado d/b/a DML Enterprises. Mr. Liniado is an executive officer of Student
Advantage. Under this agreement, Student Advantage agreed to allow DML to market
discounts on products and services using the Student Advantage name in the
southeastern United States. In February 1996, Student Advantage acquired DML's
business and assets. DML received 111 membership units in the predecessor LLC
and the right to 35% of Student Advantage's pre-tax earnings derived from such
southeastern U.S. markets in 1996, 1997 and 1998. In April 1997, Student
Advantage issued an additional 239 membership units in complete satisfaction of
its obligation to pay DML 35% of its earnings derived from that region. On
October 20, 1998 the balance of DML's total membership units were converted into
517,536 shares of common stock and 16,698 shares of convertible preferred stock
(convertible into 50,094 shares of common stock).
In December 1997, Student Advantage entered into an asset purchase
agreement with The Main Quad, Inc. under which Student Advantage purchased
certain assets, including U-WIRE and Virtual Backpack, for $272,000 in cash and
270 membership units in the predecessor LLC. In connection with this agreement,
the predecessor LLC entered into an ancillary agreement entitling The Main Quad
to a certain number of additional membership interests, depending on the
valuation of Student Advantage in its initial public offering. In October 1998,
Student Advantage issued to The Main Quad an additional 480 membership units in
satisfaction of this obligation. The Main Quad's total membership units held as
of October 20, 1998 were converted into 1,109,013 shares of common stock and
55,345 shares of convertible preferred stock (convertible into 166,035 shares of
common stock). In connection with the asset purchase agreement, Student
Advantage entered into a three year employment agreement, dated May 1, 1997,
with Mr. Myers, co-founder of The Main Quad. Pursuant to the agreement, Mr.
Myers' base salary was $55,000 for the first year, $60,000 for the second year
and $65,000 for the third year of his employment. Student Advantage also entered
into an employment agreement with Kevin Watters, co-founder of The Main Quad, on
similar terms.
Mr. Sozzi, the Chairman of the Board of Directors, President and Chief
Executive Officer of Student Advantage, loaned Student Advantage $400,000 on
April 21, 1998 at an interest rate of 3% per year, which was repaid on August 3,
1998. Mr. Sozzi loaned $300,000 to Student Advantage on August 17, 1998,
$200,000 on August 31, 1998, $100,000 on September 4, 1998 and $250,000 on
September 18, 1998, all at an interest rate of approximately 6% per year.
Student Advantage repaid all of these loans on October 29, 1998.
Student Advantage loaned Mr. Siegel, Vice President, Product Development,
and an executive officer of Student Advantage, $60,000 on February 9, 1998 at an
interest rate per year of approximately 6% per year, which was paid in late
1998. Mr. Siegel loaned Student Advantage $100,000 on April 21, 1998 without
interest, which was repaid on May 11, 1998.
In January 1998, Ms. Abegglen, Vice President, Marketing Communications,
and an executive officer of Student Advantage, borrowed $164,914 from Student
Advantage in connection with the purchase of membership units in the predecessor
LLC. This borrowing, with interest at a rate of 5% per year, was repaid in
December 1998.
In December 1998, Student Advantage granted Christopher B. Andrews, Vice
President, Finance and Administration and an executive officer of Student
Advantage, an option under the 1998 Stock Incentive Plan to purchase 202,500
shares of common stock at an exercise price of $0.33 per share. This option
vests as to 16 2/3% of the shares on December 10, 1998, 8 1/3% of the shares on
September 22, 1999, and 25% on each September 22 for three years thereafter. In
December 1998, Student Advantage also granted David M. Liniado, Vice President,
Campus Development and an executive officer of Student Advantage, an option
under the 1998 Stock Incentive Plan to purchase 90,000 shares of common stock at
an exercise price of $0.33 per share. This option vests as to 25% of shares on
each of January 1, 2000, 2001, 2002 and 2003. The options granted to Messrs.
Andrews and Liniado are immediately exercisable in full, subject to repurchase
by Student Advantage at the exercise price upon termination of the executive
officer's employment prior to vesting in the shares. The option agreements for
each of Messrs. Andrews and
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Liniado provide for the acceleration of vesting in the event of a change in
control of Student Advantage with respect to the number of shares that would
have vested on a monthly vesting schedule through the date of the change in
control and 50% of the remaining unvested shares. If, following a change in
control, the successor terminates the employment of the executive officer
without cause or the executive officer terminates his employment for certain
reasons, vesting of the shares will accelerate in full.
All future transactions, including loans between us and our officers,
directors, principal stockholders and their affiliates will be approved by a
majority of the Board of Directors, including a majority of the disinterested
directors on the Board of Directors, and will be on terms no less favorable to
us than could be obtained from unaffiliated third parties.
DISTRIBUTIONS TO MEMBERS OF PREDECESSOR LIMITED LIABILITY COMPANY
During April 1998, the predecessor LLC distributed to its LLC members an
aggregate of approximately $1,043,000 so that they could pay their estimated tax
liability with respect to the 1997 taxable income of the predecessor LLC. These
LLC members included, among others, Mr. Sozzi, Mr. Eichler, Mr. Siegel,
Princeton Review, Ms. Abegglen, Mr. Liniado and The Main Quad. In November 1998,
Student Advantage distributed to the former members the remainder of the
predecessor LLC's 1997 taxable income (approximately $1,277,000). To the extent
Princeton Review's tax liability on the predecessor LLC's taxable income for
1997 and 1998 exceeds its estimated tax liability, Student Advantage agreed to
indemnify Princeton Review for such excess. Student Advantage also has agreed to
distribute to its former LLC members approximately 45% of the predecessor LLC's
1998 taxable income (expected to be a nominal amount) so that they can pay their
tax liability with respect to the 1998 taxable income of the predecessor LLC for
the period between January 1, 1998 and October 20, 1998, which was the date on
which the predecessor LLC was converted to a C Corporation.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of the common stock of Student Advantage as of April 30, 1999, and as
adjusted to reflect the sale of the shares of common stock offered by this
prospectus, by:
- each person or entity, or group of affiliated persons or entities, who
Student Advantage knows beneficially owns five percent or more of the
common stock,
- each director of Student Advantage and each executive officer named in
the Summary Compensation Table, and
- all directors and executive officers of Student Advantage as a group.
Unless otherwise indicated, (1) each person or entity named in the table
has sole voting power and investment power (or shares such power with his or her
spouse) with respect to all shares of capital stock listed as beneficially owned
by such person or entity and (2) the address of each beneficial owner is c/o
Student Advantage, Inc., 280 Summer Street, Boston, Massachusetts 02210. The
number of shares of common stock outstanding used in calculating the percentage
for each person listed includes the shares of common stock underlying options
held by such person that are exercisable within 60 days of April 30, 1999, but
excludes shares of common stock underlying options held by any other person.
Percentage of beneficial ownership is based on 24,497,061 shares of common stock
outstanding as of April 30, 1999, after giving effect to the conversion of the
convertible preferred stock, and 30,497,061 shares of common stock outstanding
after completion of this offering.
<TABLE>
<CAPTION>
PERCENTAGE OF
COMMON
STOCK OUTSTANDING
--------------------
SHARES BENEFICIALLY BEFORE AFTER
NAME OF BENEFICIAL OWNER OWNED(1) OFFERING OFFERING
- ------------------------ ------------------- -------- --------
<S> <C> <C> <C>
Raymond V. Sozzi, Jr.(1).................................. 7,714,683 31.5% 25.3%
Greylock IX Limited Partnership(2)........................ 3,750,000 15.3 12.3
William S. Kaiser(2)...................................... 3,750,000 15.3 12.3
Marc Turtletaub........................................... 3,750,000 15.3 12.3
Daniel G. Siegel.......................................... 2,229,912 9.1 7.3
G. Todd Eichler........................................... 2,229,912 9.1 7.3
Princeton Review Publishing, L.L.C.(3).................... 1,620,003 6.6 5.3
John Katzman(3)........................................... 1,620,003 6.6 5.3
Mason Myers(4)(5)......................................... 1,335,048 5.4 4.4
Kevin Watters(4)(5)....................................... 1,323,048 5.4 4.3
The Main Quad, Inc.(4).................................... 1,275,048 5.2 4.2
All executive officers and directors as a group (11
persons)(6)............................................. 22,954,347 93.0% 74.8%
</TABLE>
- ---------------
(1) Consists of shares held of record by Mr. Sozzi. Does not include a total of
7,540,314 shares of common stock held by Ms. Abegglen, Messrs. Eichler,
Liniado and Siegel, The Main Quad, Inc., Thomas W. Haines and Mark Caputo,
over which Mr. Sozzi has voting control pursuant to an irrevocable proxy
granted under a Voting Agreement and Proxy dated October 20, 1998. Counting
these shares, Mr. Sozzi may be deemed to beneficially own a total of
15,254,997 shares, or 62.3% of the outstanding common stock prior to this
offering. The Voting Agreement and Proxy and the proxy granted thereunder
terminate upon the consummation of this offering.
(2) Consists of 3,750,000 shares held of record by Greylock IX Limited
Partnership. Mr. Kaiser is a general partner of Greylock IX GP Limited
Partnership, the general partner of Greylock IX Limited Partnership.
Greylock IX GP Limited Partnership has sole voting and investment power with
respect to these shares. Mr. Kaiser disclaims beneficial ownership of such
shares, except to the extent of his pecuniary interest therein. The address
for Greylock IX Limited Partnership and Greylock IX GP Limited Partnership
is One Federal Street, Boston, Massachusetts 02110.
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(3) Consists of 1,620,003 shares held of record by Princeton Review Publishing,
L.L.C. Mr. Katzman is the President of Princeton Review Publishing. Mr.
Katzman disclaims beneficial ownership of such shares, except to the extent
of his pecuniary interest therein. The address for Princeton Review
Publishing is 2315 Broadway, New York, New York 10024.
(4) Includes 1,275,048 shares held of record by The Main Quad, Inc. Messrs.
Myers and Watters are each stockholders, directors and officers of The Main
Quad, Inc. Messrs. Myers and Watters share investment and voting power with
respect to these shares. Messrs. Myers and Watters disclaim beneficial
ownership of such shares, except to the extent of their pecuniary interest
therein.
(5) Includes 60,000 shares subject to options held by Mr. Myers and 48,000
shares subject to options held by Mr. Watters, all of which are immediately
exercisable in full. Any shares acquired upon exercise are subject to
vesting over a four-year period and are subject to repurchase by Student
Advantage at the exercise price upon termination of the executive officer's
employment prior to vesting in the shares. In the event of a change in
control of Student Advantage, vesting of the shares will accelerate in part.
If, following a change in control, the successor terminates the employment
of the executive officer without cause or the executive officer terminates
his employment for certain reasons, vesting of the shares will accelerate in
full.
(6) See footnotes 1 through 5 above. Includes 172,500 shares subject to options
held by the executive officers which are immediately exercisable in full.
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DESCRIPTION OF CAPITAL STOCK
After this offering, the authorized capital stock of Student Advantage will
consist of 150,000,000 shares of common stock, $0.01 par value per share, and
5,000,000 shares of preferred stock, $0.01 par value per share. As of April 30,
1999, there were outstanding (1) 16,255,953 shares of common stock held by 12
stockholders of record, (2) 2,747,036 shares of convertible preferred stock
(convertible into 8,241,108 shares of common stock) held by 10 stockholders of
record and (3) options to purchase an aggregate of 2,225,736 shares of common
stock.
The following summary of certain provisions of our securities and various
provisions of our amended and restated certificate of incorporation and our
amended and restated bylaws is not intended to be complete and is qualified by
reference to the provisions of applicable law and to our amended and restated
certificate of incorporation and amended and restated bylaws included as
exhibits to the Registration Statement of which this prospectus is a part. See
"Additional Information."
COMMON STOCK
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of common stock are entitled to receive
proportionately any such dividends declared by the Board of Directors, subject
to any preferential dividend rights of outstanding preferred stock. Upon the
liquidation, dissolution or winding up of Student Advantage, the holders of
common stock are entitled to receive ratably the net assets of Student Advantage
available after the payment of all debts and other liabilities and subject to
the prior rights of any outstanding preferred stock. Holders of common stock
have no preemptive, subscription, redemption or conversion rights. The
outstanding shares of common stock are, and the shares offered by Student
Advantage in this offering will be, when issued and paid for, fully paid and
nonassessable. The rights, preferences and privileges of holders of common stock
are subject to the rights of the holders of shares of any series of preferred
stock which Student Advantage may designate and issue in the future. Certain
holders of common stock have the right to require Student Advantage to register
their shares of common stock under the Securities Act in certain circumstances.
See "Shares Eligible for Future Sale."
PREFERRED STOCK
Under the terms of our amended and restated certificate of incorporation,
the Board of Directors is authorized to issue such shares of preferred stock in
one or more series without stockholder approval. The Board has discretion to
determine the rights, preferences, privileges and restrictions, including voting
rights, dividend rights, conversion rights, redemption privileges and
liquidation preferences of each series of preferred stock.
The purpose of authorizing the Board of Directors to issue preferred stock
and determine its rights and preferences is to eliminate delays associated with
a stockholder vote on specific issuances. The issuance of preferred stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could make it more difficult for a third party to
acquire, or could discourage a third party from acquiring, a majority of the
outstanding voting stock of Student Advantage. Student Advantage has no present
plans to issue any shares of preferred stock.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
Student Advantage is subject to the provisions of Section 203 of the
General Corporation Law of Delaware. In general, the statute prohibits a
publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. A "business
combination" includes mergers, asset sales and other transactions resulting in a
financial benefit to the interested stockholder. Subject to certain exceptions,
an
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"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15% or more of the
corporation's voting stock.
The amended and restated bylaws provide for the division of the Board of
Directors into three classes as nearly equal in size as possible with staggered
three-year terms. Under the amended and restated bylaws, any vacancy on the
Board of Directors, including a vacancy resulting from an enlargement of the
Board of Directors, may only be filled by vote of a majority of the directors
then in office. The classification of the Board of Directors and the limitation
on and filling of vacancies could make it more difficult for a third party to
acquire, or discourage a third party from acquiring, control of Student
Advantage.
The amended and restated bylaws also provide that after this offering, any
action required or permitted to be taken by the stockholders of Student
Advantage at an annual meeting or special meeting of stockholders may only be
taken if it is properly brought before such meeting and may not be taken by
written action in lieu of a meeting. The amended and restated bylaws further
provide that special meetings of the stockholders may only be called by the
Chairman of the Board, the President or the Board of Directors. In order for any
matter to be considered "properly brought" before a meeting, a stockholder must
comply with certain requirements regarding advance notice and provide certain
information to Student Advantage. These provisions could have the effect of
delaying until the next stockholders meeting stockholder actions which are
favored by the holders of a majority of the outstanding voting securities of
Student Advantage. These provisions could also discourage a third party from
making a tender offer for the common stock, because even if it acquired a
majority of the outstanding voting securities of Student Advantage, it would be
able to take action as a stockholder (such as electing new directors or
approving a merger) only at a duly called stockholders' meeting and not by
written consent.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is BankBoston, N.A.
58
<PAGE> 60
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. We cannot predict the effect, if any, that sales of shares of common
stock to the public after completion of this offering or the availability of
shares for sale to the public after completion of this offering will have on the
market price of the common stock prevailing from time to time. Nevertheless, if
a significant number of shares of common stock are sold in the public market, or
if people believe that such sales may occur, the prevailing market price of our
common stock could decline and could impair our future ability to raise capital
through the sale of our equity securities.
Upon completion of this offering, based on the number of shares outstanding
on April 30, 1999, we will have an aggregate of 30,497,061 shares of common
stock outstanding (32,924,664 shares if the merger with University Netcasting is
completed), assuming no exercise of the underwriters' over-allotment option and
no exercise of options outstanding at April 30, 1999. Of the outstanding shares,
the shares sold in this offering will be freely tradeable, without restriction
under the Securities Act of 1933, except for any such shares which may be
acquired by an "affiliate" of Student Advantage, which shares will be subject to
the volume limitations of Rule 144 under the Securities Act. As defined in Rule
144, an "affiliate" of an issuer is a person who, directly or indirectly,
through one or more intermediaries, controls or is controlled by, or is under
common control with, such issuer. The remaining 24,497,061 shares of common
stock outstanding (26,924,664 shares if the merger with University Netcasting is
completed) will be "restricted securities" as that phrase is defined in Rule 144
and may not be resold in the absence of registration under the Securities Act or
pursuant to an exemption from such registration, including the exemption
provided by Rule 144 under the Securities Act.
In connection with this offering, our directors, officers and stockholders,
holding 24,497,061 shares (26,846,229 shares if the merger with University
Netcasting is completed) in the aggregate, have agreed that, without the prior
written consent of BancBoston Robertson Stephens Inc. on behalf of the
underwriters, during the period ending 180 days after the date of this
prospectus, they will not directly or indirectly offer to sell, contract to
sell, or otherwise sell, dispose of, loan, pledge, or grant any right with
respect to, any shares of common stock or any securities convertible into or
exchangeable for shares of common stock, whether such shares or any such
securities are then owned by such person or are thereafter acquired directly
from us.
Subject to the foregoing and to the lock-up agreements, under Rule 144 as
currently in effect, beginning 180 days after the date of this prospectus,
holders of restricted securities will be entitled to sell a number of shares of
common stock within any three-month period equal to the greater of 1% of the
then outstanding shares of the common stock (approximately 304,970 shares
immediately following the offering (329,246 shares if the merger with University
Netcasting is completed)) or the average weekly reported volume of trading of
the common stock on the Nasdaq National Market during the four calendar weeks
preceding such sale, provided that certain manner of sale and notice
requirements and requirements as to the availability of current public
information concerning Student Advantage are satisfied.
Immediately after the offering, based on the number of options outstanding
on April 30, 1999, certain of our employees and former employees will hold
options to purchase approximately 2,225,736 shares of common stock outstanding
(2,288,658 shares if the merger with University Netcasting is completed).
Subject to the provisions of the lock-up agreements described below, holders of
these options may rely on the resale provisions of Rule 701 under the Securities
Act, which permits nonaffiliates to sell shares without having to comply with
the current public information, holding period, volume limitation or notice
provisions of Rule 144 and permits affiliates to sell their shares without
having to comply with the holding period provision of Rule 144, in each case
beginning 90 days after the consummation of this offering. In addition,
immediately after this offering, Student Advantage intends to file a
registration statement on Form S-8 covering all options granted under the 1998
Stock Incentive Plan and shares issued under the 1999 Employee Stock Purchase
Plan. Shares of common stock registered under such registration statement will,
subject to Rule 144 volume limitations applicable to affiliates, be available
for sale in the open
59
<PAGE> 61
market, unless such shares are subject to vesting restrictions with Student
Advantage or the lock-up agreements described above. See "Management--Stock
Plans--1998 Stock Incentive Plan."
We have agreed not to sell or otherwise dispose of any shares of common
stock during the 180-day period following the date of the prospectus, except
that we may issue shares in connection with certain acquisitions and issue, and
grant options to purchase, shares of common stock under the 1998 Stock Incentive
Plan and the 1999 Employee Stock Purchase Plan.
If the merger with University Netcasting is completed, Student Advantage
has agreed to use its reasonable best efforts to register for public sale
1,213,802 shares that will be issued by Student Advantage in the merger on the
earlier of: (1) the 180th day after the date of this prospectus, and (2) the
date any of Raymond V. Sozzi, Jr., Greylock IX Limited Partnership, Marc
Turtletaub or Princeton Review Publishing, L.L.C. sells greater than 1% of the
then outstanding shares of common stock (other than in an underwritten secondary
offering of common stock).
In addition, following this offering, under specified conditions and
subject to customary exceptions, holders of 16,454,895 shares of common stock
will have demand registration rights with respect to their shares of common
stock (subject to the 180-day lock-up arrangement described above) to require us
to register their shares of common stock under the Securities Act, and they will
have rights to participate in any future registration of securities by us. We
are not required to effect more than two demand registrations on behalf of these
holders.
60
<PAGE> 62
UNDERWRITING
The underwriters named below, acting through their representatives,
BancBoston Robertson Stephens Inc., Prudential Securities Incorporated, Volpe
Brown Whelan & Company, LLC and Wit Capital Corporation have severally agreed
with us subject to the terms and conditions of the underwriting agreement, to
purchase from us the number of shares of common stock set forth opposite their
names below. The underwriters are committed to purchase and pay for all such
shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ----------- ---------
<S> <C>
BancBoston Robertson Stephens Inc. ......................... 2,655,000
Prudential Securities Incorporated.......................... 1,947,000
Volpe Brown Whelan & Company, LLC........................... 1,298,000
Wit Capital Corporation..................................... 100,000
---------
Total............................................. 6,000,000
=========
</TABLE>
The underwriters' representatives have advised us that the underwriters
propose to offer the shares of common stock to the public at the initial public
offering price set forth on the cover page of this prospectus and to certain
dealers at such price less a concession not in excess of $0.34 per share, of
which $0.10 per share may be reallowed to other dealers. After the initial
public offering, the public offering price, concession, and reallowance to
dealers may be reduced by the representatives. No such reduction shall change
the amount of proceeds to be received by us as set forth on the cover page of
this prospectus.
The underwriters have informed us that they do not intend to confirm sales
to any accounts over which they exercise discretionary authority.
Over-Allotment Option. We have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to 900,000 additional shares of common stock at the same price per
share as we will be paid for the 6,000,000 shares that the underwriters have
agreed to purchase. To the extent that the underwriters exercise such option,
each of the underwriters will have a firm commitment to purchase approximately
the same percentage of such additional shares that the number of shares of
common stock to be purchased by it shown in the above table represents as a
percentage of the 6,000,000 shares offered hereby. If purchased, such additional
shares will be sold by the underwriters on the same terms as those on which the
6,000,000 shares are being sold. We will be obligated, pursuant to the option,
to sell shares to the extent the option is exercised. The underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of the shares of common stock offered hereby. If such option is exercised
in full, the total public offering price, underwriting discounts and commissions
and proceeds to Student Advantage will be $55.2 million, $3.9 million and $51.3
million, respectively.
Expenses. The following table summarizes the compensation to be paid by
Student Advantage to the underwriters:
<TABLE>
<CAPTION>
TOTAL
--------------------------------
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
--------- -------------- --------------
<S> <C> <C> <C>
Public offering price................................. $8.00 $48,000,000 $55,200,000
Underwriting discounts and commissions payable by
Student Advantage................................... 0.56 3,360,000 3,864,000
</TABLE>
Student Advantage estimates expenses payable by us in connection with this
offering, other than the underwriting discounts and commissions referred to
above, will be approximately $1.1 million.
Wit Capital, a member of the National Association of Securities Dealers,
Inc., will participate in the offering as one of the underwriters. The National
Association of Securities Dealers, Inc. approved the membership of Wit Capital
on September 4, 1997. Except for its participation as a manager in this
offering, Wit Capital has no relationship with Student Advantage or any of its
founders or significant stockholders.
61
<PAGE> 63
Directed Share Program. At our request, the underwriters have reserved up
to six percent of the common stock to be issued by us and offered for sale in
this offering, at the initial public offering price, to business associates and
certain persons otherwise connected to Student Advantage. The number of shares
of common stock available for sale to the general public will be reduced to the
extent such individuals purchase such reserved shares. Any reserved shares which
are not so purchased will be offered by the underwriters to the general public
on the same basis as the other shares offered in this offering.
Lycos, Inc., Vulcan Ventures, L.P. and Northwest Ventures Inc. have
expressed an interest in purchasing up to 600,000 shares of common stock in this
offering at the initial public offering price, and up to 600,000 shares of
common stock may be sold to such purchasers in the offering. There can be no
assurance that any of such shares will be purchased.
Indemnity. Pursuant to the underwriting agreement, Student Advantage will
indemnify the underwriters against certain civil liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
representation and warranties contained in the underwriting agreement.
Lock-Up Agreements. Each director, officer and stockholder of Student
Advantage and certain stockholders and option holders of University Netcasting
have agreed, during the period ending 180 days after the date of this prospectus
(the "lock-up period"), not to offer to sell, contract to sell, or otherwise
sell, dispose of, loan, pledge or grant any rights with respect to any shares of
common stock or any options, warrants to purchase any shares of common stock, or
any securities convertible into or exchangeable for shares of common stock owned
as of the date of this prospectus or thereafter acquired directly by such
holders or with respect to which they have the power of disposition, other than
shares acquired on the open market, without the prior written consent of
BancBoston Robertson Stephens Inc. However, the securities subject to the
lock-up agreement may be transferred (1) as a bona fide gift, (2) in a
distribution to stockholders or partners of such Student Advantage stockholder,
or (3) to certain trusts, if the transfer is not for value, provided, in each
case, that the proposed transferee agrees in writing to be bound by the
restrictions contained in the lock-up agreement. In addition, BancBoston
Robertson Stephens Inc. may, in its sole discretion and at any time without
notice, release all or any portion of securities subject to the lock-up
agreement. There are no existing agreements between the representatives of the
underwriters and any of our stockholders providing consent to the sale of shares
prior to the expiration of the lock-up period.
Future Sales. In addition, we have agreed that during the lock-up period
we will not, without the prior written consent of BancBoston Robertson Stephens
Inc., (1) consent to the disposition of any shares held by stockholders subject
to lock-up agreements prior to the expiration of the lock-up period or (2)
issue, sell, contract to sell, or otherwise dispose of, any shares of common
stock, any options to purchase any shares of common stock or any securities
convertible into, exercisable for or exchangeable for shares of common stock
other than (a) our sale of shares in this offering, (b) the issuance of common
stock upon the exercise of outstanding options and the issuance of options under
existing stock option and incentive plans, provided such common stock and the
common stock issuable upon the exercise of such options cannot be transferred
prior to the expiration of the lock-up period and (c) the issuance of shares in
connection with certain acquisitions that cannot be sold on the public market
during the lock-up period. See "Shares Eligible for Future Sale."
Listing. The shares of common stock have been approved for quotation on
the Nasdaq National Market under the symbol "STAD."
Determination of Offering Price. Prior to this offering, there has been no
public market for the common stock. Consequently, the initial public offering
price for the common stock offered by this prospectus was determined through
negotiations among us and the representatives of the underwriters. Among the
factors considered in such negotiations were prevailing market conditions,
certain of our financial information, market valuations of other companies that
we and the representatives of the
62
<PAGE> 64
underwriters believe to be comparable to us, estimates of our business
potential, the present state of our development and other factors deemed
relevant.
Stabilization. The underwriters have advised us that, pursuant to
Regulation M under the Securities Act, certain persons participating in the
offering may engage in transactions, including stabilizing bids, syndicate
covering transactions or the imposition of penalty bids, that may have the
effect of stabilizing or maintaining the market price of the common stock at a
level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of common stock on behalf of the
underwriters for the purpose of fixing or maintaining the price of the common
stock. A "syndicate covering transaction" is the bid for or the purchase of the
common stock on behalf of the underwriters to reduce a short position incurred
by the underwriters in connection with this offering. A "penalty bid" is an
arrangement permitting the representatives to reclaim the selling concession
otherwise accruing to an underwriter or syndicate member in connection with this
offering if the common stock originally sold by such underwriter or syndicate
member is purchased by the representatives of the underwriters in a syndicate
covering transaction and has therefore not been effectively placed by such
underwriter or syndicate member. The representatives of the underwriters have
advised us that such transactions may be effected on the Nasdaq National Market
or otherwise and, if commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for Student Advantage by Hale and Dorr LLP, Boston, Massachusetts, and for
the underwriters by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts.
EXPERTS
The audited financial statements included in this Prospectus have been
audited by
PricewaterhouseCoopers LLP, independent accountants. The companies and periods
covered by these audits are indicated in the individual reports. Such financial
statements have been so included in reliance on the reports (with respect to the
report on University Netcasting, Inc., such report contains an explanatory
paragraph relating to University Netcasting's ability to continue as a going
concern as described in Note 1 to the University Netcasting, Inc. financial
statements) of PricewaterhouseCoopers LLP given on the authority of said firm as
experts in auditing and accounting.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-1. This prospectus, which is a part of the Registration
Statement, does not contain all of the information included in the Registration
Statement. Certain information is omitted and you should refer to the
Registration Statement and its exhibits. With respect to references made in this
prospectus to any contract, agreement or other document of Student Advantage,
such references are not necessarily complete and you should refer to the
exhibits attached to the Registration Statement for copies of the actual
contract, agreement or other document. You may review a copy of the Registration
Statement, including exhibits, at the Commission's public reference room at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 or Seven World
Trade Center, 13th Floor, New York, New York 10048 or Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Please call the Commission
at 1-800-SEC-0330 for further information on the operation of the public
reference rooms.
We will also file annual, quarterly and current reports, proxy statements
and other information with the Commission. You may read and copy any reports,
statements or other information on file at the public reference rooms. You can
also request copies of these documents, for a copying fee, by writing to the
Commission.
Our Commission filings and the Registration Statement can also be reviewed
by accessing the Commission's Internet site at http://www.sec.gov, which
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
63
<PAGE> 65
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<PAGE> 66
STUDENT ADVANTAGE, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
STUDENT ADVANTAGE, INC.
Report of Independent Accountants........................... F-2
Balance Sheet as of December 31, 1997 and 1998 and as of
March 31, 1999 (unaudited)................................ F-3
Statement of Operations for the years ended December 31,
1996, 1997 and 1998 and the three months ended March 31,
1998 and March 31, 1999 (unaudited)....................... F-4
Statement of Changes in Redeemable Convertible Preferred
Stock and Stockholders' Deficit for the years ended
December 31, 1996, 1997 and 1998 and the three months
ended March 31, 1999 (unaudited).......................... F-5
Statement of Cash Flows for the years ended December 31,
1996, 1997 and 1998 and the three months ended March 31,
1998 and March 31, 1999 (unaudited)....................... F-6
Notes to Financial Statements............................... F-7
COLLEGIATE ADVANTAGE, INC.
Report of Independent Accountants........................... F-18
Balance Sheet as of December 31, 1997....................... F-19
Statement of Operations for the year ended December 31,
1997...................................................... F-20
Statement of Changes in Stockholders' Equity for the year
ended December 31, 1997................................... F-21
Statement of Cash Flows for the year ended December 31,
1997...................................................... F-22
Notes to Financial Statements............................... F-23
THE MAIN QUAD, INC.
Report of Independent Accountants........................... F-26
Balance Sheet as of December 6, 1997........................ F-27
Statement of Operations for the period from January 1, 1997
through December 6, 1997.................................. F-28
Statement of Changes in Stockholders' Deficit for the period
from January 1, 1997 through December 6, 1997............. F-29
Statement of Cash Flows for the period from January 1, 1997
through December 6, 1997.................................. F-30
Notes to Financial Statements............................... F-31
UNIVERSITY NETCASTING, INC.
Report of Independent Accountants........................... F-34
Balance Sheet as of March 31, 1998 and 1999................. F-35
Statement of Operations for the years ended March 31, 1998
and 1999.................................................. F-36
Statement of Changes in Redeemable Convertible Preferred
Stock and Stockholders' Deficit for the years ended March
31, 1998 and 1999......................................... F-37
Statement of Cash Flows for the years ended March 31, 1998
and 1999.................................................. F-38
Notes to Financial Statements............................... F-39
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
Unaudited Pro Forma Combined Balance Sheet as of March 31,
1999...................................................... F-49
Unaudited Pro Forma Combined Statement of Operations for the
year ended December 31, 1996.............................. F-50
Unaudited Pro Forma Combined Statement of Operations for the
year ended December 31, 1997.............................. F-51
Unaudited Pro Forma Combined Statement of Operations for the
year ended December 31, 1998.............................. F-52
Unaudited Pro Forma Combined Statement of Operations for the
three months ended
March 31, 1999............................................ F-53
Notes to Unaudited Pro Forma Combined Financial
Information............................................... F-54
</TABLE>
F-1
<PAGE> 67
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Student Advantage, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of changes in redeemable convertible preferred stock and
stockholders' deficit and of cash flows present fairly, in all material
respects, the financial position of Student Advantage, Inc. at December 31, 1997
and 1998, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
June 11, 1999
F-2
<PAGE> 68
STUDENT ADVANTAGE, INC.
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
------------------- MARCH 31, MARCH 31,
1997 1998 1999 1999
------- -------- ----------- -----------
(UNAUDITED)
(UNAUDITED) (NOTE 2)
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 1,904 $ 5,048 $ 3,491
Accounts receivable (net of allowance for doubtful
accounts of $70, at December 31, 1997 and December 31,
1998, respectively)..................................... 142 2,867 2,026
Prepaid expenses and other current assets................. 87 317 560
------- -------- --------
Total current assets................................ 2,133 8,232 6,077
Property and equipment, net................................. 235 1,085 1,261
Intangible assets, net...................................... 377 617 441
------- -------- --------
Total assets........................................ $ 2,745 $ 9,934 $ 7,779
======= ======== ========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' DEFICIT
Current liabilities
Borrowing under line of credit............................ $ -- $ -- $ 1,000
Accounts payable.......................................... 441 1,659 1,455
Accrued compensation...................................... 362 977 1,007
Other accrued expenses.................................... 273 1,177 1,303
Deferred revenue.......................................... 5,668 6,666 5,455
Notes payable to stockholder.............................. 225 -- --
------- -------- --------
Total current liabilities........................... 6,969 10,479 10,220
------- -------- --------
Series A redeemable convertible preferred stock; $1 par
value; Authorized: 4,000,000 shares; Issued: 1,588,688 and
2,952,568 shares at December 31, 1997 and 1998,
respectively and 2,952,568 shares at March 31, 1999
(unaudited); Outstanding: 1,383,156 and 2,747,036 shares
at December 31, 1997 and 1998 actual, respectively and
2,747,036 shares at March 31, 1999 (unaudited); no shares
issued and outstanding at December 31, 1998 pro forma
(unaudited)............................................... 111 10,196 10,196 $ --
------- -------- -------- --------
Commitments and contingencies (Notes 3 and 11)..............
Stockholders' deficit
Common stock, $.01 par value; Authorized: 15,000,000
shares; Issued: 17,121,651 and 18,348,957 at December
31, 1997 and 1998 and 18,468,957 shares at March 31,
1999 (unaudited), respectively; Outstanding: 14,906,586
and 16,133,892 shares at December 31, 1997 and 1998 and
16,253,892 shares at March 31, 1999 actual (unaudited),
respectively; 24,495,000 shares outstanding at March 31,
1999 pro forma (unaudited).............................. 171 183 184 273
Additional paid-in capital................................ 228 4,692 4,959 15,066
Accumulated deficit....................................... (4,104) (11,623) (13,832) (13,832)
Treasury stock (at cost).................................. (630) (630) (630) (630)
Deferred compensation..................................... -- (3,363) (3,318) (3,318)
------- -------- -------- --------
Total stockholders' deficit......................... (4,335) (10,741) (12,637) $ (2,441)
------- -------- -------- ========
Total liabilities, redeemable convertible preferred
stock and stockholders' deficit................... $ 2,745 $ 9,934 $ 7,779
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 69
STUDENT ADVANTAGE, INC.
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------- --------------------------
1996 1997 1998 1998 1999
------- ------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue
Subscription......................................... $ 1,093 $ 2,971 $ 7,174 $ 1,738 $ 1,668
Other................................................ 637 821 10,269 1,658 2,557
------- ------- ------- ------- -------
Total revenue.................................. 1,730 3,792 17,443 3,396 4,225
------- ------- ------- ------- -------
Costs and expenses
Cost of subscription revenue......................... 543 2,628 2,442 302 320
Cost of other revenue................................ 506 309 7,331 1,515 2,503
Product development.................................. 507 1,469 2,588 485 573
Sales and marketing.................................. 356 843 4,717 746 1,366
General and administrative........................... 437 1,485 3,647 508 1,193
Depreciation and amortization........................ 37 239 1,027 160 268
Stock-based compensation............................. -- -- 808 -- 273
------- ------- ------- ------- -------
Total costs and expenses....................... 2,386 6,973 22,560 3,716 6,496
------- ------- ------- ------- -------
Loss from operations................................... (656) (3,181) (5,117) (320) (2,271)
Interest income (expense), net......................... (1) 29 2 15 62
------- ------- ------- ------- -------
Net loss............................................... $ (657) $(3,152) $(5,115) $ (305) $(2,209)
======= ======= ======= ======= =======
Basic and diluted net loss per share................... $ (0.05) $ (0.21) $ (0.32) $ (0.02) $ (0.14)
======= ======= ======= ======= =======
Shares used in computing basic and diluted net loss per
share................................................ 14,184 15,295 15,957 15,424 16,143
======= ======= ======= ======= =======
Unaudited pro forma basic and diluted net loss per
share................................................ $ (0.24) $ (0.09)
======= =======
Shares used in computing unaudited pro forma basic and
diluted net loss per share........................... 21,128 24,384
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 70
STUDENT ADVANTAGE, INC.
STATEMENT OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS'
DEFICIT
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
REDEEMABLE
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
-------------------- ---------------------- PAID-IN ACCUMULATED TREASURY
SHARES AMOUNT SHARES PAR VALUE CAPITAL DEFICIT STOCK
---------- ------- ---------- --------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996................ 1,031,914 $ 41 11,121,162 $111 $ (152) $ (295) $ --
Issuance of preferred and common
stock................................. 340,129 13 3,665,652 37 200
Net loss................................ (657)
---------- ------- ---------- ---- ------ -------- -----
Balance, December 31, 1996.............. 1,372,043 54 14,786,814 148 48 (952) --
Issuance of preferred and common
stock................................. 119,368 19 1,286,452 13 56
Issuance of preferred and common stock
upon cancellation of notes payable.... 27,440 5 295,738 3 16
Issuance of preferred and common stock
in satisfaction of obligation to
stockholder........................... 32,792 9 353,404 3 30
Repurchase of 205,532 shares of
preferred stock and 2,215,065 shares
of common stock....................... (630)
Issuance of preferred and common stock
in connection with the acquisition of
The Main Quad......................... 37,045 24 399,245 4 78
Net loss................................ (3,152)
---------- ------- ---------- ---- ------ -------- -----
Balance, December 31, 1997.............. 1,588,688 111 17,121,653 171 228 (4,104) (630)
Issuance of preferred stock, net of
issuance costs of $84................. 1,250,000 10,000 (84)
Issuance of preferred and common stock
in connection with the acquisition of
The Main Quad......................... 65,858 49 709,768 7 169
Issuance of preferred and common stock
in exchange for note receivable....... 48,022 36 517,536 5 124
Distributions to stockholders........... (2,320)
Deferred compensation relating to grants
of stock options...................... 4,171
Compensation relating to grants of stock
options...............................
Net loss................................ (5,115)
---------- ------- ---------- ---- ------ -------- -----
Balance, December 31, 1998.............. 2,952,568 10,196 18,348,957 183 4,692 (11,623) (630)
Exercise of employee stock options
(unaudited)........................... 120,000 1 39
Deferred compensation relating to grants
of stock options (unaudited).......... 228
Compensation relating to grants of stock
options (unaudited)...................
Net loss (unaudited).................... (2,209)
---------- ------- ---------- ---- ------ -------- -----
Balance, March 31, 1999 (unaudited)..... 2,952,568 $10,196 18,468,957 $184 $4,959 $(13,832) $(630)
========== ======= ========== ==== ====== ======== =====
<CAPTION>
TOTAL
DEFERRED STOCKHOLDERS'
COMPENSATION DEFICIT
------------ -------------
<S> <C> <C>
Balance, January 1, 1996................ $ -- $ (336)
Issuance of preferred and common
stock................................. 237
Net loss................................ (657)
-------- --------
Balance, December 31, 1996.............. -- (756)
Issuance of preferred and common
stock................................. 69
Issuance of preferred and common stock
upon cancellation of notes payable.... 19
Issuance of preferred and common stock
in satisfaction of obligation to
stockholder........................... 33
Repurchase of 205,532 shares of
preferred stock and 2,215,065 shares
of common stock....................... (630)
Issuance of preferred and common stock
in connection with the acquisition of
The Main Quad......................... 82
Net loss................................ (3,152)
-------- --------
Balance, December 31, 1997.............. -- (4,335)
Issuance of preferred stock, net of
issuance costs of $84................. (84)
Issuance of preferred and common stock
in connection with the acquisition of
The Main Quad......................... 176
Issuance of preferred and common stock
in exchange for note receivable....... 129
Distributions to stockholders........... (2,320)
Deferred compensation relating to grants
of stock options...................... (4,171) --
Compensation relating to grants of stock
options............................... 808 808
Net loss................................ (5,115)
-------- --------
Balance, December 31, 1998.............. (3,363) (10,741)
Exercise of employee stock options
(unaudited)........................... 40
Deferred compensation relating to grants
of stock options (unaudited).......... (228) --
Compensation relating to grants of stock
options (unaudited)................... 273 273
Net loss (unaudited).................... (2,209)
-------- --------
Balance, March 31, 1999 (unaudited)..... $ (3,318) $(12,637)
======== ========
</TABLE>
See Note 1 for information on stock split.
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 71
STUDENT ADVANTAGE, INC.
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------- --------------------------
1996 1997 1998 1998 1999
----- ------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss............................................... $(657) $(3,152) $(5,115) $ (305) $(2,209)
Adjustments to reconcile net loss to net cash provided
by (used for) operating activities:
Depreciation and amortization........................ 37 239 1,027 164 268
Reserve for bad debts................................ -- 70 -- -- -
Compensation expense relating to issuance of
equity............................................. -- -- 808 -- 273
Changes in assets and liabilities:
Accounts receivable................................ (34) (44) (2,725) (125) 841
Prepaid expenses and other current assets.......... 7 (79) (230) (127) (243)
Accounts payable................................... 266 82 1,218 986 (204)
Accrued compensation............................... -- 273 615 -- 30
Accrued expenses................................... 17 199 704 993 126
Deferred revenue................................... 93 5,392 998 (1,666) (1,211)
----- ------- ------- ------- -------
Net cash provided by (used for) operating
activities....................................... (271) 2,980 (2,700) (80) (2,329)
===== ======= ======= ======= =======
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed assets.............................. (16) (220) (1,037) (120) (284)
Acquisitions of businesses for cash.................... (135) (429) (655) (655) --
Proceeds from sale of fixed assets..................... -- -- -- -- 16
----- ------- ------- ------- -------
Net cash used for investing activities............. (151) (649) (1,692) (775) (268)
===== ======= ======= ======= =======
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of preferred stock, net............. 250 88 9,916 -- --
Proceeds from borrowings under line of credit.......... -- -- -- -- 1,000
Repayment of note from stockholder..................... -- -- 165 -- --
Proceeds from long-term debt........................... -- 39 -- -- --
Proceeds from short-term debt -- related party......... 190 50 1,410 -- --
Repayment of short-term debt -- related party.......... -- -- (1,635) -- --
Repurchase of common and preferred stock............... -- (630) -- -- --
Proceeds from sale of common stock..................... -- -- -- -- 40
Distributions to stockholders.......................... -- -- (2,320) -- --
----- ------- ------- ------- -------
Net cash provided by (used for) financing
activities....................................... 440 (453) 7,536 -- 1,040
----- ------- ------- ------- -------
Net increase (decrease) in cash and cash equivalents..... 18 1,878 3,144 (855) (1,557)
----- ------- ------- ------- -------
Cash and cash equivalents, beginning of year............. 8 26 1,904 1,904 5,048
----- ------- ------- ------- -------
Cash and cash equivalents, end of year................... $ 26 $ 1,904 $ 5,048 $ 1,049 $ 3,491
===== ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND NON-
CASH INVESTING AND FINANCING ACTIVITIES
Cash paid during the year for interest................... $ 1 $ 28 $ 87 $ 2 $ --
===== ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 72
STUDENT ADVANTAGE, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION, NATURE OF BUSINESS AND BASIS OF PRESENTATION
Student Advantage, Inc. (the "Company") provides 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. is the surviving entity of a reorganization of
Student Advantage LLC, a limited liability company. In October 1998, Student
Advantage LLC effected a recapitalization pursuant to which each of the 10,911
outstanding Members' Interests converted into 137 Preferred Members' Interests
and 1,479 Common Members' Interests, (or an aggregate of 1,497,036 Preferred
Members' Interests and 16,133,892 Common Members' Interests). Each Member
received the proportion of Preferred and Common Members' Interests that
corresponded to such Member's proportion of the 10,911 Members' Interests that
existed immediately prior to the recapitalization. Immediately following such
recapitalization, certain Members sold an aggregate of 1,250,000 Preferred
Members' Interests to two investors for aggregate consideration of $10 million.
Immediately following such transaction, the Company was reorganized from an
"LLC" to a "C" corporation, and as part of such reorganization, each Member
received the number of shares of common stock and of preferred stock of the
Company that was equal to the number of common and preferred Members' Interests
that such Member held immediately prior to the reorganization. The assets and
liabilities of the limited liability corporation were transferred to Student
Advantage at historical cost. The recapitalization and reorganization have been
accounted for retroactively in the accompanying financial statements.
Student Advantage operates in one segment and is subject to the risks and
uncertainties common to growing companies, including reliance on certain
customers, growth and commercial acceptance of the Internet, dependence on
principal products and services and third-party technology, activities of
competitors, dependence on key personnel such as Ray Sozzi, Student Advantage's
Chief Executive Officer, and limited operating history.
Student Advantage has also experienced substantial net losses since its
inception and, as of December 31, 1998, had an accumulated deficit of $11.6
million. Such losses and accumulated deficit resulted primarily from significant
costs incurred in the development of the Company's products and services and the
preliminary establishment of the Company's infrastructure. For the foreseeable
future, the Company expects to continue to experience growth in its operating
expenses in order to execute its current business plan. As a result, the
Company's business plan indicates that additional financing would be required to
support its planned expenditures. In the event that an initial public offering
is not completed on a timely basis, the Company would likely seek such funding
through a private financing.
In May 1999, the Company increased the number of authorized shares of
common stock to 50,000,000. On April 5, 1999, the Company declared a 3-for-1
stock split in the form of a stock dividend, which was effective on May 21,
1999. All periods presented have been restated to reflect the stock dividend.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Student Advantage considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Student
Advantage invests its excess cash in money markets and certificates of deposit,
which are subject to minimal credit and market risk. Student Advantage's cash
equivalents are classified as available-for-sale and are recorded at cost which
approximates fair value.
F-7
<PAGE> 73
STUDENT ADVANTAGE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition
The Company derives subscription revenue from membership fees related to
enrolling students in the Student Advantage Membership program. Subscription
income is recognized ratably over the remaining term of the membership
agreements. Other revenue includes advertising, marketing services, and
commerce. The Company derives revenue from advertisements placed in SAM, the
Student Advantage magazine, and on its Web site. Revenue from fees related to
advertisements placed in SAM are recognized when the magazine is shipped to
members. Web site advertising revenue is recognized as the related impressions
are displayed, provided that no significant obligations remain and collection of
the related receivable is probable. Marketing services revenue is derived from
providing tailored marketing services to corporations seeking to market their
products and services to college students. Fees from marketing services are
recognized as the related services are rendered, provided that no significant
obligations remain and collection of the related receivable is probable.
Commerce revenue includes primarily transaction-based fees earned from reselling
products and services on behalf of other businesses. This revenue is recognized
upon the completion of the related contractual obligations. Payments received in
advance of revenue being earned are recorded as deferred revenue.
Fair Value of Financial Instruments
The carrying amounts of Student Advantage's financial instruments, which
include cash equivalents, accrued expenses, notes payable and redeemable
convertible preferred stock, approximate their fair values at December 31, 1997
and 1998.
Concentrations of Credit Risk and Significant Customers
Financial instruments which potentially expose the Company to concentration
of credit risk primarily are comprised of trade accounts receivable. Management
believes its credit policies are prudent and reflect normal industry terms and
business risk. The Company does not anticipate non-performance by the
counterparties and, accordingly, does not require collateral. The Company
maintains reserves for potential credit losses and such losses, in the
aggregate, have not exceeded management's expectations. For the years ended
December 31, 1997 and 1998, one customer accounted for 62% and 68% of total
revenue, respectively. At December 31, 1997, three customers accounted for 62%
of accounts receivable, and at December 31, 1998, one customer accounted for 67%
of accounts receivable.
Product Development
Costs incurred in the product development by Student Advantage are expensed
as incurred.
Property and Equipment
Fixed assets are recorded at cost and depreciated over their estimated
useful lives, generally three to five years, using the straight-line method.
Repair and maintenance costs are expensed as incurred.
Intangible Assets
Intangible assets include the excess of the purchase price over
identifiable net assets acquired in acquisitions. Such assets include goodwill,
customer lists, noncompete agreements, Web sites and other intangible assets,
which are being amortized over the estimated economic lives of such assets
ranging from two to five years. Accumulated amortization was $231,000 and
$871,000 at December 31, 1997 and 1998, respectively.
F-8
<PAGE> 74
STUDENT ADVANTAGE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Accounting for Stock-Based Compensation
Student Advantage accounts for stock-based awards to employees using the
intrinsic value method as prescribed by Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Accordingly, no compensation expense is recorded for options
issued to employees in fixed amounts and with fixed exercise prices at least
equal to the fair market value of Student Advantage's common stock at the date
of grant. Student Advantage has adopted the provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," through disclosure only (Note 8). All
stock-based awards to non-employees are accounted for at their fair value in
accordance with SFAS No. 123.
Income Taxes
Prior to its reorganization as a C Corporation in 1998 (Note 1), Student
Advantage was treated as a Limited Liability Corporation for federal and state
income tax purposes. Accordingly, no provision for corporate income taxes was
recorded during this period and all losses were passed through to Student
Advantage LLC's members. At the time of its reorganization, Student Advantage
adopted the liability method of accounting for income taxes as set forth in SFAS
No. 109, "Accounting for Income Taxes."
Advertising Expense
Student Advantage recognizes advertising expense as incurred. Advertising
expense was approximately $182,000, $158,000 and $371,000 for the years ended
December 31, 1996, 1997 and 1998, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Unaudited Pro Forma Balance Sheet
Upon the closing of Student Advantage's anticipated initial public
offering, all 2,747,036 of the outstanding shares of Series A preferred stock
(Note 6) will automatically convert into 8,241,108 shares of common stock. This
conversion has been reflected in the unaudited pro forma balance sheet as of
March 31, 1999.
Cash Flow Information
During 1997, the Company issued 37,045 shares of Preferred Stock and
399,244 shares of Common Stock in connection with the acquisition of a company.
During 1997, the Company issued 27,440 shares of Preferred Stock and
295,736 shares of Common Stock in exchange for the cancellation of a $24,000
note payable.
During 1997, the Company issued 32,792 shares of Preferred Stock and
353,404 shares of Common Stock in satisfaction of an obligation to a
stockholder.
During 1998, the Company issued 65,858 shares of Preferred Stock and
709,768 shares of Common Stock in connection with a contingent payment relating
to a 1997 acquisition of a company.
F-9
<PAGE> 75
STUDENT ADVANTAGE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
During 1998, the Company issued 48,022 shares of Preferred Stock and
517,538 shares of Common Stock in exchange for a note receivable of $165,000.
Unaudited Interim Financial Data
The interim financial data as of March 31, 1999 and for the three months
ended March 31, 1998 and 1999 have been derived from unaudited financial
statements of the Company. Management believes the Company's unaudited financial
statements have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the financial position and
results of operations for such periods. Results for the three months ended March
31, 1998 and March 31, 1999 have not been audited and are not necessarily
indicative of results to be expected for the full fiscal year.
Net Loss Per Share and Unaudited Pro Forma Net Loss Per Share
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.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income". This statement establishes standards
for the reporting and display of comprehensive income and its components. SFAS
No. 130 was effective for Student Advantage's fiscal year ended December 31,
1998. Adoption of SFAS No. 130 is for presentation purposes only and had no
effect on Student Advantage's financial position or results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" which supersedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise". This statement changes the way
public business enterprises report segment information, including financial and
descriptive information about their selected segment information. Under SFAS No.
131, operating segments are defined as revenue-producing components of the
enterprise which are generally used internally for evaluating segment
performance. SFAS No. 131 is effective for Student Advantage's fiscal year
ending December 31, 1998 and will not affect Student Advantage's financial
position or results of operations.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits". SFAS No. 132 standardizes the
disclosure requirements for pensions and other postretirement benefits and is
effective for Student Advantage's fiscal year ended December 31, 1998. SFAS No.
132 relates to disclosure only and will not affect Student Advantage's financial
position or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The new standard establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999 and is effective
for Student Advantage's fiscal year ending December 31, 1999. Student Advantage
does not expect the adoption of SFAS No. 133 to have a material effect on its
financial position or results of operations.
F-10
<PAGE> 76
STUDENT ADVANTAGE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In March 1998, the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position ("SOP") 98-1, "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 is
effective for financial statements for years beginning after December 15, 1998.
SOP 98-1 provides guidance over accounting for computer software development or
obtained for internal use including the requirement to capitalize specified
costs and amortization of such costs. Student Advantage does not expect the
adoption of this standard to have a material effect on Student Advantage's
financial position or results of operation.
In April 1998, AcSEC issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities". Start-up activities are defined broadly as those one-time
activities related to opening a new facility, introducing a new product or
service, conducting business in a new territory, conducting business with a new
class of customer, commencing some new operation or organizing a new entity.
Under SOP 98-5, the cost of start-up activities should be expensed as incurred.
SOP 98-5 is effective for Student Advantage's fiscal 1999 financial statements
and Student Advantage does not expect its adoption to have a material effect on
its financial position or results of operations.
3. ACQUISITIONS
All acquisitions by Student Advantage, since its inception, have been
accounted for as purchases. Accordingly, the purchase price of each transaction
has been allocated to the assets acquired and liabilities assumed based on the
fair value of such assets and liabilities at the respective acquisition dates.
In March 1996, Student Advantage completed its acquisition of The Passport,
Inc. ("Passport"), a company that operated student discount programs. Student
Advantage paid $100,000 in cash and assumed liabilities of $35,000 in exchange
for the net assets of Passport, which consisted primarily of customer lists,
non-compete agreements and other intangible assets. Accordingly, the operating
results of Passport have been included in Student Advantage's financial
statements since the date of acquisition. Student Advantage is amortizing these
intangible assets on a straight-line basis over a three-year period.
In December 1997, Student Advantage completed its acquisition of The Main
Quad, Inc. ("Main Quad"), a company that owned and operated Web sites focused on
students. Student Advantage paid $272,000 in cash and issued 399,244 shares of
common stock and 37,045 shares of preferred stock with an aggregate estimated
fair value of $106,000 in exchange for the net assets of The Main Quad, which
consisted of certain office equipment as well as Web sites, customer lists,
non-compete agreements and other intangible assets. Student Advantage is
amortizing these tangible and intangible assets on a straight-line basis over a
two-year period. The agreement also provided for the payment of additional
consideration by Student Advantage upon the resolution of certain contingencies.
In 1998, the agreement was amended to eliminate the contingency provisions, and
Student Advantage agreed to issue an additional 709,768 shares of common stock
and 65,858 shares of preferred stock with an aggregate fair value of $225,000
which has been recorded as additional cost of the assets acquired. The operating
results of The Main Quad have been included in Student Advantage's financial
statements since the date of acquisition.
In December 1997, Student Advantage completed its acquisition of Loci, Inc.
("Loci"), a company that owned and operated a Web site focused on students.
Student Advantage paid approximately $100,000 in cash in exchange for the net
assets of Loci, which consisted of the Web site, customer lists, non-compete
agreements and other intangible assets. Accordingly, the operating results of
Loci have been included in Student Advantage's financial statements since the
date of acquisition. Student Advantage is amortizing these intangible assets on
a straight-line basis over a three-year period.
Student Advantage entered into an agreement effective January 1, 1998 for
the purchase of Collegiate Advantage, Inc., a provider of marketing and
promotional services to the college community. The cost of the acquisition
consisted of $601,000 in cash (including transaction costs) and the assumption
of liabilities
F-11
<PAGE> 77
STUDENT ADVANTAGE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
of $275,000. During 1998, the Company paid additional contingent consideration
of $50,000. Student Advantage may be required to pay additional consideration
based on future performance of the former Collegiate Advantage business. The
following unaudited pro forma data summarizes the results of operations for the
year ended December 31, 1997 as if the acquisition of Collegiate Advantage had
been completed on January 1, 1997. The pro forma data gives effect to actual
operating results prior to the acquisition and adjustments to interest income
and amortization of goodwill and other intangible assets. These pro forma
amounts do not purport to be indicative of the results that would have actually
been obtained if the acquisition had occurred on January 1, 1997 or that may be
obtained in the future.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1997
-------------------------
(UNAUDITED, IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C>
Net revenue............................................. $ 8,641
Net loss................................................ (3,560)
Net loss per common share:
Basic and diluted..................................... $ (0.23)
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- MARCH 31,
1997 1998 1999
---- ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Furniture and fixtures.................................. $ 17 $ 50 $ 75
Computer equipment and software......................... 164 673 746
Equipment............................................... 90 196 196
Leasehold improvements.................................. -- 389 555
---- ------ ------
271 1,308 1,572
Less: Accumulated depreciation and amortization......... 36 223 311
---- ------ ------
$235 $1,085 $1,261
==== ====== ======
</TABLE>
Depreciation and amortization expense with respect to property and
equipment for the years ended December 31, 1996, 1997 and 1998 was $3,000,
$20,000 and $187,000, respectively and for the three months ended March 31, 1999
was $88,000.
5. BORROWINGS
At December 31, 1997, the Company had two notes payable from a stockholder
in the aggregate amount of $225,000. These notes were fully repaid in 1998.
During 1998, the Company entered into a $1,250,000 line of credit agreement
with a bank expiring in April of 1999. The agreement is subject to certain
financial covenants as defined in the agreement, and the assets of the Company
collateralize the related obligation. Borrowings under the agreement bear
interest at the bank's rate, which at December 31, 1998 was 9.25%. During 1998,
the Company borrowed $1,250,000 under the agreement. There were no borrowing
outstanding at December 31, 1998. There was $1,000,000 outstanding at March 31,
1999.
In April 1999, this line of credit agreement was replaced with and
superseded by a new line of credit agreement which provides for borrowings of up
to $2.75 million, including a $250,000 equipment line of credit. The terms of
this line of credit agreement require the maintenance of certain minimum
financial ratios and conditions and includes other covenants similar to those in
the initial agreement. A termination
F-12
<PAGE> 78
STUDENT ADVANTAGE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
of the Company's agreements with AT&T would give the bank the right to terminate
the credit agreement. All borrowings under this line of credit agreement bear
interest at LIBOR plus 200 basis points or at the bank's rate (7.75% at March
31, 1999), and expires in June 2000.
6. PREFERRED STOCK
The Series A preferred stockholders have the following rights and
privileges:
Voting Rights
Each holder of the Series A preferred stock is entitled to a number of
votes equal to the number of shares of common stock into which each share of
such stock is convertible. With respect to the election of directors, the Series
A preferred stockholders, voting as a single class, may elect two directors.
Conversion
Each share of Series A preferred stock is convertible, at the option of the
holder, into three shares of common stock, subject to certain anti-dilution
adjustments. Each share of the Series A preferred stock will automatically
convert into three shares of common stock upon the closing of an underwritten
public offering of Student Advantage's common stock at a price to the public of
at least $4.10 per share resulting in aggregate proceeds to Student Advantage of
at least $15 million.
Dividend Rights
The Series A preferred stockholders are not entitled to receive any
dividends unless declared by Student Advantage's Board of Directors. In the
event that dividends are paid on the common stock, the Series A preferred
stockholders are entitled to receive dividends at the same rate and at the same
time as the common stockholders, with each share of Series A preferred stock
being treated as equal to the number of shares of common stock into which each
share of such stock is convertible.
Liquidation Preferences
In the event of any liquidation, dissolution or winding up of Student
Advantage, the Series A preferred stockholders are entitled to receive, in
preference to the holders of the common stock, an amount equal to the greater of
$8.00 per share, subject to certain anti-dilutive adjustments, or such amount as
would have been payable had such shares been converted to common stock just
prior to liquidation. Any assets remaining following the initial distribution to
the preferred stockholders shall be available for distribution ratably among the
common stockholders only.
Redemption
On October 16, 2003, at the request of at least one-third of the holders of
the Series A preferred stock, Student Advantage shall redeem the then
outstanding shares of Series A preferred stock from each holder that requests
redemption. Upon redemption, each holder of the Series A will be entitled to
receive a cash payment equal to $8.00 per share plus any declared but unpaid
dividends.
Undesignated Preferred Stock
On April 5, 1999, Student Advantage's Board of Directors approved, subject
to stockholder approval, 5,000,000 shares of undesignated preferred stock.
Issuances of the undesignated preferred stock may be made at the discretion of
the Board of Directors (without stockholder approval), in one or more series and
with such designations, rights and preferences as determined by the Board. As a
result, the undesignated preferred stock may have dividend, liquidation,
conversion, redemption, voting or other rights which may be more expansive than
the rights of holders of and the common stock.
F-13
<PAGE> 79
STUDENT ADVANTAGE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMON STOCK
Authorized Shares
On April 5, 1999, Student Advantage's Board of Directors approved, subject
to stockholder approval, an increase in the authorized shares of common stock,
$0.01 par value, to 150,000,000.
8. STOCK AWARD PLANS
1998 Stock Incentive Plan
Under the 1998 Incentive Stock Plan, the Board of Directors may award
options and restricted stock or other stock-based awards. Incentive stock
options may not be granted at less than the fair market value of Student
Advantage's common stock at the date of grant, for a term not to exceed ten
years and generally vesting over a four-year period. The exercise price under
each non-qualified stock option shall be specified by the Board of Directors.
Awards made under the 1998 Stock Plan may be made at the discretion of the Board
of Directors with terms to be defined therein.
On April 5, 1999, the Board approved, subject to stockholder approval, an
increase in the 1998 Stock Plan providing for the issuance of up to an aggregate
7,500,000 shares of Student Advantage common stock to eligible employees,
officers, directors, consultants and advisors of Student Advantage.
Prior to 1998, there was no compensation expense recognized for stock
option grants made by Student Advantage under APB Opinion No. 25. For the year
ended December 31, 1998, compensation expense recognized for stock option grants
totaled $808,000. Had compensation cost for Student Advantage's option grants
been determined based on the fair value at the date of grant consistent with the
method prescribed by SFAS No. 123, Student Advantage's net loss and net loss per
share would have increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
---------------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C>
Net loss:
As reported...................................... $(5,115)
Pro forma........................................ (5,139)
Basic and diluted net loss per share...............
As reported...................................... (0.32)
Pro forma........................................ (0.32)
</TABLE>
Because the determination of the fair value of all options granted after
Student Advantage becomes a public entity will include an expected volatility
factor, because additional option grants are expected to be made subsequent to
December 31, 1998, and because most options vest over several years, the pro
forma effects of applying the fair value method may be material to the results
of operations in future years.
Under SFAS No. 123, the fair value of each employee option grant is
estimated on the date of grant using the Black-Scholes option pricing model to
apply the minimum value method with the following weighted-average assumptions
used for grants made during the year ended December 31, 1998: no dividend yield;
risk free interest rates of 4.54%; no volatility; and an expected option term of
4 years.
F-14
<PAGE> 80
STUDENT ADVANTAGE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Stock option activity during the year ended December 31, 1998 was as
follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
----------------------
WEIGHTED-
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
--------- ---------
<S> <C> <C>
Outstanding -- January 1, 1998
Granted (weighted average fair value of $1.86)....... 2,313,000 $0.33
Exercised............................................ --
Canceled............................................. --
--------- -----
Outstanding -- December 31, 1998....................... 2,313,000 $0.33
========= =====
</TABLE>
As of December 31, 1998, 1,887,000 shares were available for grant under
the 1998 Stock Plan.
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
VESTED AND EXERCISABLE
WEIGHTED-AVERAGE ----------------------------
REMAINING WEIGHTED-AVERAGE
EXERCISE NUMBER CONTRACTUAL LIFE NUMBER OF EXERCISE
PRICE OUTSTANDING (IN YEARS) SHARES PRICE
- -------- ----------- ---------------- --------- ----------------
<S> <C> <C> <C> <C>
$0.33 2,313,000 9.31 450,535 $0.33
</TABLE>
1999 Employee Stock Purchase Plan
On April 5, 1999, the Board of Directors authorized, subject to stockholder
approval, the 1999 Employee Stock Purchase Plan (the "Purchase Plan"). The
Purchase Plan provides for the issuance of up to 450,000 shares of Student
Advantage's common stock to eligible employees. Under the Purchase Plan, Student
Advantage is authorized to make one or more offerings during which employees may
purchase shares of common stock through payroll deductions made over the term of
the offering. The per-share purchase price at the end of each offering is equal
to 85% of the closing price of the common stock at the beginning or end of the
offering period (as defined by the Purchase Plan), whichever is lower.
Deferred Compensation
During 1998, Student Advantage granted stock options to purchase 2,313,000
shares of its common stock with an exercise price of $0.33 per share. Student
Advantage recorded compensation expense and deferred compensation relating to
these options totaling $808,000 and $4.2 million, respectively, representing the
differences between the estimated fair market value of the common stock on the
date of grant and the exercise price. Compensation relating to options which
vested immediately upon grant was expensed in full at the date of grant, while
compensation related to options which vest over time was recorded as a component
of stockholders' deficit and is being amortized over the vesting periods of the
related options.
F-15
<PAGE> 81
STUDENT ADVANTAGE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES
Deferred tax assets are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------
<S> <C>
Deferred tax assets:
Deferred revenue................................... $ 2,400,000
Net operating loss carryforwards................... 800,000
Non current assets................................. 200,000
Accruals........................................... 300,000
Deferred compensation.............................. 300,000
Other.............................................. 100,000
-----------
Total deferred tax assets.................. 4,100,000
Deferred tax asset valuation allowance............... (4,100,000)
-----------
$ --
===========
</TABLE>
The Company has provided a full valuation allowance for the deferred tax
assets since it is more likely than not that these future benefits will not be
realized. If the Company achieves future profitability, a significant portion of
these deferred tax assets could be available to offset future income taxes.
At December 31, 1998, the Company has a net operating loss carryforward for
federal and state purposes of approximately $2 million which expires through
2018.
Under the Internal Revenue Code, certain substantial changes in the
Company's ownership could result in an annual limitation on the amount of net
operating loss and tax credit carryforwards which can be utilized in future
years.
10. EMPLOYEE SAVINGS PLAN
During 1998, Student Advantage adopted an employee retirement savings plan
under Section 401(k) of the Internal Revenue Code which covers substantially all
employees. Under the terms of the 401(k) Plan, employees may contribute a
percentage of their salary, up to a maximum of 20%. Student Advantage
contributed $61,000 to the 401(k) Plan on behalf of its employees during 1998.
11. COMMITMENTS AND CONTINGENCIES
Student Advantage leases its operating facility and certain office
equipment under noncancelable operating lease agreements. Rent expense under
these leases for the years ended December 31, 1996, 1997 and 1998, totalled
approximately $44,000, $246,000 and $722,000, respectively.
Future minimum lease payments under noncancelable operating leases at
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
----------
<S> <C>
1999..................................................... $ 799,000
2000..................................................... 708,000
2001..................................................... 496,000
2002..................................................... 437,000
2003..................................................... 437,000
Thereafter............................................... 238,000
----------
Total minimum lease payments............................. $3,115,000
==========
</TABLE>
Legal Proceedings
Student Advantage is from time to time subject to legal proceedings and
claims which arise in the normal course of its business. In the opinion of
management, the amount of ultimate liability with respect to these actions will
not have a material adverse effect on Student Advantage's financial position or
results of operations.
F-16
<PAGE> 82
STUDENT ADVANTAGE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
12. SUBSEQUENT EVENT
On April 1, 1999, Student Advantage completed its 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 will be 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 will be amortized over 3 years. Because the historical results of Campus
Agency and Travel Holding Group are immaterial, pro forma financial information
has not been presented.
On May 7, 1999, Student Advantage entered into an agreement to acquire
University Netcasting, Inc. in a transaction that will be accounted for as a
pooling of interests. 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. In connection with the acquisition, Student Advantage will issue
2,427,603 shares of common stock to the stockholders of University Netcasting.
The agreement provides that 242,760 of the shares of common stock will be held
in escrow to secure the indemnification obligations of the University Netcasting
stockholders for a period ending on the earlier of the date one year after the
closing of the merger and the date of issuance of the first independent audit
report of Student Advantage after the closing of the merger. In addition, all
outstanding options to purchase University Netcasting common stock will be
converted into options to purchase an aggregate of 62,922 shares of Student
Advantage common stock. Student Advantage also agreed to pay expenses, in an
amount not to exceed $825,000, incurred by University Netcasting in connection
with the transaction. Student Advantage agreed to use reasonable best efforts to
register for public sale 1,213,802 shares of common stock that will be issued to
the stockholders of University Netcasting. Student Advantage agreed to register
such shares on the earlier of: (1) the 180th day after the date of this
prospectus, and (2) the date any of Raymond V. Sozzi, Jr., Greylock IX Limited
Partnership, Marc Turtletaub or Princeton Review Publishing, L.L.C. sells
greater than 1% of the then outstanding shares of common stock.
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. will be included in Student Advantage's
results beginning on the acquisition date. Because the historical results of
Mentor Interactive Corp. are immaterial, pro forma financial information has not
been presented.
On June 11, 1999, Student Advantage 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 will not
be restated. In connection with the acquisition, Student Advantage issued
195,000 shares of common stock to the stockholders of Transaction Service
Providers.
F-17
<PAGE> 83
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Student Advantage, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of changes in stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of Collegiate
Advantage, Inc. at December 31, 1997, and the results of its operations and its
cash flows for the year then ended, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 5, 1999
F-18
<PAGE> 84
COLLEGIATE ADVANTAGE, INC.
BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS
Current assets
Cash...................................................... $ 304,665
Accounts receivable (net of allowance for doubtful
accounts of $20,000)................................... 851,195
Costs in excess of billings............................... 65,337
Prepaid expenses and other current assets................. 25,442
----------
Total current assets.............................. 1,246,639
Fixed assets, net........................................... 275,630
Deposits.................................................... 15,194
----------
Total assets...................................... $1,537,463
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accrued payroll........................................... $ 131,099
Accounts payable.......................................... 265,470
Deferred revenue.......................................... 371,092
----------
Total current liabilities......................... 767,661
----------
Commitments (Note 4)
Stockholders' equity
Capital stock, no par value; 15,000 shares authorized; 100
shares issued and outstanding at December 31, 1997..... 2,000
Retained earnings......................................... 767,802
----------
Total stockholders' equity........................ 769,802
----------
Total liabilities and stockholders' equity........ $1,537,463
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE> 85
COLLEGIATE ADVANTAGE, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Revenue..................................................... $4,849,270
Cost of revenue............................................. 3,812,075
----------
Gross profit.............................................. 1,037,195
General and administrative expenses......................... 1,207,580
----------
Loss from operations...................................... (170,385)
----------
Interest and other income:
Interest income........................................... 10,209
Other income.............................................. 17,611
----------
27,820
----------
Net loss.................................................... $ (142,565)
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE> 86
COLLEGIATE ADVANTAGE, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK
------------------
CARRYING RETAINED
SHARES VALUE EARNINGS TOTAL
------ -------- ---------- ----------
<S> <C> <C> <C> <C>
Balance at December 31, 1996..................... 100 $2,000 $1,041,517 $1,043,517
Net loss......................................... (142,565) (142,565)
Dividends paid................................... (131,150) (131,150)
--- ------ ---------- ----------
Balance at December 31, 1997..................... 100 $2,000 $ 767,802 $ 769,802
=== ====== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE> 87
COLLEGIATE ADVANTAGE, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................. $(142,565)
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 110,691
Changes in operating assets and liabilities
Accounts receivable.................................. (132,065)
Costs in excess of billings.......................... 37,531
Prepaid expenses and other current assets............ 12,353
Accrued payroll...................................... 131,099
Accounts payable..................................... 15,039
Deferred revenue..................................... 353,092
---------
Net cash provided by operating activities......... 385,175
---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed assets................................. (88,516)
---------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid............................................ (131,150)
---------
Net increase in cash........................................ 165,509
Cash, beginning of year..................................... 139,156
---------
Cash, end of year........................................... $ 304,665
=========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest.................... $ 338
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE> 88
COLLEGIATE ADVANTAGE, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION, NATURE OF BUSINESS AND BASIS OF PRESENTATION
Collegiate Advantage, Inc. operates in one business segment and is engaged
primarily in providing promotional, marketing and advertising services on
college campuses throughout the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Cash
All highly liquid investments with an original maturity of three months or
less are considered to be cash equivalents. The Company maintains its cash in
bank deposit accounts which at times, may exceed federally insured limits. The
Company does not believe that it is exposed to significant credit risk
concerning cash and cash equivalents.
Accounts Receivable, Concentration of Credit Risk and Significant Customers
Financial statements which potentially expose the Company to concentrations
of credit risk include accounts receivable. The Company does not require
collateral but closely monitors amounts receivable from customers.
During 1997, the Company earned approximately 61% of its revenue from one
customer. Additionally, the Company had $433,222 of accounts receivable and
$371,092 of deferred revenue related to this customer at December 31, 1997.
Fixed Assets
Fixed assets are recorded at cost and depreciated using the straight-line
method over their estimated useful lives. Maintenance and repairs costs are
expensed as incurred.
Income Taxes
Collegiate Advantage has elected, by consent of its stockholders, to be
taxed under the provisions of Subchapter S of the Internal Revenue Code for
income tax return purposes. Under these provisions, the Company does not pay
Federal income taxes on its taxable income. Instead, the stockholders are liable
for individual Federal income taxes on the Company's taxable income. Thus, the
Company does not incur Federal income tax obligations.
Advertising Expense
Collegiate Advantage recognizes advertising expense as incurred.
Advertising expense was approximately $11,469 for the year ended December 31,
1997.
F-23
<PAGE> 89
COLLEGIATE ADVANTAGE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition
Revenue is recognized as services are performed, provided that all
significant obligations have been fulfilled and collection of the related
receivable is probable. Billings and payments in advance of the recognition of
revenue are recorded as deferred revenue.
3. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES DECEMBER 31,
(IN YEARS) 1997
------------ ------------
<S> <C> <C>
Computers and equipment.............................. 5 $374,381
Furniture and fixtures............................... 5 - 7 37,523
Motor vehicles....................................... 3 107,626
Leasehold improvements............................... 3 23,050
--------
542,580
Less -- accumulated depreciation and amortization.... (266,950)
--------
$275,630
========
</TABLE>
Depreciation and amortization expense totaled $110,691 for the year ended
December 31, 1997.
4. COMMITMENTS
Service Agreement
During 1997, Collegiate Advantage negotiated the redemption of a 50%
stockholder's interest in the Company. The stock was purchased directly from the
50% stockholder by another stockholder of the Company. In connection with this
arrangement, the Company entered into a service consulting agreement with the
former stockholder which expires on December 31, 2000 unless terminated earlier
under the provisions of the agreement. The Company is required to pay $25,000 on
the last day of each calendar quarter commencing on March 31, 1998.
Leases
Collegiate Advantage leases its facilities and certain equipment under
operating leases extending through 1998. In addition to rent, Collegiate
Advantage is responsible for incremental operating costs, including real estate
taxes, on each property. Expenses incurred under these leases during the year
ended December 31, 1997 totaled $193,483.
Future minimum lease payments under operating leases are as follows:
<TABLE>
<S> <C>
1998...................................................... $187,099
1999...................................................... 91,290
--------
$278,389
========
</TABLE>
5. EMPLOYEE BENEFIT PLANS
During 1995, Collegiate Advantage implemented a defined contribution profit
sharing plan covering all eligible employees. Employer contributions are at the
discretion of management. Collegiate Advantage elected not to make any
contributions to the plan in 1997.
F-24
<PAGE> 90
COLLEGIATE ADVANTAGE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In addition, Collegiate Advantage established an employee savings and
profit sharing plan during 1995. Employees may contribute to the employee
savings plan subject to the provisions of Code Section 401(k) of the Internal
Revenue Code. Collegiate Advantage matches employee contributions up to 6.0% of
eligible compensation. Collegiate Advantage contributed $20,031 to this plan in
1997.
6. LINE OF CREDIT
During 1997, the Company entered into a $450,000 line of credit agreement
with a bank. Borrowings under the agreement bear interest at the bank's prime
rate plus 0.5% (9.0% at December 31, 1997). At December 31, 1997, there were no
advances outstanding under this line of credit.
7. RELATED PARTY TRANSACTIONS
During 1997, Collegiate Advantage, Inc. paid $373,883 to Event Staffers,
L.L.C., a related company under common control, for payroll services provided to
Collegiate Advantage and related administrative expenses.
8. SUBSEQUENT EVENT
The Company entered into an agreement effective January 1, 1998 to be
purchased by Student Advantage which paid $601,000 and assumed $275,000 of the
Company's liabilities in connection with the acquisition. Student Advantage may
be required to pay additional consideration based on the future performance of
the Company's former business.
F-25
<PAGE> 91
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Student Advantage, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of changes in stockholders' deficit and of cash flows present
fairly, in all material respects, the financial position of The Main Quad, Inc.
at December 6, 1997, and the results of its operations and its cash flows for
the period from January 1, 1997 through December 6, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 5, 1999
F-26
<PAGE> 92
THE MAIN QUAD, INC.
BALANCE SHEET
DECEMBER 6, 1997
<TABLE>
<S> <C>
ASSETS
Current assets
Accounts receivable....................................... $ 32,743
Prepaid expenses.......................................... 5,800
---------
Total current assets.............................. 38,543
Fixed assets, net........................................... 18,431
---------
Total assets...................................... $ 56,974
=========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable.......................................... $ 45,608
Advance from Student Advantage............................ 25,000
Current portion of capital lease obligations.............. 10,019
Notes payable founders and related parties................ 187,511
---------
Total current liabilities......................... 268,138
Capital lease obligations................................... 1,790
---------
Total liabilities................................. 269,928
---------
Commitments (Note 6)
Stockholders' deficit
Series A Preferred Stock, $0.50 par value; 500,000 shares
authorized; 120,000 shares issued and outstanding at
December 6, 1997....................................... 60,000
Series B Preferred Stock, $0.55 par value; 570,000 shares
authorized; 387,724 shares issued and outstanding at
December 6, 1997....................................... 213,248
Common Stock, $0.01 par value; 5,000,000 shares
authorized; 1,560,000 shares issued and outstanding at
December 6, 1997....................................... 15,600
Stock subscription receivable............................. (13,120)
Accumulated deficit....................................... (488,682)
---------
Total stockholders' deficit....................... (212,954)
---------
Total liabilities and stockholders' deficit....... $ 56,974
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE> 93
THE MAIN QUAD, INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1, 1997 THROUGH DECEMBER 6, 1997
<TABLE>
<S> <C>
Revenue..................................................... $ 96,908
Cost of revenue............................................. 46,118
---------
Gross profit.............................................. 50,790
---------
Operating expenses
Product development....................................... 31,232
Selling and marketing..................................... 22,313
General and administrative................................ 125,531
---------
179,076
---------
Net loss.................................................. $(128,286)
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE> 94
THE MAIN QUAD, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE PERIOD FROM JANUARY 1, 1997 THROUGH DECEMBER 6, 1997
<TABLE>
<CAPTION>
SERIES A SERIES B
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
----------------- ------------------ ------------------- SUBSCRIPTION ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT RECEIVABLE DEFICIT TOTAL
------- ------- ------- -------- --------- ------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1997.................... 120,000 $60,000 1,560,000 $15,600 $(13,120) $(360,396) $(297,916)
Issuance of Series B
Preferred Stock......... 387,724 $213,248 213,248
Net loss.................. (128,286) (128,286)
------- ------- ------- -------- --------- ------- -------- --------- ---------
Balance, December 6,
1997.................... 120,000 $60,000 387,724 $213,248 1,560,000 $15,600 $(13,120) $(488,682) $(212,954)
======= ======= ======= ======== ========= ======= ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE> 95
THE MAIN QUAD, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1997 THROUGH DECEMBER 6, 1997
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................. $(128,286)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization.......................... 28,582
Changes in operating assets and liabilities
Accounts receivable.................................. (24,480)
Prepaid expenses..................................... (2,850)
Other assets......................................... 45,285
Accounts payable..................................... (24,060)
Accrued expenses..................................... (9,736)
Deferred revenue..................................... (550)
---------
Net cash used for operating activities............... (116,095)
---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed assets................................. (1,359)
---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of Series B Preferred Stock........ 213,248
Advance from Student Advantage............................ 25,000
Repayment of notes........................................ (110,234)
Payment of capital leases................................. (10,607)
---------
Net cash provided by financing activities............ 117,407
---------
Net decrease in cash........................................ (47)
Cash, beginning of period................................... 47
---------
Cash, end of period......................................... $ --
=========
Supplemental disclosure of cash flow information
Cash paid for interest.................................... $ 2,275
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE> 96
THE MAIN QUAD, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF THE BUSINESS
The Main Quad, Inc. (the "Company") is organized as a California
corporation. The Company also runs a comprehensive Web site positioned as an
online collection of services and content for students in the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
The Company derives revenue from advertisements placed on its Web site and
from providing other advertising services to corporate sponsors participating in
the network. Sponsor advertising revenue is recognized when all significant
obligations have been fulfilled and collection of the related receivable is
probable. Web site advertising revenue is recognized as the related impressions
are displayed, provided that no significant obligations of the Company remain
and collection of the related receivable is probable.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Concentration of Credit Risk and Significant Customers
Financial instruments which potentially expose the Company to concentration
of credit risk include accounts receivable. The Company does not require
collateral but closely monitors amounts receivable from customers.
Revenue of approximately $27,000 (28%) and $14,500 (15%) was attributable
to two separate customers during the period from January 1, 1997 through
December 6, 1997.
Fixed Assets
Fixed assets are recorded at cost and depreciated using the straight-line
method over their estimated useful lives. Maintenance and repair costs are
expenses as incurred.
3. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE DECEMBER 6,
(YEARS) 1997
----------- -----------
<S> <C> <C>
Computer equipment and software....................... 3 $ 26,646
Furniture and fixtures................................ 5 3,250
Office equipment...................................... 5 35,332
--------
65,228
Less -- accumulated depreciation and amortization..... (46,797)
--------
$ 18,431
========
</TABLE>
F-31
<PAGE> 97
THE MAIN QUAD, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation and amortization expense totaled $28,572 for the period from
January 1, 1997 through December 6, 1997.
4. BORROWINGS
The Company's borrowings consist of the following at December 6, 1997:
<TABLE>
<CAPTION>
DECEMBER 6,
1997
-----------
<S> <C> <C>
Notes payable, founders:
Non-interest bearing promissory notes payable to founders............. $ 21,215
Notes payable, other related parties:
Non-interest bearing promissory notes payable to other related
parties.......................................................... 166,296
--------
$187,511
========
</TABLE>
5. SERIES A AND SERIES B PREFERRED STOCK
The Series A and Series B Preferred Stock have the following
characteristics:
Voting
Except with regard to actions on which the Series A and Series B
Stockholders are entitled to vote as a separate class, the holders of Series A
and Series B Preferred Stock vote together with all other classes and series of
stock on all actions to be taken by the stockholders of the Company.
Dividends
The holders of the outstanding Series A and Series B Preferred Stock shall
be entitled to receive, when and as declared by the Board of Directors,
dividends at the rate of 8% ($0.04) per share per annum, payable in preference
and priority to any payment of any dividend on Common Stock. Such preferential
dividend rights of the Series A and Series B Preferred Stock shall have equal
priority to one another. Such dividends shall not be cumulative, and no right to
such dividends shall accrue to holders of Series A or Series B Preferred Stock
unless declared by the Board of Directors.
Liquidation Preference
In the event of any liquidation, dissolution, or winding-up of the Company,
the holders of Series A and Series B Preferred Stock are entitled to receive,
prior to and in preference to holders of Common Stock, the amount equal to the
original purchase price for their respective series of Preferred Stock on a pro
rata basis with all Preferred Stockholders, plus an amount equal to all declared
but unpaid dividends on the Series A and Series B Preferred Stock.
Conversion
Each share of Series A and Series B Preferred Stock may be converted, at
the option of the holders thereof, at any time after the date of the issuance,
into one share of Common Stock, subject to adjustment in the event of stock
split, combination or recapitalization.
Warrants
In connection with the issuance of Series A and Series B Preferred Stock,
the Company issued warrants to purchase 40,000 shares of Series A Preferred
Stock and 69,093 shares of Series B Preferred
F-32
<PAGE> 98
THE MAIN QUAD, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Stock at their respective par values. These warrants are immediately
exercisable, and will terminate five years from the date of issuance, unless the
Company's initial sale of its Common Stock in a public offering or the
acquisition of the Company occurs prior to that date.
6. COMMON STOCK
Each share of Common Stock entitles the holder to one vote on all matters
submitted to a vote of the Company's stockholders. Common stockholders are
entitled to receive dividends, if any, as may be declared by the Board of
Directors, subject to the preferential dividend rights of the Series A and
Series B Preferred stockholders.
7. COMMITMENTS
The Company leases its office space and certain office equipment under
non-cancelable operating and capital leases. Total rent expense under these
leases was approximately $41,600 for the period from January 1, 1997 through
December 6, 1997.
Future minimum lease commitments at December 6, 1997 are as follows:
<TABLE>
<CAPTION>
CAPITAL
YEAR ENDING DECEMBER 31, LEASES
- ------------------------ -------
<S> <C>
1998..................................................... $11,063
1999..................................................... 1,844
-------
12,907
Less: portion representing interest...................... (1,098)
-------
$11,809
=======
</TABLE>
There are no lease commitments for the period from December 7, 1997 through
December 31, 1997.
8. SUBSEQUENT EVENT
In December of 1997, the Company was purchased by Student Advantage.
Student Advantage paid $272,000 in cash and issued 270 Members' Interests with
an estimated fair value of $106,000 in exchange for the net assets of the
Company, which consisted of certain office equipment as well as customer lists,
non-compete agreements and other intangible assets. In 1998, the agreement was
amended to eliminate the contingency provisions, and Student Advantage agreed to
issue an additional 480 Members' Interests with an aggregate fair value of
$225,000.
F-33
<PAGE> 99
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
University Netcasting, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of stockholders' deficit and redeemable convertible preferred
stock and of cash flows present fairly, in all material respects, the financial
position of University Netcasting, Inc. at March 31, 1998 and 1999, and the
results of its operations and its cash flows for each of the two years in the
period ended March 31, 1999 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred recurring operating losses and is
in an accumulated deficit position; these factors raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ PricewaterhouseCoopers LLP
San Diego, California
April 30, 1999
F-34
<PAGE> 100
UNIVERSITY NETCASTING, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31,
-------------------
1998 1999
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,902 $ 1,092
Accounts receivable, net.................................. 339 342
Other current assets...................................... 86 16
------- --------
Total current assets.............................. 4,327 1,450
Furniture and equipment, net................................ 134 301
Other assets................................................ 11 20
------- --------
Total assets...................................... $ 4,472 $ 1,771
======= ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 272 $ 325
Accrued expenses.......................................... 587 855
Deferred revenue.......................................... 302 398
------- --------
Total current liabilities......................... 1,161 1,578
------- --------
Commitments (Note 7)
Redeemable convertible preferred stock, $0.01 par value:
Series A, 11,923,700 shares designated at March 31, 1998
and 1999; 11,291,734 and 11,588,907 shares issued and
outstanding at March 31, 1998 and 1999; (liquidating
and redemption preference of $11,292 and $11,589 at
March 31, 1998 and 1999)............................... 7,031 8,039
Series B, 9,500,000 shares designated at March 31, 1998
and 1999; 6,761,604 and 9,428,172 shares issued and
outstanding at March 31, 1998 and 1999; (liquidating
and redemption preference of $5,071 and $7,071 at March
31, 1998 and 1999)..................................... 4,804 6,858
Warrant for Series B...................................... 194 194
------- --------
12,029 15,091
------- --------
Stockholders' deficit:
Common stock, $0.01 par value, 24,000,000 shares
authorized; 32,037 shares issued and outstanding at
March 31, 1999......................................... -- 6
Accumulated deficit....................................... (8,718) (14,904)
------- --------
Total stockholders' deficit....................... (8,718) (14,898)
------- --------
Total liabilities and stockholders' deficit....... $ 4,472 $ 1,771
======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE> 101
UNIVERSITY NETCASTING, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------
1998 1999
---- ----
<S> <C> <C>
Revenue..................................................... $ 1,023 $ 1,917
------- -------
Costs and expenses:
Royalties................................................. 384 536
Cost of product sales..................................... 9 --
Product development....................................... 1,784 2,360
Marketing and sales....................................... 1,062 2,596
General and administrative................................ 1,242 1,837
Depreciation.............................................. 112 128
------- -------
4,593 7,457
------- -------
Operating loss.................................... (3,570) (5,540)
Interest income............................................. 26 119
Interest expense............................................ (132) --
------- -------
Net loss.......................................... $(3,676) $(5,421)
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE> 102
UNIVERSITY NETCASTING, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT AND REDEEMABLE CONVERTIBLE PREFERRED STOCK
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
REDEEMABLE PREFERRED STOCK STOCKHOLDERS' DEFICIT
--------------------------------------------------- ---------------------------------------------
SERIES A SERIES B STOCK COMMON STOCK TOTAL
------------------- ------------------ PURCHASE --------------- ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT WARRANTS SHARES AMOUNT DEFICIT DEFICIT
------ ------ ------ ------ -------- ------ ------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT MARCH 31, 1997... 9,607,524 $5,672 -- $ -- $ -- -- $-- $ (4,986) $ (4,986)
Issuance of stock for notes
and interest payable...... 1,094,837 821 --
Issuance of stock for
cash...................... 1,006,745 625 --
Issuance of stock for cash,
net of issuance costs of
$267...................... 5,666,667 3,983 --
Issuance of stock for
services.................. 677,465 678 --
Issuance of warrants........ 194 --
Accretion of discount on
redeemable preferred
stock..................... 56 (56) (56)
Net loss.................... (3,676) (3,676)
---------- ------ --------- ------ ---- ------ --- -------- --------
BALANCE AT MARCH 31, 1998... 11,291,734 7,031 6,761,504 4,804 194 -- -- (8,718) (8,718)
Exercise of stock options... 32,037 6 6
Issuance of stock for
services.................. 297,173 297 --
Issuance of stock for
cash...................... 2,666,668 2,000 --
Accretion of discount on
redeemable preferred
stock..................... 711 54 (765) (765)
Net loss.................... (5,421) (5,421)
---------- ------ --------- ------ ---- ------ --- -------- --------
BALANCE AT MARCH 31, 1999... 11,588,907 $8,039 9,428,172 $6,858 $194 32,037 $ 6 $(14,904) $(14,898)
========== ====== ========= ====== ==== ====== === ======== ========
</TABLE>
The acompanying notes are an integral part of these financial statements.
F-37
<PAGE> 103
UNIVERSITY NETCASTING, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------
1998 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(3,676) $(5,421)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation......................................... 112 128
Amortization of discount on notes payable to
stockholders........................................ 121 --
Interest expense on notes payable to stockholders
exchanged for stock................................. 11 --
Services received for stock.......................... 678 297
Changes in assets and liabilities:
Accounts receivable............................... (310) (3)
Other assets...................................... (49) 61
Accounts payable.................................. 234 53
Accrued expenses.................................. 449 268
Deferred revenue.................................. 302 96
------- -------
Net cash used in operating activities........ (2,128) (4,521)
------- -------
Cash flows from investing activities:
Purchases of furniture and equipment...................... (137) (295)
------- -------
Net cash used in investing activities........ (137) (295)
------- -------
Cash flows from financing activities:
Proceeds from notes payable to stockholders............... 939 --
Payment of notes payable to stockholders.................. (250) --
Proceeds from warrants.................................... 194 --
Proceeds from issuance of stock, net of issuance costs.... 4,608 2,000
Proceeds from stock option exercises...................... -- 6
------- -------
Net cash provided by financing activities.... 5,491 2,006
------- -------
Net increase (decrease) in cash and cash equivalents........ 3,226 (2,810)
Cash and cash equivalents at beginning of year.............. 676 3,902
------- -------
Cash and cash equivalents at end of year.................... $ 3,902 $ 1,092
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid:
Income taxes.............................................. $ 1 $ 1
======= =======
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Issuance of stock for notes and interest payable.......... $ 821 $ --
======= =======
Issuance of stock for services............................ $ 678 $ 297
======= =======
Accretion of discount on mandatorily redeemable preferred
stock.................................................. $ 56 $ 765
======= =======
</TABLE>
The acompanying notes are an integral part of these financial statements.
F-38
<PAGE> 104
UNIVERSITY NETCASTING, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY
University Netcasting, Inc., a Delaware corporation (the Company or
University Netcasting), is an Internet-based sports media company that provides
branded, interactive information and programming to college sports enthusiasts.
The Company's world wide web sites deliver real-time, in-depth sports content
and programming.
The Company, was formed on August 6, 1996 as a wholly-owned subsidiary of
Stella Interactive, Inc. (Stella), a California corporation. On August 27, 1996,
Stella was reincorporated in the state of Delaware pursuant to a short form
merger, whereby it was merged with and into the Company (the Merger). As part of
the Merger, the outstanding common and preferred shares of Stella were converted
into shares of University Netcasting Series A Preferred Stock at a ratio of
4.623 shares of Series A Preferred Stock for each share of Stella common and
Stella preferred stock (the Conversion), resulting in the issuance of 4,383,707
shares of University Netcasting Series A Preferred Stock. Prior to the Merger,
Stella produced, published and distributed CD-ROM college and university sports
information reference products for sale to retail customers.
The Company has incurred recurring operating losses and is in an
accumulated deficit position of $14,904,000 as of March 31, 1999. Management is
currently pursuing additional capital resources. There can be no assurance that
additional financing will be available or if available, that such financing will
be completed on commercially favorable terms.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FINANCIAL STATEMENT PREPARATION
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REVENUE RECOGNITION
REVENUE BY TYPE
Revenue by type for the years ended March 31, 1998 and 1999 are as follows
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------
1998 1999
---- ----
<S> <C> <C>
Advertising................................................. $ 821 $1,418
Barter advertising.......................................... 184 463
Electronic commerce......................................... 7 18
Products.................................................... 8 --
Other....................................................... 3 18
------ ------
$1,023 $1,917
====== ======
</TABLE>
ADVERTISING
Advertising revenue is derived primarily from the sale of advertising on
the Company's web sites. Advertising commitments are generally for periods of
eighteen months or less and typically include guarantees of a minimum number of
"impressions," or times that any advertising is viewed by the users of the
Company's web sites. Advertising revenue is recognized based upon the lesser of:
1) ratable recognition over the period the advertising is displayed, provided
that no significant Company obligations
F-39
<PAGE> 105
UNIVERSITY NETCASTING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
remain and collection of the revenues is probable, or 2) a pro-rata portion of
contract revenue based upon impressions delivered relative to minimum guaranteed
impressions to be delivered. To the extent there is an unexpired term of the
advertising contract or minimum guaranteed impressions are not met, the Company
defers recognition of the corresponding revenues until the contract term expires
or minimum guaranteed impression levels are achieved.
BARTER ADVERTISING
Barter revenue is derived from the sale of advertising on the Company's web
sites in exchange for advertising on another company's web site or another
company's products or services. Barter commitments are for periods of one year
or less and typically include guarantees of a minimum number of impressions.
Barter revenue is recognized at the lower of the estimated fair value of: 1)
advertising, products or services received, or 2) advertising provided. Barter
revenue and the related marketing expense is recognized during the period in
which the advertising is displayed.
ELECTRONIC COMMERCE
Electronic commerce revenue is derived from the sale of products or
services by third parties, the orders for which are generated on the Company's
web sites. This revenue is recognized when products are delivered or services
are provided by the third party if no significant Company obligations remain and
collection of the revenue is probable.
PRODUCTS
Historically, product revenue was derived from the sale of Stella CD-ROMS.
Revenue was recognized upon shipment net of any allowance for rights of returns
and price protection. Products were primarily sold to retailers and
distributors.
COST AND EXPENSES
ROYALTIES
Royalties are paid to organizations, primarily colleges, universities and
athletic associations, for the licensing, the use of organizational information
and indicia (name and logo), and for supplying sports activity content for the
Company to include in the web sites. Licensing agreements generally are for
periods of three years or less. There are no minimum guaranteed royalties;
however, certain licensing agreements require a non-refundable advance payment
of royalties. Royalty expense is recognized as the related advertising revenue
is earned. Amounts paid are based upon a percentage of the advertising revenues
received from the sale of advertising on the Company's web sites where such
organizational information and indicia are displayed.
PRODUCTS
Product costs primarily consist of the cost to produce CD-ROM products and
royalties paid to the content providers for these products. The costs were
expensed as product sales were recognized.
PRODUCT DEVELOPMENT
Product development includes costs incurred in the development of internal
software for deployment of content to the Company's web sites and the actual
development and maintenance of the web page content. Development costs of
internal software used for deployment of content to the Company's web sites has
been charged to expense as incurred.
F-40
<PAGE> 106
UNIVERSITY NETCASTING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
CONCENTRATION OF SALES AND CREDIT RISK
Financial instruments which potentially expose the Company to credit risk
consist principally of cash and cash equivalents and accounts receivable at
March 31, 1998 and 1999. The Company places its cash and temporary cash
investments with high-quality financial institutions or into high credit quality
instruments for which credit loss is not anticipated. The Company limits the
amount of credit exposure in any one institution or type of investment
instrument. The Company performs ongoing credit evaluations of its customers and
maintains allowances for doubtful accounts based on factors surrounding the
credit risk of specific customers, historical trends and other information.
Accounts receivable were concentrated in the financial services and
communications industries at March 31, 1998 and 1999. For the year ended March
31, 1998 and 1999, revenue derived from two advertisers totaled approximately
$711,000 and $515,000. Included in accounts receivable are amounts due from such
advertisers totaling $177,000 and $175,000 at March 31, 1998 and 1999.
CASH EQUIVALENTS
Cash equivalents are stated at cost, which approximates fair value. The
Company considers all highly liquid and temporary cash investments with
maturities of three months or less at the time of acquisition to be cash
equivalents. At March 31, 1998 and 1999, cash equivalents included money market
accounts and certificates of deposit.
OTHER CURRENT ASSETS
Other current assets include non-refundable advance royalty payments made
to colleges, universities and athletic organizations pursuant to licensing
agreements of $64,000 and $0 at March 31, 1998 and 1999, respectively. Advanced
royalty payments are expensed as the related advertising revenues are earned.
FURNITURE AND EQUIPMENT
Furniture and equipment are recorded at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets,
which range from three to five years. Maintenance and repairs are expensed as
incurred. When the property or equipment is retired or otherwise disposed of,
related costs and accumulated depreciation are removed from the accounts and any
resulting gain or loss is included in operations.
LONG-LIVED ASSETS
The Company reviews assets for impairment whenever events or changes in
circumstances indicate the carrying amount of the asset may not be recoverable.
A determination of impairment (if any) is made based on estimates of
undiscounted future cash flows. For years ended March 31, 1998 and 1999 there
have been no asset impairments.
INCOME TAXES
Current income tax expense (benefit) is the amount of income taxes expected
to be payable (receivable) for the current year. A deferred income tax asset or
liability is computed for the expected future impact of differences between the
financial reporting and tax bases of assets and liabilities as well as the
expected future tax benefit to be derived from tax loss and tax credit
carryforwards. Deferred income tax expense (benefit) is generally the net change
during the year in the deferred income tax asset or liability. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount more likely than not to be realized in future tax returns.
F-41
<PAGE> 107
UNIVERSITY NETCASTING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
STOCK-BASED COMPENSATION
The Company has elected to account for stock-based employee compensation
using the intrinsic value method and to disclose in the footnotes the pro-forma
impact on the financial statements as if the Company had accounted for
stock-based employee compensation using the fair value method. All stock based
non-employee compensation has been accounted for using the fair value method.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable, accrued expenses and
redeemable preferred stock. The carrying amount of cash and cash equivalents,
accounts receivable, accounts payable and accrued expenses approximate their
fair values at March 31, 1998 and 1999 because of the short-term maturities of
these financial instruments. Management believes that determining a fair value
for the Company's redeemable convertible preferred stock is impractical due to
the closely-held nature of these instruments.
NOTE 3 -- COMPOSITION OF CERTAIN BALANCE SHEET COMPONENTS (IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31,
-----------
1998 1999
---- ----
<S> <C> <C>
Accounts receivable, net consists of the following:
Accounts receivable....................................... $339 $379
Allowance for doubtful accounts........................... -- (37)
---- ----
$339 $342
==== ====
Furniture and equipment, net consists of the following:
Computer equipment and software........................... $313 $423
Furniture, fixtures and office equipment.................. 66 88
---- ----
379 511
Less accumulated depreciation............................. (245) (210)
---- ----
$134 $301
==== ====
Accrued expenses consist of the following:
Salaries and benefits..................................... $125 $120
Professional fees and services............................ 81 272
Accrued stock issuance costs.............................. 138 --
Accrued royalties and commissions......................... 243 320
Other..................................................... -- 143
---- ----
$587 $855
==== ====
</TABLE>
NOTE 4 -- REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
RESTATEMENT OF CERTIFICATE OF INCORPORATION
On February 23, 1998, the Company restated its certificate of incorporation
to create an additional class of preferred stock entitled Series B Preferred
stock. This restatement also amended the rights of the Series A Preferred Stock
and granted to the holders of Series A and Series B Preferred Stock the right to
redeem such stock after February 25, 2003 and before February 26, 2004. As a
result of this restatement, the Series A Preferred Stock, which did not
previously contain redemption features, has been reclassified in the
accompanying financial statements to a redeemable preferred stock classification
outside of stockholders' equity on a retroactive basis for all periods
presented.
F-42
<PAGE> 108
UNIVERSITY NETCASTING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Since certain issuances of Preferred Stock had been previously issued at a
discount from their redemption values, this discount is being accreted by a
charge to retained earnings (accumulated deficit) using the interest method. The
discount is accreted over the period from the later of: 1) the date of issuance
of the Preferred Stock or 2) the date of the restatement of the certificate of
incorporation, through the earliest date the preferred stock may be redeemed
(February 26, 2003).
REDEEMABLE CONVERTIBLE PREFERRED STOCK
Series A Preferred Stock and Series B Preferred Stock (Preferred Stock) are
redeemable and convertible at the option of the holder. Series A Preferred Stock
is redeemable at $1.00 per share plus declared but unpaid dividends and Series B
Preferred Stock is redeemable at $0.75 per share plus declared but unpaid
dividends, from February 26, 2003 through February 25, 2004. The Company is
accreting the carrying value to the redemption amount using the effective
interest method over the period from original issuance to the earliest
redemption date.
Preferred Stock is convertible at any time into common stock at a
conversion rate determined by dividing the original Preferred Stock issue price
by the conversion price at the time of issuance, subject to adjustment for
conversions, splits and other adjustments as set forth in the certificate of
incorporation. In addition, the Preferred Stock is convertible into common stock
if the Company consummates an initial public offering of its common stock.
Series A and B Preferred Stock have no stated dividend rates. The holders
shall be entitled to dividends as declared by the Company's Board of Directors.
If dividends are declared, holders of Series B Preferred Stock are entitled to
receive dividends at a rate of $0.06 per share annually prior to the declaration
or payment of any dividends to both the holders of Series A Preferred Stock and
common stock. If dividends are declared, holders of Series A Preferred Stock are
entitled to receive dividends at a rate of $0.08 per share annually prior to
declaration or payment of dividends to any holders of common stock. Each share
of Preferred Stock is entitled to the number of votes equal to the number of
common shares into which such shares of Preferred Stock are convertible.
OPTION TO PURCHASE PREFERRED STOCK
The President of the Company has an irrevocable right for six years through
September 2000 to purchase shares from certain stockholders (a combined
aggregate of 462,300 shares of Preferred Stock) at a price of $1.18 per share
(with the price escalating 10% per annum for the first three years of the
agreement, and 14% per annum thereafter).
PREFERRED STOCK ISSUED IN EXCHANGE FOR NOTES AND INTEREST PAYABLE
During the year ended March 31, 1998, the Company received $1,060,000 from
certain of its stockholders in exchange for the issuance of stockholder notes
payable and detachable warrants. The notes were valued at $939,000 and were
convertible into 1,413,333 shares of Series B Preferred Stock at $0.75 per
share. The detachable warrants, which were estimated by management to have a
fair value of $121,000 based upon application of the Black-Scholes option
pricing model, contained rights to purchase 282,667 shares of Series B Preferred
Stock at $0.75 per share. The notes, including accrued interest payable, were
effectively repaid through a cash payment of $250,000 plus the issuance of
1,094,837 shares at $0.75 per share. The $121,000 discount to the notes payable
was fully accreted by a charge to interest expense prior to conversion. The
aforementioned warrants to purchase shares of Series B Preferred Stock remain
outstanding at March 31, 1999, expires in February 2003 and the Company has
reserved 282,667 shares of Series B Preferred Stock to be issued if and when the
warrants are exercised.
F-43
<PAGE> 109
UNIVERSITY NETCASTING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SALE OF PREFERRED STOCK
During the year ended March 31, 1998, the Company issued 5,666,667 shares
of Series B Preferred Stock for aggregate proceeds of $3,983,000, net of
issuance costs totaling $267,000 including the fair value of warrants to
purchase 169,560 shares of Series B Preferred Stock at $.75 per share which were
issued to a service provider in connection with the transaction. The fair value
of such warrants was estimated by management to be $73,000 based upon
application of the Black-Scholes option pricing model. Such warrants remain
outstanding at March 31, 1999, expire in February 2003 and the Company has
reserved 169,560 shares of Series B Preferred Stock to be issued if and when the
warrants are exercised. During the year ended March 31, 1998, the Company also
issued 1,006,745 shares of Series A Preferred Stock for aggregate proceeds of
$625,000.
During the year ended March 31, 1999, the Company issued 2,666,668 shares
of Series B Preferred Stock for aggregate proceeds of $2,000,000.
PREFERRED STOCK ISSUED IN CONNECTION WITH CONSULTING ARRANGEMENTS
During the year ended March 31, 1998 and 1999, an aggregate of 677,465 and
297,173 shares, respectively, of Series A Preferred Stock, valued $1.00 per
share, was earned by certain consultants to the Company in exchange for services
provided by such consultants (Note 8).
NOTE 5 -- STOCK OPTION PLANS
1995 STOCK OPTION PLAN
In 1995, the Board of Directors of Stella adopted the 1995 Stock Option
Plan (the 1995 Plan) authorizing the issuance of incentive and non-qualified
options and Stella common stock (Stock) to select employees and non-employees.
Options granted under the 1995 Plan expire in ten years or less. The vesting
terms were set by the 1995 Plan's administrator, and were generally established
with monthly vesting over periods of four years, including cliff vesting at the
end of the first year of 25%.
After the Merger, each outstanding stock option to acquire Stella common
stock under the 1995 Plan was converted into an option to acquire 4.623 shares
of Series A Preferred Stock. In connection with the Merger, the Company reserved
273,297 shares of Series A Preferred Stock for issuance under the 1995 Plan.
The following is a summary of the activity related to the 1995 Plan (Series
A Preferred shares after conversion) for the years ended March 31:
<TABLE>
<CAPTION>
1998 1999
-------------------- --------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS OUTSTANDING OPTIONS PRICE OPTIONS PRICE
- ------------------- ------- -------- ------- --------
<S> <C> <C> <C> <C>
Beginning of year................................. 244,413 $0.13 221,297 $0.13
Expired and forfeited........................... (23,116) $0.13 (27,131) $0.03
-------- --------
End of year....................................... 221,297 $0.13 194,166 $0.15
======== ========
Exercisable at end of year........................ 159,100 $0.13 180,601 $0.15
======== ========
</TABLE>
F-44
<PAGE> 110
UNIVERSITY NETCASTING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options to acquire
Series A Preferred Stock at March 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- ---------------------------------
NUMBER WEIGHTED- WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
AS OF REMAINING EXERCISE AS OF EXERCISE
MARCH 31, 1999 LIFE (YEARS) PRICE MARCH 31, 1999 PRICE
-------------- ------------ --------- -------------- ---------
<S> <C> <C> <C> <C> <C>
92,460 6.2 $0.11 87,900 $0.11
101,706 6.4 $0.18 92,701 $0.18
------- -------
194,166 6.3 $0.15 180,601 $0.15
======= =======
</TABLE>
1996 STOCK OPTION PLAN
In 1996, the Board of Directors of the Company adopted the 1996 Stock
Option Plan (the 1996 Plan) whereby 655,220 shares of common stock have been
reserved for the issuance of incentive and non-qualified stock to eligible
employees. Options granted under the 1996 Plan expire in ten years or less. The
vesting terms are set by the 1996 Plan's administrator, and are generally
established with monthly vesting over a four-year period and cliff vesting at
the end of the first year of 25%.
The following is a summary of the activity related to the 1996 Plan for the
years ended March 31:
<TABLE>
<CAPTION>
1998 1999
--------------------- ----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS OUTSTANDING OPTIONS PRICE OPTIONS PRICE
- ------------------- ------- -------- ------- --------
<S> <C> <C> <C> <C>
Beginning of year............................. 353,000 $0.20
Granted.................................. 381,000 $0.20 910,000 $0.15
Exercised................................ (32,037) $0.20
Expired and/or forfeited................. (28,000) $0.20 (298,724) $0.18
------- --------
End of year................................... 353,000 $0.20 932,239 $0.16
======= ========
Exercisable at end of year.................... 127,812 $0.20 370,696 $0.17
======= ========
</TABLE>
The following table summarizes information about stock options to acquire
common stock at March 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- ---------------------------------
NUMBER WEIGHTED- WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
AS OF REMAINING EXERCISE AS OF EXERCISE
MARCH 31, 1999 LIFE (YEARS) PRICE MARCH 31, 1999 PRICE
-------------- ------------ --------- -------------- ---------
<S> <C> <C> <C> <C> <C>
745,800 8.6 $0.15 259,569 $0.15
186,439 7.6 $0.20 111,127 $0.20
------- -------
932,239 7.8 $0.16 370,696 $0.17
======= =======
</TABLE>
FAIR VALUE DISCLOSURE
The weighted average fair value of options granted during the year ended
March 31, 1999 was $0.06.
Pro forma information regarding net income is required to be disclosed in
accordance with Financial Accounting Standards Board Statement No. 123
"Accounting for Stock Based Compensation" (SFAS No. 123), and has been
determined as if the Company has accounted for its employee stock options at the
date of grant using the minimal value pricing model with the following weighted
average assumptions for
F-45
<PAGE> 111
UNIVERSITY NETCASTING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
each of the three years ended March 31, 1999: risk free interest rate of 5.5%,
dividend yield of 0%, and weighted average life of the options of 7.1 and 7.9
years for the years ended March 31, 1998 and 1999, respectively.
Had compensation cost for the Company's options issued to employees been
determined based on the fair value at the grant date of the awards consistent
with SFAS No. 123, the Company's pro forma results from operations for the years
ended March 31 would have been as follows (in thousands):
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Net loss
As reported............................................ $(3,676) $(5,421)
Pro forma.............................................. (3,682) (5,435)
</TABLE>
NOTE 6 -- INCOME TAXES
No current benefit for federal or state income taxes has been recorded due
to a net loss being recognized for income tax purposes. Further, no deferred
income tax benefit has been provided as deferred tax assets have been fully
reserved.
The components of deferred income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
------------------
1998 1999
------- -------
<S> <C> <C>
Deferred tax assets:
Start-up costs......................................... $ 257 $ 154
Net operating loss carryforwards....................... 3,028 4,982
Other.................................................. 45 65
------- -------
3,330 5,201
Valuation allowance.................................... (3,330) (5,201)
------- -------
$ -- $ --
======= =======
</TABLE>
At March 31, 1999, the Company has federal and state net operating loss
carryforwards for income tax purposes of approximately $13,182,000 and
$8,576,000, respectively. Federal net operating loss carryforwards will begin to
expire in 2012. State net operating loss carryforwards expire beginning in 2004.
The Internal Revenue Code imposes limitations on the future availability of
net operating loss and tax credit carryforwards, including annual limitations on
the amount of the carryforwards which could be utilized following substantial
changes in a company's ownership.
NOTE 7 -- COMMITMENTS
OPERATING LEASES
The Company leases its office space under an operating leases expiring
January 31, 2001. At March 31, 1999, future minimum lease commitments under
these agreements are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING MINIMUM
MARCH 31, PAYMENTS
- ----------- --------
<S> <C>
2000...................................................... $142
2001...................................................... 121
----
Total minimum lease payments................................ $263
====
</TABLE>
Rent expense was $96,000 and $192,000 for the years ended March 31, 1998
and 1999, respectively.
F-46
<PAGE> 112
UNIVERSITY NETCASTING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- RELATED PARTY TRANSACTIONS
CONSULTING SERVICES PROVIDED BY A CORPORATION
During the year ended March 31, 1997, the Company and another corporation,
which is a stockholder of the Company, entered into services agreements, whereby
the corporation is to provide product development services related to University
Netcasting's internet product and network, as well as general business
consulting services. Product development services were not to exceed $500,000
(this amount was increased to $750,000 during the year ended March 31, 1998)
over a two-year period ending August 26, 1998. All services were provided prior
to the expiration of the agreement and an additional $105,000 of product
development costs were incurred through March 31, 1999. At March 31, 1999
$80,000 was payable for the product development services provided. Business
consulting services are not to exceed $750,000 over a three-year period ending
August 27, 1999 of which $642,000 in services had been provided through March
31, 1999. These business consulting services are earned at a rate of $20,000 per
month in year 1, $21,000 per month in year 2 and $21,500 per month in year 3.
Payment for these services are to be made in shares of Series A Preferred Stock
valued at $1.00 per share. For the years ended March 31, 1998 and 1999, the
Company recognized $554,000 and $255,000, respectively, of expense related to
these agreements.
SERVICES PROVIDED BY INDIVIDUALS
During the year ended March 31, 1997, the Company entered into a service
agreement with two individuals who are stockholders of the Company, whereby
these individuals are to provide services in the area of merchandising, defining
and managing relationships with various sports and apparel manufacturers, and
assisting the Company in retailing efforts over a two-year period ending August
26, 1998, in exchange for 200,000 shares of Series A Preferred Stock valued at
$1.00 per share. For the years ended March 31, 1998 and 1999, the Company
recognized $100,000 and $42,000, respectively, of expense related to this
agreement.
F-47
<PAGE> 113
UNAUDITED PRO FORMA COMBINED
FINANCIAL INFORMATION
The following unaudited pro forma combined information assumes a business
combination between Student Advantage, Inc. ("Student Advantage") and University
Netcasting, Inc., ("University Netcasting") accounted for on a pooling of
interests basis and are based on the respective historical financial statements
and the notes thereto, which are included in this registration statement. The
unaudited pro forma combined balance sheet gives effect to the combination as if
it had occurred on March 31, 1999 and combines Student Advantage's March 31,
1999 unaudited balance sheet with University Netcasting's March 31, 1999 balance
sheet. The unaudited pro forma statements of operations give effect to the
merger as if it had occurred at the beginning of the earliest period presented.
The unaudited pro forma combined statements of operations for the years ended
December 31, 1996, 1997 and 1998 combine Student Advantage's historical results
for each of the three years ended December 31, 1996, 1997 and 1998 with
University Netcasting's historical statement of operations for each of the three
fiscal years ended March 31, 1997, 1998 and 1999, respectively. The unaudited
pro forma combined statements of operations for the three months ended March 31,
1999 combine Student Advantages unaudited historical results for the three
months ended March 31, 1999 with University Netcasting's unaudited historical
statement of operations for the three months ended March 31, 1999. Accordingly,
University Netcasting historical statements of operations for the three months
ended March 31, 1999 have been included in the unaudited pro forma combined
statement of operations for both the fiscal year ended December 31, 1998 and the
three months ended March 31, 1999.
The pro forma information is presented for illustrative purposes only and
is not necessarily indicative of the operating results or financial position
that would have occurred had the merger been consummated at the beginning of the
periods presented, nor is it necessarily indicative of future operating results
or financial position.
These pro forma financial statements are based on, and should be read in
conjunction with, the historical financial statements and the related notes
thereto of Student Advantage and University Netcasting, included in this
registration statement.
F-48
<PAGE> 114
PRO FORMA COMBINED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
STUDENT UNIVERSITY
ADVANTAGE, INC. NETCASTING, INC.
MARCH 31, MARCH 31, PRO FORMA PRO FORMA
1999 1999 ADJUSTMENTS COMBINED
--------------- ---------------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.............................. $ 3,491 $ 1,092 $ -- $ 4,583
Accounts receivable, net............................... 2,026 342 -- 2,368
Prepaid expenses and other current assets.............. 560 16 -- 576
-------- -------- ------ --------
Total current assets............................... 6,077 1,450 -- 7,527
Property and equipment, net............................ 1,261 301 -- 1,562
Intangible assets, (net) and other assets.............. 441 20 -- 461
-------- -------- ------ --------
Total Assets....................................... $ 7,779 $ 1,771 $ -- $ 9,550
======== ======== ====== ========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Borrowings under line of credit........................ $ 1,000 $ -- $ -- $ 1,000
Accounts payable....................................... 1,455 325 -- 1,780
Accrued compensation................................... 1,007 120 -- 1,127
Other accrued expenses................................. 1,303 735 1,000 3,038
Deferred revenue....................................... 5,455 398 -- 5,853
-------- -------- ------ --------
Total current liabilities.......................... 10,220 1,578 1,000 12,798
Student Advantage, Inc. Series A convertible preferred
stock.................................................. 10,196 -- -- 10,196
University Netcasting, Inc. Series A convertible
preferred stock........................................ -- 8,039 (8,039) --
University Netcasting, Inc. Series B convertible
preferred stock........................................ -- 6,858 (6,858) --
University Netcasting, Inc. Warrants, preferred series
B...................................................... -- 194 (194) --
Commitment and contingencies
Stockholders' deficit:
Common stock........................................... 184 6 210 400
Additional paid in capital............................. 4,959 -- 14,881 19,840
Accumulated deficit.................................... (13,832) (14,904) (1,000) (29,736)
Treasury stock (at cost)............................... (630) -- -- (630)
Deferred Compensation.................................. (3,318) -- -- (3,318)
-------- -------- ------ --------
Total stockholders' deficit........................ (12,637) (14,898) 14,091 (13,444)
Total liabilities, redeemable convertible preferred
stock and stockholder's deficit.................. $ 7,779 $ 1,771 $ -- $ 9,550
======== ======== ====== ========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
F-49
<PAGE> 115
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
UNIVERSITY
STUDENT NETCASTING, PRO FORMA
ADVANTAGE, INC. INC. COMBINED
--------------- ----------- ---------
<S> <C> <C> <C>
Revenue
Subscription........................................ $ 1,093 $ -- $ 1,093
Other............................................... 637 108 745
------- ------- -------
Total revenue.................................. 1,730 108 1,838
Costs and Expenses
Cost of subscription revenue........................ 543 -- 543
Cost of other revenue............................... 506 64 570
Product development................................. 507 1,009 1,516
Sales and marketing................................. 356 180 536
General and administrative.......................... 437 771 1,208
Depreciation and amortization....................... 37 70 107
------- ------- -------
Total costs and expenses....................... 2,386 2,094 4,480
Loss from operations.................................. (656) (1,986) (2,642)
------- ------- -------
Interest income (expense), net........................ (1) 5 4
Net loss.............................................. $ (657) $(1,981) $(2,638)
======= ======= =======
Pro forma basic and diluted net loss per share........ $ (0.05) $ (9.92) $ (0.18)
======= ======= =======
Shares used in computing pro forma basic and diluted
net loss per share.................................. 14,184 200 14,384
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
F-50
<PAGE> 116
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
UNIVERSITY
STUDENT NETCASTING, PRO FORMA
ADVANTAGE, INC. INC. COMBINED
--------------- ----------- ---------
<S> <C> <C> <C>
Revenue
Subscription.......................................... $ 2,971 $ -- $ 2,971
Other................................................. 821 1,023 1,844
------- ------- -------
Total revenue................................. 3,792 1,023 4,815
Costs and Expenses
Cost of subscription revenue.......................... 2,628 -- 2,628
Cost of other revenue................................. 309 393 702
Product development................................... 1,469 1,784 3,523
Sales and marketing................................... 843 1,062 1,905
General and administrative............................ 1,485 1,242 2,727
Depreciation and amortization......................... 239 112 351
------- ------- -------
Total costs and expenses...................... 6,973 4,593 11,566
Loss from operations.................................... (3,181) (3,570) (6,751)
Interest income (expense), net.......................... 29 (106) (77)
Net loss................................................ $(3,152) $(3,676) $(6,828)
======= ======= =======
Pro forma basic and diluted net loss per share.......... $ (0.21) $ (8.66) $ (0.43)
======= ======= =======
Shares used in computing pro forma basic and diluted net
loss per share........................................ 15,295 425 15,720
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
F-51
<PAGE> 117
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
UNIVERSITY
STUDENT NETCASTING, PRO FORMA
ADVANTAGE, INC. INC. COMBINED
--------------- ----------- ---------
<S> <C> <C> <C>
Revenue
Subscription....................................... $ 7,174 $ -- $ 7,174
Other.............................................. 10,269 1,917 12,186
------- ------- --------
Total revenue................................. 17,443 1,917 19,360
Costs and Expenses
Cost of subscription revenue....................... 2,442 -- 2,442
Cost of other revenue.............................. 7,331 536 7,867
Product development................................ 2,588 2,360 4,948
Sales and marketing................................ 4,717 2,596 7,313
General and administrative......................... 3,647 1,837 5,484
Depreciation and amortization...................... 1,027 128 1,155
Stock-based compensation........................... 808 -- 808
------- ------- --------
Total costs and expenses...................... 22,560 7,457 30,017
Loss from operations................................. (5,117) (5,540) (10,657)
------- ------- --------
Interest income (expense), net....................... 2 119 121
Net loss............................................. $(5,115) $(5,421) $(10,536)
======= ======= ========
Pro forma basic and diluted net loss per share....... $ (0.32) $ (7.78) $ (0.63)
======= ======= ========
Shares used in computing pro forma basic and diluted
net loss per share................................. 15,957 696 16,653
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
F-52
<PAGE> 118
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
UNIVERSITY
STUDENT NETCASTING, PRO FORMA
ADVANTAGE, INC. INC. COMBINED
--------------- ----------- ---------
<S> <C> <C> <C>
Revenue
Subscription.......................................... $ 1,668 $ -- $ 1,668
Other................................................. 2,557 682 3,239
------- ------- -------
Total revenue.................................... 4,225 682 4,907
------- ------- -------
Costs and Expenses
Cost of subscription revenue.......................... 320 -- 320
Cost of other revenue................................. 2,503 172 2,675
Product development................................... 573 684 1,257
Sales and marketing................................... 1,366 754 2,120
General and administrative............................ 1,193 629 1,822
Depreciation and amortization......................... 268 102 370
Stock-based compensation.............................. 273 -- 273
------- ------- -------
Total costs and expenses......................... 6,496 2,341 8,837
Loss from operations.................................... (2,271) (1,659) (3,930)
Interest income (expense), net.......................... 62 12 74
Net loss................................................ $(2,209) $(1,647) $(3,856)
======= ======= =======
Pro forma basic and diluted net loss per share.......... $ (0.14) $ (2.36) $ (0.23)
======= ======= =======
Shares used in computing pro forma basic and diluted net
loss per share........................................ 16,143 696 16,839
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
F-53
<PAGE> 119
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1) These unaudited pro forma combined financial statements give effect to
the merger as if it had occurred on the dates or at the beginning of the periods
presented (as applicable), reflecting the issuance of .0117 shares of Student
Advantage, Inc. common stock for each share of University Netcasting, Inc.
common stock, and .04135 and .03393 shares of Student Advantage, Inc. common
stock for each share of University Netcasting, Inc. Series A and B preferred
stock, respectively. Additionally at the effective time, all outstanding
warrants to purchase shares of University Netcasting, Inc. Series B preferred
stock will convert into shares of University Netcasting, Inc. Series B preferred
stock, each of which shares will then be exchanged for .03393 shares of Student
Advantage, Inc. common stock. All options to purchase shares of University
Netcasting, Inc. Series A preferred stock and common stock will be exchanged for
options to purchase .04135 and .0117 shares of Student Advantage, Inc. common
stock, respectively. At March 31, 1999, there were warrants to purchase 452,228
shares of University Netcasting, Inc. Series B preferred stock outstanding and
options to purchase 194,166 and 1,106,439 shares of University Netcasting, Inc.
Series A preferred stock and common stock outstanding, respectively.
The unaudited pro forma combined balance sheet gives effect to the
combination as if it had occurred on March 31, 1999 and combines Student
Advantage's March 31, 1999 unaudited balance sheet with University Netcasting's
March 31, 1999 balance sheet. The unaudited pro forma statements of operations
give effect to the merger as if it had occurred at the beginning of the earliest
period presented. The unaudited pro forma combined statements of operations for
the years ended December 31, 1996, 1997 and 1998 combine Student Advantage's
historical results for each of the three years ended December 31, 1996, 1997 and
1998 with University Netcasting's historical statement of operations for each of
the three fiscal years ended March 31, 1997, 1998 and 1999, respectively. The
unaudited pro forma combined statements of operations for the three months ended
March 31, 1999 combine Student Advantages unaudited historical results for the
three months ended March 31, 1999 with University Netcasting's unaudited
historical statement of operations for the three months ended March 31, 1999.
Accordingly, University Netcasting historical statements of operations for the
three months ended March 31, 1999 have been included in the unaudited pro forma
combined statement of operations for both the fiscal year ended December 31,
1998 and the three months ended March 31, 1999.
2) The adjustments to the unaudited pro forma combined balance sheet give
effect to merger-related expenses totaling approximately $1,000,000, such
expenses include investment advisory fees, legal and accounting expenses and
other transaction costs. The unaudited pro forma combined statements of
operations do not reflect these non-recurring charges, which Student Advantage
anticipates will be recorded in the period the merger is consummated.
3) The pro forma combined per share amounts in the unaudited pro forma
combined statements of operations are based upon the aggregate of (1) the
historical weighted average number of shares of common stock and dilutive common
stock equivalents of Student Advantage outstanding during each period presented
and (2) the shares of Student Advantage common stock to be issued in connection
with the merger, based on the equivalent weighted average shares and dilutive
common share equivalents of University Netcasting outstanding during the periods
presented.
4) Certain financial statement balances of University Netcasting have been
reclassified to conform with Student Advantage's financial statement
presentation.
5) There were no material differences between the accounting policies of
Student Advantage and University Netcasting.
F-54
<PAGE> 120
[This Page Intentionally Left Blank]
<PAGE> 121
[This Page Intentionally Left Blank]
<PAGE> 122
The Student Advantage logo is at the top of the page and the heading
"Student Advantage" is centered beneath the logo. Beneath the heading is the
text "A leading resource and advocate for students, creating access for
businesses by working with universities." Centered below the heading is a larger
version of the Student Advantage logo with arrows pointing out of the top, left
and right sides of the logo. The arrow on the left side points to a photo of a
student with the heading "Universities" and the text "Students at over 3,000
colleges and universities are members of the Student Advantage program" below
the photo. The arrow on the top points to a photo of a group of students with
the heading "Students" and the text "A community of over 1,000,000 student
members receive a variety of services and benefits, including ongoing discounts
on products and services" above the photo. The arrow on the right points to a
photo of a store front with the heading "Businesses" and the text "Over 40
national sponsors and 12,000 sponsors in 115 local markets" below it.
<PAGE> 123
================================================================================
[STUDENT ADVANTAGE LOGO]
UNTIL JULY 12, 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS THAT BUY, SELL OR TRADE OUR COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS REQUIREMENT IS
IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
================================================================================
