<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 8-K/A
AMENDMENT NO. 1 TO CURRENT REPORT
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Date of Report (Date of earliest event reported): October 31, 2000
Commission File No. 0-26173
STUDENT ADVANTAGE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 04-3263743
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION
NUMBER)
</TABLE>
---------------
280 SUMMER STREET
BOSTON, MASSACHUSETTS 02210
(Address of Principal Executive Offices) (Zip Code)
(617) 912-2000
(Registrant's telephone number, including area code)
--------------
<PAGE> 2
ITEM 2. Acquisition or Disposition of Assets
On October 31, 2000, Student Advantage, Inc. (the "Company") completed
its acquisition (the "Acquisition") of substantially all of the assets of
CollegeClub.com, Inc., CollegeStudent.com, Inc. and Campus 24, Inc. On November
15, 2000, the Company filed a Current Report on Form 8-K (the "Current Report")
to report the Acquisition. The purpose of this Amendment No. 1 to the Current
Report on Form 8-K is to file the financial statements of the business acquired
and the pro forma financial statements required by Item 7.
The Company hereby amends Item 7 of the Current Report to read in its
entirety as follows:
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of the Business Acquired.
The required financial statements are attached hereto on pages 3
through 31.
(b) Pro Forma Financial Information.
The required pro forma financial information is attached hereto on
pages 30 through 34.
(c) Exhibits.
2.1* Asset Purchase Agreement, dated as of August 21, 2000, by and
among Student Advantage, Inc., CollegeClub.com, Inc.,
CollegeStudent.com, Inc. and Campus 24, Inc.
2.2* Amendment No. 1 to the Asset Purchase Agreement, dated as of
October 19, 2000, by and among Student Advantage, Inc.,
CollegeClub.com, Inc., CollegeStudent.com, Inc. and Campus 24,
Inc.
2.3* Asset Purchase Agreement, dated as of July 28, 2000, by and
among Student Advantage, Inc., ESL Acquisition Co.,
eStudentLoan, LLC, CollegeStudent.com, Inc. and
CollegeClub.com, Inc.
23.1 Consent of PricewaterhouseCoopers LLP.
-----------------------
* Previously filed.
2
<PAGE> 3
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
CollegeClub.com, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' deficit and of cash
flows present fairly, in all material respects, the financial position of
CollegeClub.com, Inc. and its subsidiaries (the "Company") at December 31, 1998
and 1999, and the results of their operations and their cash flows for each of
the two years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, 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 2 to the
financial statements, the Company has filed a petition with the United States
Bankruptcy Court for the Southern District of California under the provisions of
Chapter 11 of the Bankruptcy Code that raises substantial doubt about its
ability to continue as a going concern in its present form. Management's plans
in regard to these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
PricewaterhouseCoopers LLP
San Diego, California
February 11, 2000, except as to Note 17,
which is as of April 18, 2000 and
as to Note 2, which is as of
August 21, 2000
3
<PAGE> 4
Collegeclub.com, Inc.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 409,000 $ 29,740,000
Accounts receivable, net 198,000 1,249,000
Other current assets 18,000 164,000
------------ ------------
Total current assets 625,000 31,153,000
Property and equipment, net 580,000 4,225,000
Advances to employees -- 100,000
Goodwill and other intangible assets, net -- 19,561,000
Other assets 46,000 1,393,000
------------ ------------
Total assets $ 1,251,000 $ 56,432,000
============ ============
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 1,536,000 $ 3,681,000
Accrued interest 16,000 16,000
Accrued wages, benefits and related taxes 167,000 563,000
Accrued liabilities 45,000 858,000
Software license deposit (Note 9) 500,000 --
Current portion of long-term debt 1,561,000 --
Current portion of capital lease obligation 782,000 622,000
Deferred revenue -- 744,000
------------ ------------
Total current liabilities 4,607,000 6,484,000
Accrued interest 74,000 --
Capital lease obligation, net of current portion 160,000 1,348,000
Long-term debt 552,000 5,000
------------ ------------
Total liabilities 5,393,000 7,837,000
------------ ------------
Commitments and contingencies (Note 11 and 17)
Mandatorily redeemable preferred stock
Preferred stock, $.001 par value, authorized 26,213,537 shares:
Series A convertible preferred stock, designated 1,536,537 shares,
1,536,516 shares issued and outstanding at December 31, 1998 and 1999;
liquidation preference of $2,110,000 2,110,000 2,110,000
Series B convertible preferred stock, designated 8,000,000 shares, none and
7,409,566 shares issued and outstanding at December 31, 1998 and
1999, respectively; liquidation preference of $21,120,000 -- 16,478,000
Series B-1 convertible preferred stock, designated 777,000 shares,
none and 761,259 issued and outstanding at December 31, 1998
and 1999, respectively; liquidation preference of $2,604,000 -- 521,000
Series C convertible preferred stock, designated 12,700,000 shares, none and
11,322,897 shares issued and outstanding at December 31, 1998 and
1999, respectively; liquidation preference of $58,766,000 -- 36,590,000
Series C-1 convertible preferred stock, designated 1,700,000 shares, none
and 1,636,977 shares issued and outstanding at December 31, 1998 and
1999, respectively; liquidation preference of $8,496,000 -- 5,664,000
------------ ------------
2,110,000 61,363,000
Stockholders' deficit
Common stock, $.001 par value, authorized 81,700,000 shares, 16,167,757 and
19,972,895 shares issued and outstanding at
December 31, 1998 and 1999, respectively 16,000 20,000
Paid-in capital 4,426,000 31,070,000
Unearned compensation (1,457,000) (8,856,000)
Accumulated deficit (9,237,000) (35,002,000)
------------ ------------
Total stockholders' deficit (6,252,000) (12,768,000)
Total liabilities, mandatorily redeemable preferred stock and
stockholders' deficit $ 1,251,000 $ 56,432,000
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE> 5
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
REVENUES, NET $ 332,000 $ 2,913,000
OPERATING EXPENSES
Production and technology, excluding stock-based compensation 763,000 3,483,000
expense of $98,000 and $231,000, respectively
Selling and marketing, excluding stock-based compensation 930,000 12,503,000
expense of $447,000 and $2,304,000, respectively
General and administrative, excluding stock-based compensation 868,000 7,010,000
expense of $611,000 and $1,616,000, respectively
Depreciation and amortization 344,000 1,498,000
Stock-based compensation 1,156,000 4,151,000
------------ ------------
4,061,000 28,645,000
------------ ------------
Loss from operations (3,729,000) (25,732,000)
------------ ------------
Other income (expense)
Interest income -- 186,000
Interest expense (91,000) (537,000)
Other, net (3,000) 318,000
------------ ------------
Net loss $ (3,823,000) $(25,765,000)
============ ============
Net loss per common share $ (0.24) $ (1.57)
============ ============
Basic and diluted common equivalent shares 16,034,576 16,387,676
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE> 6
Collegeclub.com, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
COMMON STOCK
--------------------- PAID-IN UNEARNED ACCUMULATED
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT TOTAL
---------- ------------ ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 15,565,417 $ 16,000 $ 2,570,000 $ (889,000) $ (5,414,000) $ (3,717,000)
Issuance of common stock for cash on
exercise of stock options 302,307 -- 66,000 66,000
Issuance of common stock for cash 300,033 -- 66,000 66,000
Compensatory stock options (Note 14) 1,585,000 (568,000) 1,017,000
Issuance of warrants 139,000 139,000
Net loss (3,823,000) (3,823,000)
---------- ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1998 16,167,757 16,000 4,426,000 (1,457,000) (9,237,000) (6,252,000)
Conversion of Series C convertible
preferred stock into common stock 277,500 -- 960,000 960,000
Issuance of common stock associated
with the CollegeStudent acquisition
(Note 6) 3,479,724 4,000 12,036,000 12,040,000
Issuance of common stock for cash on
exercise of stock options 29,670 -- 34,000 34,000
Issuance of common stock for
services rendered 18,244 -- 63,000 63,000
Compensatory stock options (Note 14) 11,550,000 (7,399,000) 4,151,000
Issuance of warrants (Notes 9, 10, 13
and 16) 2,001,000 2,001,000
Net loss (25,765,000) (25,765,000)
---------- ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1999 19,972,895 $ 20,000 $ 31,070,000 $ (8,856,000) $(35,002,000) $(12,768,000)
========== ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE> 7
Collegeclub.com, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(3,823,000) $(25,765,000)
Adjustments to reconcile net loss to net cash used
in operating activities
Depreciation and amortization 344,000 1,498,000
Loss on disposition of asset - 1,000
Non-cash compensation, expenses and gains 1,157,000 5,248,000
Increase (decrease) in cash resulting from changes in
Accounts receivable, net (190,000) (873,000)
Other current assets (18,000) (766,000)
Other assets (45,000) (1,259,000)
Accounts payable 882,000 1,404,000
Accrued interest 76,000 225,000
Accrued wages, benefits and related taxes 134,000 211,000
Deferred revenue - 744,000
Software license deposit 500,000 (500,000)
Other accrued liabilities (51,000) 725,000
----------- ------------
Net cash used in operating activities (1,034,000) (19,107,000)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (256,000) (2,209,000)
Issuance of advances to employees - (100,000)
Cash acquired in business acquisition - 376,000
----------- ------------
Net cash used in investing activities (256,000) (1,933,000)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of convertible debt - 17,855,000
Proceeds from issuance of long-term debt 1,622,000 -
Proceeds from issuance of Series A convertible preferred stock 2,000 -
Proceeds from issuance of Series B convertible preferred stock - 6,515,000
Proceeds from issuance of Series B-1 convertible preferred stock - 476,000
Proceeds from issuance of Series C convertible preferred stock - 26,953,000
Proceeds from issuance of common stock 132,000 34,000
Payments on long-term debt - (602,000)
Payments on capital lease obligation (57,000) (860,000)
----------- ------------
Net cash provided by financing activities 1,699,000 50,371,000
----------- ------------
Net increase in cash 409,000 29,331,000
Cash at beginning of year - 409,000
----------- ------------
Cash at end of year $409,000 $29,740,000
=========== ============
NON-CASH INVESTING AND FINANCING ACTIVITIES
Acquisition of fixed assets through capital lease agreements $262,000 $1,882,000
=========== ============
Conversion of subordinated convertible notes and unpaid accrued
interest to Series B convertible preferred stock $8,318,000
============
Purchase of Campus 24, Inc. in exchange for Series B
convertible preferred stock $1,111,000
============
Purchase of CollegeBeat.com, Inc. in exchange for Series B convertible
preferred stock $425,000
============
Issuance of Series B and B-1 convertible preferred stock in
conjunction with in-kind contributions and equipment from strategic
partnership $6,248,000
============
Conversion of subordinated convertible notes to Series C
preferred stock and unpaid accrued interest $10,597,000
============
Conversion of Series C convertible preferred stock to common stock $960,000
============
Purchase of CollegeStudent.com, Inc. in exchange for Series C-1
convertible preferred stock and common stock and forgiveness of debt $18,154,000
============
Issuance of warrants $139,000 $2,001,000
=========== ============
Services rendered in exchange for common stock $63,000
============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest $55,000 $245,000
=========== ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
7
<PAGE> 8
Collegeclub.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
1. ORGANIZATION, NATURE OF BUSINESS AND BASIS OF PRESENTATIONS
CollegeClub.com, Inc., formerly known as Public Online Communication
Corporation (the "Company"), is an integrated communications and media
Internet company that operates an online destination targeting college
students. The Company derives revenues primarily from the sale of
sponsorships, advertising and other promotional services and also
generates fees from various commerce relationships.
2. BANKRUPTCY
On August 21, 2000 (the "Petition Date") CollegeClub.com, Inc. and
certain of its subsidiaries filed a voluntary petition under Chapter 11
of the Bankruptcy Code in the United States Bankruptcy Court for the
Southern District of California (the "Bankruptcy Court"). These related
proceedings are being jointly administered under the caption "In re
CollegeClub.com, Inc.", Case No. 00-8305-A11. The following
subsidiaries were not included in the bankruptcy filings: Versity.com,
Inc. and IZIO Corporation. Simultaneously with the initial filing, a
motion was filed seeking approval for the sale of substantially all the
Company's and certain subsidiaries' assets to Student Advantage, Inc.
("Student Advantage").
Under the Bankruptcy Code, actions to collect pre-petition indebtedness
are stayed and other contractual obligations may not be enforced
against the Company. In addition, the Company may reject executory
contracts and lease obligations. Parties affected by these rejections
may file claims with the Bankruptcy Court.
The accompanying financial statements have been prepared on a going
concern basis, which contemplates continuity of operations, realization
of assets and liquidation of liabilities in the ordinary course of
business. However, as a result of the Chapter 11 filing and
circumstances relating to this event, including the Company's losses
from operations, such realization of assets and liquidation of
liabilities is subject to significant uncertainty. While under the
protection of Chapter 11, the Company may sell or otherwise dispose of
assets, and liquidate or settle liabilities, for amounts other than
those reflected in the financial statements. Further, any plan of
reorganization or liquidation could materially change the amounts
reported in the financial statements, which do not give effect to any
adjustments of the carrying value of assets or liabilities that might
be necessary as a consequence of a plan of reorganization. The
appropriateness of using the going concern basis is dependent upon,
among other things, the Company's decision to reorganize or liquidate,
future profitable operations and the ability to generate sufficient
cash from operations and financing arrangements to meet obligations.
3. REINCORPORATION
Effective September 28, 1999, the Company changed its state of
incorporation from California to Delaware. There was no impact on the
Company's financial condition or results of operations as a result of
the reincorporation.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated.
REVENUE RECOGNITION
Fees generated from sponsorships and other marketing programs are
recognized on a straight-line basis over the life of each contract. 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. Certain advertising
arrangements include guarantees of a minimum number of impressions. For
arrangements with guarantees, revenue is recognized based upon the
lesser of: 1)
8
<PAGE> 9
Collegeclub.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
ratable recognition over the period the advertising is displayed,
provided that no significant Company obligations remain and collection
of the receivable is probable, or 2) a pro-rata portion of contract
revenue based upon impressions delivered relative to minimum guaranteed
impressions to be delivered. Commerce revenue includes
transaction-based fees earned from reselling products and services on
behalf of the Company's business partners, which is recognized upon the
completion of the underlying related contractual obligations.
Web site professional services consist of domain development,
enhancement and maintenance. Web site professional services revenue is
recognized when the related services are performed provided no
significant obligations remain and the collection of the related
receivable is probable.
Income from non-refundable one-time-charge licensed software is
recognized when the program is shipped with a deferral for
post-contract customer support. This deferral is recognized ratably
over the support period. Any payments received in advance of revenue
being earned are recorded as deferred revenue.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. At
December 31, 1999, the Company held $21,206,000 in interest bearing
cash accounts. This amount is included in cash and cash equivalents,
the fair value of which approximates cost.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash
equivalents, accounts receivable, accounts payable, capital lease
obligations and long-term debt. The carrying amounts of these
instruments approximate fair value.
ADVERTISING COSTS
The cost of advertising is expensed as incurred. For the years ended
December 31, 1998 and 1999, the Company incurred advertising expense of
$5,000 and $1,407,000, respectively.
CERTAIN RISKS AND CONCENTRATIONS
The Company has a limited operating history and its prospects are
subject to the risks, expenses and uncertainties frequently encountered
by companies in the new and rapidly evolving markets for Internet
products and services. The risks include failure to develop and extend
the Company's online service brands, the rejection of the Company's
services by Web consumers, vendors and/or advertisers, the inability of
the Company to maintain and increase the levels of traffic on its
online services, as well as other risks and uncertainties. In the event
that the Company does not successfully implement its business plan,
certain assets may not be recoverable.
The Company's financial instruments that are subject to concentrations
of credit risk consist primarily of cash and cash equivalents and trade
receivables.
At times, cash balances held at financial institutions were in excess
of federally insured limits. To date, the Company has experienced no
losses in connection with such deposits.
The Company's customers are concentrated in the United States. The
Company generally does not require collateral. The Company maintains an
allowance for doubtful accounts based upon the expected collectibility
of accounts receivable.
For the year ended December 31, 1999, the Company had sales to one
customer which represented 17% of total net revenues.
As of December 31, 1999, the Company had amounts due from three major
customers, which represented 61% of the net accounts receivable.
EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per common share is calculated by dividing net
income (loss) for the period by the weighted-average number of common
shares outstanding during the period. Diluted earnings per common share
is calculated by dividing net income (loss) for the period by the
weighted-average number of common shares outstanding during the period,
increased by dilutive potential common shares ("dilutive securities")
that were outstanding during the period. Dilutive securities include
the Company's Series A convertible preferred stock, Series B
convertible preferred stock, Series B-1 convertible preferred stock,
Series C convertible preferred stock, Series C-1 convertible preferred
stock, options issued under the Company's 1996 Stock Option Plan and
warrants to purchase stock as may be issued by the Company from time to
time. Dilutive securities are included in the calculation of diluted
earnings per common share using
9
<PAGE> 10
Collegeclub.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
the treasury stock method. During the years ended December 31, 1998 and
1999, all dilutive securities were excluded from the calculation of
diluted loss per share, as their effect would have been antidilutive.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost less accumulated
depreciation. Depreciation of property and equipment is provided over
their estimated useful lives, generally two to three years, using the
straight-line method. Repair and maintenance costs are expensed as
incurred. The Company periodically evaluates the recoverability of its
long-lived assets based on expected undiscounted cash flows and
recognizes impairments, if any, based on expected discounted future
cash flows.
INTANGIBLE ASSETS
Intangible assets consists of goodwill resulting from acquired
businesses, technology and strategic contracts, all of which are being
amortized over the estimated useful lives of two and one-half to three
years using the straight-line method. Amortization expense totaled
$786,000 for the year ended December 31, 1999. Intangible assets are
reviewed for impairment whenever changes in circumstances indicate that
the carrying amount of an asset may not be recoverable.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company 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 value of the Company's
common stock at the date of grant. If the Company issues options to
employees in fixed amounts and with fixed exercise prices at less than
the fair value of the Company's common stock, compensation expense is
recorded for such difference over the period the related options are
earned. The Company has adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation, through disclosure only (Note 14). All
stock-based awards to non-employees are accounted for at their fair
value in accordance with SFAS No. 123.
INCOME TAXES
Current income tax expense or benefit is the amount of income taxes
expected to be payable or refundable 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 basis of
assets and liabilities and for the expected future tax benefit to be
derived from tax credits and loss carryforwards. Deferred tax assets
are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the
deferred tax assets will not be realized.
COMPREHENSIVE INCOME
The Company reports all components of comprehensive income in the
financial statements in the period in which they are recognized. During
the years ended December 31, 1998 and 1999, the Company did not have
any components of comprehensive income other than net loss.
SEGMENT INFORMATION
Management has determined that its operations can be aggregated into
one reportable segment. Additionally, as the Company operates its Web
site within the U.S., no segment disclosures, other than sales to
significant customers, have been included in the accompanying notes to
the consolidated financial statements.
RECLASSIFICATIONS
Certain reclassifications were made to prior year's consolidated
financial statements to conform to the current year presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
10
<PAGE> 11
Collegeclub.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
NEW ACCOUNTING PRONOUNCEMENTS
The SEC issued Staff Accounting Bulletin 101 (SAB 101) in December
1999. SAB 101 provides guidance on the recognition and disclosure of
revenue in financial statements. The Company has assessed that its
current revenue recognition policies are in accordance with SAB 101.
5. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
<TABLE>
<CAPTION>
ACCOUNTS RECEIVABLE
1998 1999
<S> <C> <C>
Accounts receivable $ 198,000 $ 1,404,000
Less allowance for doubtful accounts -- (155,000)
----------- -----------
$ 198,000 $ 1,249,000
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
PROPERTY AND EQUIPMENT
1998 1999
<S> <C> <C>
Computers and software $ 1,138,000 $ 4,890,000
Equipment 200,000 370,000
Furniture and fixtures 83,000 385,000
Leasehold improvements 3,000 131,000
----------- -----------
1,424,000 5,776,000
Less accumulated depreciation (844,000) (1,551,000)
----------- -----------
Property and equipment, net $ 580,000 $ 4,225,000
=========== ===========
</TABLE>
Depreciation expense with respect to property and equipment for the
years ended December 31, 1998 and 1999 was $344,000 and $709,000,
respectively. Included in the table above at December 31, 1998 and 1999
are property and equipment under capital leases of $1,137,000 and
$3,019,000, respectively, with accumulated depreciation of $740,000 and
$1,267,000, respectively.
<TABLE>
<CAPTION>
GOODWILL AND INTANGIBLE ASSETS
1998 1999
<S> <C> <C>
Goodwill $ -- $ 10,861,000
Technology -- 4,743,000
Strategic contracts -- 4,743,000
--------- ------------
-- 20,347,000
Less accumulated amortization -- (786,000)
--------- ------------
$ -- $ 19,561,000
========= ============
</TABLE>
11
<PAGE> 12
Collegeclub.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
ACCRUED LIABILITIES
1998 1999
<S> <C> <C>
Accrued legal settlement (Note 12) $ - $500,000
Other 45,000 358,000
-------- --------
$ 45,000 $858,000
======== ========
</TABLE>
6. ACQUISITIONS
COLLEGEBEAT.COM, INC.
In June 1999, the Company acquired the assets of CollegeBeat.com, Inc.,
which primarily maintained a Web site that offered college students
free e-mail access and other online services. The purchase price was
equal to $250 per active user acquired through February 15, 2000. Based
upon the users acquired, the Company issued a total of 100,087 shares
of Series B convertible preferred stock with an estimated fair value of
$425,000.
The acquisition was accounted for as a purchase. The purchase price was
allocated to identifiable assets of approximately $5,000 based on their
estimated fair value, with the excess of the purchase price over the
fair value of such assets reflected as goodwill of approximately
$420,000, which is being amortized over three years.
CAMPUS 24, INC.
In July 1999, the Company acquired all outstanding shares of common and
preferred stock of Campus 24, Inc. ("Campus 24"), a Delaware
Corporation that commenced operations in February 1999 that primarily
administered a Web site that facilitated person-to-person trading of
personal items in an auction format.
In consideration, the Company issued 389,925 shares of Series B
convertible preferred stock with an estimated fair value of
approximately $1,111,000. The acquisition was accounted for as a
purchase with goodwill being amortized over a period of three years.
The purchase price was allocated to identifiable assets and liabilities
based on their estimated fair values, with the excess of the purchase
price over the fair value of such net assets acquired reflected as
goodwill, as follows:
<TABLE>
<S> <C>
Cash $ 176,000
Other current assets 1,000
Property and equipment 22,000
Other assets 1,000
Goodwill 911,000
----------
$1,111,000
==========
</TABLE>
The unaudited pro forma results of operations below represents the
effect on the Company's results of operations as if the acquisition of
Campus 24 had occurred on January 1, 1999, instead of on the
acquisition date.
<TABLE>
<S> <C>
Net revenue $ 2,915,000
Net loss $(26,165,000)
Net loss per common share $ (1.60)
</TABLE>
CollegeStudent.com, Inc.
In December 1999, the Company acquired all outstanding shares of common
and preferred stock of CollegeStudent.com, Inc. ("CollegeStudent"), a
business that primarily maintains a Web site focused on developing
online campus communities that provide student-oriented material for
the college market targeted to college students.
The Company also assumed all outstanding stock options. In conjunction
with the acquisition all outstanding warrants to purchase common shares
of CollegeStudent were canceled.
12
<PAGE> 13
Collegeclub.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
In consideration, the Company issued 1,636,977 shares of Series C-1
convertible preferred stock with an estimated fair value of
approximately $5,664,000 and 3,479,724 shares of common stock with an
estimated fair value of approximately $12,040,000. The acquisition was
accounted for as a purchase.
The purchase price was allocated to identifiable assets and liabilities
based on their estimated fair values, with the excess of the purchase
price over the fair value of the net liabilities acquired reflected as
intangible assets, as follows:
<TABLE>
<S> <C>
Cash $ 200,000
Other current assets 209,000
Property and equipment 110,000
Other assets 90,000
Technology 4,743,000
Strategic relationships 4,743,000
Goodwill 9,486,000
Liabilities assumed (1,227,000)
------------
Purchase price $ 18,354,000
============
</TABLE>
The unaudited pro forma results of operations below represents the
effect on the Company's results of operations for the years ended
December 31, 1998 and 1999 as if the acquisition of CollegeStudent had
occurred as of January 1, 1998, instead of on the acquisition date.
<TABLE>
<CAPTION>
1998
(UNAUDITED)
<S> <C>
Net revenue $ 599,000
Net loss $(10,972,000)
Net loss per common share $ (0.56)
</TABLE>
<TABLE>
<CAPTION>
1999
(UNAUDITED)
<S> <C>
Net revenue $ 4,047,000
Net loss $(34,154,000)
Net loss per common share $ (1.72)
</TABLE>
7. LETTER OF CREDIT
The Company was extended an irrevocable standby letter of credit of
$1,000,000 by a bank, which acts as an additional security for the
Company's San Diego office lease agreement. The letter of credit is
automatically renewed until the end of the lease term of November 2006.
As a condition, the bank required the Company to invest $1,000,000 in
the form of a 30-day certificate of deposit that will continue to roll
over for the term of the lease.
8. STRATEGIC RELATIONSHIP
During September 1999, the Company entered into an agreement with a
strategic partner and a number of the partner's affiliates. The
agreement called for an equity investment by the partner, whereby the
Company sold to the partner 1,769,922 shares of Series B convertible
preferred stock at a price of $2.85 per share and 761,259 shares of
Series B-1 convertible preferred stock at a price of $3.42 per share in
exchange for $1,400,000 in cash, $130,000 of tangible equipment and a
commitment to deliver certain proprietary advertising content and
promotional items from the partner as well as online promotion
throughout the partner's network of Web sites for a period of three
years. The estimated fair value of the future promotional commitments
of approximately $6,118,000 has been recorded as a reduction of
convertible preferred stock and will be recognized as selling and
marketing expense as the services are delivered.
13
<PAGE> 14
CollegeClub.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 and 1999
9. SOFTWARE AGREEMENT
In November 1998, the Company entered into a software agreement with a
note holder whereby the Company agreed to license an Internet product
suitable for marketing to the agricultural industry and other
prospective customers in a form and format essentially the same as has
been developed for the Company's Web site. In consideration for the
software, the Company received $500,000 in cash and upon delivery, the
note holder forgave $800,000 of previously issued promissory notes. In
conjunction with the sale, the Company issued warrants to purchase
885,129 shares of common stock at $0.22 per share. The estimated fair
value of the warrants of $800,000, determined using the Black Scholes
option pricing model, was recorded as a reduction of revenues under the
agreement for the year ended December 31, 1999.
Under the terms of the agreement, the note holder was entitled to
additional warrants if the Company did not obtain at least $3,000,000
of financing by a specified date. The Company did not obtain the
required financing; however, the number of warrants to be issued had
been in dispute. In January 2000, the parties agreed in principal for
the Company to issue additional warrants to purchase 265,538 shares of
the Company's common stock at $0.22 per share. The estimated fair value
of approximately $918,000 is included in general and administrative
expense in the Company's statement of operations for the year ended
December 31, 1999.
As a result of issuing the additional warrants, the Company issued
4,461, 1,919, 25,966 and 23,089 shares of Series B convertible
preferred stock, Series B-1 convertible preferred stock, Series C
convertible preferred stock and common stock, respectively, to comply
with anti-dilution agreements with certain stockholders. The estimated
fair value of those additional shares, $226,000, in aggregate, will be
included in general and administrative expense in the Company's
statement of operations for the year ending December 31, 2000.
10. LONG TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
10% subordinated convertible notes, principal and
interest due April 30, 1999 $ 34,000 $ -
8% subordinated convertible notes, principal and
interest due December 31, 1999 1,527,000 -
8% subordinated convertible notes, principal and
interest due June 30, 2000 25,000 -
10% notes payable, principal and interest due
December 31, 2005 527,000 -
10% notes payable, principal and interest due
April 12, 2001 - 5,000
--------------- ----------------
2,113,000 5,000
Less current portion (1,561,000) -
--------------- ----------------
Total long-term debt $ 552,000 $ 5,000
--------------- ----------------
</TABLE>
At December 31, 1998, notes payable consisted of borrowings from related
parties. As a result of financing obtained in June 1999, principal and accrued
interest of $527,000 and $91,000, respectively, was paid to the noteholders.
During 1999, the Company issued approximately $6,596,000 in subordinated
convertible notes, which bore interest at a rate equal to 8% per annum. In June
1999, all outstanding subordinated convertible notes were voluntarily converted
into 2,941,689 shares of Series B convertible preferred stock at a rate equal to
one share per $2.85 of principal and interest payable, or approximately
$8,384,000. In conjunction with this conversion, the noteholders were issued
warrants to purchase
14
<PAGE> 15
CollegeClub.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 and 1999
128,638 shares of Series B convertible preferred stock at $2.85 per share, which
expire in June 2004. The estimated fair value of these warrants of $69,000,
determined using the Black Scholes option pricing model, is included in the net
loss for the year ended December 31, 1999. Also during 1999, the Company issued
approximately $10,460,000 in subordinated convertible notes, which bore interest
at a rate equal to 10% per annum. Such subordinated convertible notes were
voluntarily converted into 3,062,825 shares of Series C convertible preferred
stock at a rate equal to one share per $3.46 of principal and interest payable,
or approximately $10,597,000. In conjunction with this conversion, the
noteholders were issued warrants to purchase 151,155 shares of Series C
convertible preferred stock at $3.46 per share, which expire in October 2004.
The estimated fair value of these warrants of $68,000, determined using the
Black Scholes option pricing model, is included in the net loss for the year
ended December 31, 1999.
11. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company currently leases property and equipment under
non-cancelable capital leases and office facilities under operating
leases. Capital leases are collateralized by the underlying equipment.
Future minimum commitments as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASE
<S> <C> <C>
2000 $ 874,000 $ 844,000
2001 766,000 742,000
2002 763,000 667,000
2003 47,000 691,000
2004 - 714,000
Thereafter - 1,435,000
--------------- ---------------
2,450,000 $ 5,093,000
---------------
Less imputed interest (480,000)
---------------
Present value of net minimum lease
payments 1,970,000
Less current portion (622,000)
---------------
Long-term capital lease obligation $ 1,348,000
---------------
</TABLE>
Rent expense under all operating leases for the years ended December 31, 1998
and 1999 was $77,000 and $595,000, respectively.
LEASE SETTLEMENTS
The Company is currently finalizing negotiations with various lessors to settle
amounts due for capital leases, which were in default. As of December 31, 1999,
the principal portion of capital leases in default was $69,000, which is
included in the current portion of leases payable.
JOINT MARKETING AGREEMENT
In June 1999, the Company entered into a joint marketing agreement with a
company that primarily develops and sells student planners. Under the terms of
the agreement, the Company is required to issue up to 71,052 shares of the
Series B convertible preferred stock as consideration for providing marketing
initiatives for the Company's online services in connection with the student
planners and the Company's registered users. These shares will be issued based
on agreed upon performance targets as the student planners are delivered and the
users are registered. The Company will account for this agreement pursuant to
the provisions of EITF No.96-18, Accounting for Equity Instruments That are
Issued to Other Than Employees for
15
<PAGE> 16
CollegeClub.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 and 1999
Acquiring, or in Conjunction with Selling, Goods or Services, and will recognize
the fair value of the shares issued as selling and marketing expense as the
student planners are delivered and the users are registered.
In addition, the Company is required to pay $3.00 for every new user brought in
by additional marketing efforts performed by the said business.
12. LEGAL PROCEEDINGS
In December 1999, the Company settled and subsequently paid $500,000 to
a competitor who filed a complaint against the Company for, among other
things, false advertising and interference with contractual
relationships.
The Company is also, 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 the Company's
financial position, results of operations or cash flows.
13. CONVERTIBLE PREFERRED STOCK AND WARRANTS
STOCK SPLIT
Effective August 1999, the Board of Directors approved a three-for-one
stock split. All share and per share information in the consolidated
financial statements has been adjusted to reflect the stock split on a
retroactive basis.
PREFERRED STOCK
The Series A convertible preferred ("Series A") stockholders, Series B
convertible preferred ("Series B") stockholders, Series B-1 convertible
preferred ("Series B-1") stockholders, Series C convertible preferred
("Series C") stockholders, Series C-1 convertible preferred ("Series
C-1") stockholders and Series C-2 convertible preferred ("Series C-2")
stockholders have the following rights and privileges:
DIVIDENDS
The Series A, Series B, Series B-1, Series C, Series C-1 and Series C-2
stockholders are not entitled to receive any dividends unless declared
by the Company's Board of Directors. In the event that dividends are
declared by the Company's Board of Directors, the Series A, Series B,
Series B-1, Series C, Series C-1 and Series C-2 stockholders are
entitled to receive dividends in cash at the rate per annum of $0.1099,
$0.2280, $0.2736, $0.2768, $0.2768 and $0.2768, respectively.
LIQUIDATION PREFERENCES
In the event of any voluntary or involuntary liquidation, dissolution
or winding up of the Company, including a change in control, the Series
C, Series C-1 and Series C-2 stockholders will receive prior to and in
preference of any payment to the Series A, Series B and Series B-1
stockholders and the holders of common stock, an amount of $5.19 per
share for Series C and for Series C-1 and $5.07 for Series C-2 for one
year after the issuance of the Series C and thereafter, $3.46 per
share, as adjusted to reflect any subsequent stock dividends, stock
splits or recapitalizations, and all declared and unpaid dividends to
the data fixed for distribution. The Series A, Series B and Series B-1
stockholders are entitled to receive, out of the assets of the Company
available for distribution to its shareholders, in preference to the
holders of the common stock, an amount of $1.37, $2.85 and $3.42 per
share of Series A, Series B and Series B-1 stock then outstanding,
respectively, as adjusted to reflect any subsequent stock dividends,
stock splits or recapitalizations, and all declared and unpaid
dividends to the date fixed for distribution. The remaining assets of
the Company following the initial distribution to the preferred
stockholders shall be distributed among the holders of common stock pro
rata based on the number of shares of common stock held by each such
holder.
ANTIDILUTION
The conversion price of each series of preferred stock is subject to
adjustment in the event the Company issues additional shares of our
capital stock for consideration less than the conversion price then in
effect. For the first year following the issuance of the Series C, the
conversion price will be reduced to equal the applicable consideration
paid in any subsequent issuance, to a minimum conversion price of
$2.85. Thereafter, the adjustment will be made according to a
broad-based, weighted average formula. The weighted average formula is
based on outstanding shares of common stock (including outstanding
stock options), Series A, Series B, Series B-1 and Series C on a
fully-diluted basis. No adjustment will be made, however, in connection
with issuances of common stock (i) upon conversion of preferred stock,
(ii) to employees, consultants and directors at not less than fair
market value and otherwise on terms approved by the board of directors,
(iii) as a dividend or distribution on the preferred stock, (iv) in
connection with issuances of capital stock at fair market value as
consideration in
16
<PAGE> 17
CollegeClub.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 and 1999
an acquisition or asset purchase approved by the board of directors,
and (v) in connection with any borrowing from a commercial lending
institution or in connection with the lease of equipment or property
approved by the board of directors.
VOTING
Each holder of the Series A, Series B, Series B-1, Series C and Series
C-2 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. The shares of the Series C-1 are non-voting, except as
required by law.
CONVERSION
Holders of the Series A, Series B, Series B-1, Series C, Series C-1 and
Series C-2 may convert their shares into common stock at any time
following the date of issuance of such share at the then applicable
conversion rate and without payment of further consideration into fully
paid and nonassessable shares of common stock of the Company.
AUTOMATIC CONVERSION
Each share of Series A, Series B, Series B-1, Series C and Series C-1
will convert automatically into common stock upon written consent of
the majority of holders or in the event of a firm commitment initial
public offering of common stock with aggregate gross proceeds of at
least $20,000,000, provided that the per share public offering price
(before any underwriting commissions) is at least 1.75 times the
applicable Series C conversion price. Each share of Series C-2 will
convert automatically into common stock upon written consent of the
majority of holders or in the event of the completion of an initial
public offering with aggregate gross proceeds of at least $20,000,000,
provided that the per share public offering price (before any
underwriting commissions) is at least $6.05.
17
<PAGE> 18
The following summarizes issuances of convertible preferred stock for
the two years in the period ended December 31, 1999:
<TABLE>
<CAPTION>
SERIES A SERIES B
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Balance at December 31, 1997 1,535,060 $2,108,000
Issuance of Series A convertible preferred stock for cash 1,456 2,000
--------- ----------
Balance at December 31, 1998 1,536,516 2,110,000
Issuance of Series B convertible preferred stock for
cash, less direct costs incurred upon issuance of $681,000 2,195,662 $5,579,000
Issuance of Series B convertible preferred stock upon
conversion of subordinated convertible notes and unpaid
accrued interest (Note 10) 2,941,689 8,318,000
Issuance of Series B convertible preferred stock for
services rendered 4,386 13,000
Issuance of Series B convertible preferred stock
associated with Campus 24, Inc. acquisition (Note 6) 389,925 1,111,000
Issuance of Series B convertible preferred stock
associated with CollegeBeat, Inc. acquisition (Note 6) 100,087 425,000
Issuance of Series B convertible preferred stock
associated with joint marketing agreement (Note 11) 7,895 23,000
Issuance of Series B and B-1 convertible preferred stock
associated with strategic partnership agreement (Note 8) 1,769,922 1,009,000
Issuance of Series C convertible preferred stock for
cash, less direct costs incurred upon issuance of $2,587,000
Issuance of Series C convertible preferred stock upon
conversion of subordinated convertible notes and unpaid
accrued interest (Note 10)
Conversion of Series C convertible preferred stock into
common stock
Issuance of Series C-1 convertible preferred stock
associated with CollegeStudent acquisition (Note 6)
--------- ---------- --------- -----------
Balance at December 31, 1999 1,536,516 $2,110,000 7,409,566 $16,478,000
--------- ---------- --------- -----------
</TABLE>
<TABLE>
<CAPTION>
SERIES B-1 SERIES C
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Balance at December 31, 1997
Issuance of Series A convertible preferred stock for cash
Balance at December 31, 1998
Issuance of Series B convertible preferred stock for
cash, less direct costs incurred upon issuance of $681,000
Issuance of Series B convertible preferred stock upon
conversion of subordinated convertible notes and unpaid
accrued interest (Note 10)
Issuance of Series B convertible preferred stock for
services rendered
Issuance of Series B convertible preferred stock
associated with Campus 24, Inc. acquisition (Note 6)
Issuance of Series B convertible preferred stock
associated with CollegeBeat, Inc. acquisition (Note 6)
Issuance of Series B convertible preferred stock
associated with joint marketing agreement (Note 11)
Issuance of Series B and B-1 convertible preferred stock
associated with strategic partnership agreement (Note 8) 761,259 $521,000
Issuance of Series C convertible preferred stock for
cash, less direct costs incurred upon issuance of $2,587,000 8,537,572 $26,953,000
Issuance of Series C convertible preferred stock upon
conversion of subordinated convertible notes and unpaid
accrued interest (Note 10) 3,062,825 10,597,000
Conversion of Series C convertible preferred stock into (277,500) (960,000)
common stock
Issuance of Series C-1 convertible preferred stock
associated with CollegeStudent acquisition (Note 6)
------- -------- ---------- -----------
Balance at December 31, 1999 761,259 $521,000 11,322,897 $36,590,000
------- -------- ---------- -----------
</TABLE>
<TABLE>
<CAPTION>
SERIES C-1
CONVERTIBLE
PREFERRED STOCK
SHARES AMOUNT
<S> <C> <C>
Balance at December 31, 1997
Issuance of Series A convertible preferred stock for cash
Balance at December 31, 1998
Issuance of Series B convertible preferred stock for
cash, less direct costs incurred upon issuance of $681,000
Issuance of Series B convertible preferred stock upon
conversion of subordinated convertible notes and unpaid
accrued interest (Note 10)
Issuance of Series B convertible preferred stock for
services rendered
Issuance of Series B convertible preferred stock
associated with Campus 24, Inc. acquisition (Note 6)
Issuance of Series B convertible preferred stock
associated with CollegeBeat, Inc. acquisition (Note 6)
Issuance of Series B convertible preferred stock
associated with joint marketing agreement (Note 11)
Issuance of Series B and B-1 convertible preferred stock
associated with strategic partnership agreement (Note 8)
Issuance of Series C convertible preferred stock for
cash, less direct costs incurred upon issuance of $2,587,00
Issuance of Series C convertible preferred stock upon
conversion of subordinated convertible notes and unpaid
accrued interest (Note 10)
Conversion of Series C convertible preferred stock into
common stock
Issuance of Series C-1 convertible preferred stock
associated with CollegeStudent acquisition (Note 6) 1,636,977 $5,664,000
--------- ----------
Balance at December 31, 1999 1,636,977 $5,664,000
--------- ----------
</TABLE>
18
<PAGE> 19
WARRANTS
In exchange for services rendered during the year ended December 31,
1999, the Company issued warrants to purchase 268,773 shares of Series
B convertible preferred stock, 313,214 shares of Series C convertible
preferred stock, and 366,000 shares of common stock. In connection with
a lease commitment, the Company issued warrants to purchase 60,000
shares of Series B convertible preferred stock. The warrants are
generally immediately vested, have exercise prices ranging from $0.22
to $3.56 per share and expire between January 2002 and September 2006.
The Company recorded the fair value of these warrants at their fair
values determined using the Black Scholes option pricing model.
14. STOCK OPTION PLAN
The 1996 Stock Option Plan (the "Plan") permits the granting of
incentive and non-statutory stock options to the Company's employees,
consultants, and directors. 12,900,000 shares of common stock are
reserved under the Plan. Any person who is not an employee on the
effective date of grant of an option may be granted only a
non-statutory stock option. Incentive stock options may be granted for
a term not to exceed ten years, and generally vest over a five year
period.
The following table summarizes stock option activity for the years
ended December 31, 1998 and 1999:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
EXERCISE
SHARES PRICE
<S> <C> <C>
Outstanding, December 31, 1997 3,855,621 $0.22
Granted 1,773,588 $0.22
Exercised (302,307) $0.22
Canceled (225,111) $0.22
----------
Outstanding, December 31, 1998 5,101,791 $0.22
Granted 7,418,787 $1.07
Exercised (174,005) $0.58
Canceled (624,503) $0.39
----------
Outstanding, December 31, 1999 11,722,070 $0.74
==========
</TABLE>
19
<PAGE> 20
The following table summarizes information regarding options
outstanding and exercisable at December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE WEIGHTED-
REMAINING AVERAGE
EXERCISE OPTIONS CONTRACTUAL OPTIONS EXERCISE
PRICES OUTSTANDING AGE (YEARS) EXERCISABLE PRICE
<S> <C> <C> <C> <C> <C>
$0.22 6,840,018 8.03 3,618,116 $0.22
$0.34 229,272 9.92 229,272 $0.34
$0.86 419,679 9.54 24,697 $0.86
$1.14 868,483 9.61 292,080 $1.14
$1.43 236,349 9.69 45,000 $1.43
$1.71 1,370,948 9.64 5,400 $1.71
$1.83 150,861 9.70 124,044 $1.83
$1.92 43,605 9.46 32,703 $1.92
$2.00 1,562,855 9.87 8,934 $2.00
----------- ----------
11,722,070 9.50 4,380,246 $0.37
=========== ==========
</TABLE>
During 1998 and 1999, the Company recorded $1,156,000 and $4,151,000,
respectively, in compensation expense for certain options to purchase
shares of common stock granted to employees and non-employees. The
valuation of the options granted to non-employees is estimated using
the Black-Scholes option pricing model.
Unearned compensation has been charged for the value of options granted
to employees on the measurement date based on the intrinsic value
method. These amounts are amortized over the vesting period. The
unamortized portion of unearned compensation is shown as a reduction of
stockholders' equity in the accompanying consolidated balance sheet.
If the Company had elected to recognize compensation expense based upon
the fair value at the grant date for employee awards under this plan,
the Company's pro forma net loss would be changed to $(3,826,000) and
$(26,177,000) for the years ended December 31, 1998 and 1999,
respectively. Basic and diluted net loss per share would not have
changed from the amounts reported for the year ended December 31, 1998.
For the year ended December 31, 1999, the basic and diluted net loss
per share would have changed to $(1.60). The fair value of employee
stock options was estimated at the date of grant using the
Black-Scholes option pricing model with the following assumptions for
the years ended December 31, 1998 and 1999: dividend yield of 0%,
expected volatility of 0%, risk free interest rates of approximately
4.6% to 7.6% and expected lives of three years.
15. INCOME TAXES
Deferred tax assets comprise the following:
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
Net operating loss carryforwards $ 2,202,000 $ 10,227,000
Nonqualified stock options 920,000 1,650,000
Software license deposit 199,000 -
Accruals and other 29,000 395,000
Depreciation 95,000 (47,000)
--------------- -----------------
3,445,000 12,225,000
Less valuation allowance (3,445,000) (12,225,000)
--------------- -----------------
Net deferred tax asset $ - $ -
=============== =================
</TABLE>
Based upon the lack of prior earnings history of the Company and other
available evidence, management has recorded a full valuation allowance
for deferred tax assets as it is more likely than not that such assets
will not be realized.
20
<PAGE> 21
The reconciliation of income tax computed by applying the statutory
federal income tax rate (34%) to loss before income taxes to the
Company's actual income tax provision is as follows:
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
Benefit computed at statutory federal rate $ 1,299,000 $ 8,699,000
State income tax benefits, net of federal effect 202,000 1,261,000
Meals and entertainment disallowed and other (1,000) (162,000)
Nondeductible stock option compensation (105,000) (879,000)
Nondeductible goodwill - (239,000)
Increase in valuation allowance (1,395,000) (8,680,000)
---------------- -----------------
Tax expense $ - $ -
================ =================
</TABLE>
At December 31, 1999, the Company has federal and California net
operating loss carryforwards of approximately $25,807,000 and
$25,802,000, respectively, which expire beginning in 2011 and 2004,
respectively.
Pursuant to Section 382 of the Internal Revenue Code, annual use of the
Company's net operating losses will be limited due to cumulative
changes in ownership. However, management does not expect that the
annual limitation will result in any loss of tax benefits.
16. RELATED PARTY TRANSACTIONS
TRANSACTIONS WITH EMPLOYEES
In June 1999, the Company entered into an agreement with an employee
whereby the employee borrowed $100,000 in exchange for a promissory
note. The principal and interest at a rate equal to 4.98% per annum,
are payable June 2002.
STOCKHOLDER'S SALES
The Company sells Web site advertising through a stockholder of the
Company. During the years ended December 31, 1998 and 1999, gross sales
of $113,000 and $437,000 respectively, were sold to third parties
through the stockholder. The stockholder was paid commissions of
$30,000 and $133,000 respectively, related to these sales.
SETTLEMENT AGREEMENT
During December 1999, the Company received notification from a
stockholder alleging that the Company was in breach of an online
recruiting agreement entered into in 1996. Subsequent to year end as a
result of a settlement agreement, the Company issued the stockholder
warrants to purchase 100,000 shares of common stock at $3.46 per share
in settlement of such dispute. The Company recorded the fair value of
these warrants, determined using the Black-Scholes option pricing
model, during the year ended December 31, 1999.
17. SUBSEQUENT EVENTS
BUILDING SUBLEASE
In January and February 2000, the Company entered into two sublease
agreements, whereby the Company subleased a portion of their facilities
for terms and conditions consistent with the Company's primary lease.
The subleases provide for a base monthly rent and expire in April 2001.
STRATEGIC RELATIONSHIP
In March 2000, the Company entered into an agreement with a strategic
partner and its affiliates. The Company sold 970,874 shares of Series
C-2 convertible preferred stock in exchange for advertising throughout
the partner's television networks. The estimated fair value of the
Series C-2 preferred stock will be recorded to the preferred stock
accounts, with an equal amount related to the future advertising
recorded as a reduction of convertible preferred stock which will be
recognized as selling and marketing expense as the advertising is
delivered.
21
<PAGE> 22
Versity.com, Inc.
In April 2000, the Company acquired for a purchase price of
approximately $33,139,000 all of the outstanding common and preferred
stock of Versity.com, Inc. ("Versity"), a company that primarily
operates an online academic community for college students that
provides free lecture notes, research resources and collaborative study
tools to aggregate a loyal user base. In exchange for all of the
outstanding options, common and preferred stock of Versity, the Company
issued a) 5,819,978 shares of common stock with a fair value of $5.07
per share and b) options with a fair value of $4.63 per share to
purchase 784,422 shares of common stock at an exercise price of $2.00
per share.
RESCISSION OFFER
The Company has determined that certain amounts related to options are
subject to a potential rescission offer. The rescission offer will
include an offer to repurchase shares purchased pursuant to option
exercises at the exercise price, plus interest at an annual rate of 10%
from the date of issuance. To comply with California Securities Law,
the Company will also offer to repurchase all unexercised options
issued to such persons at 20% of the option exercise price multiplied
by the number of shares subject to such options, plus interest at an
annual rate of 10% per year from the date of issuance. Management
estimates that the Company could be required to pay up to approximately
$3,300,000 plus interest pursuant to the rescission offer.
LEGAL PROCEEDINGS
In April 2000, a former consultant filed a complaint against the
Company in California Superior Court for the County of San Diego,
alleging breach of contract and fraud. The plaintiff seeks, among other
things, compensatory and punitive damages, attorney's fees and an
option to purchase 300,000 shares of common stock at an exercise price
of $0.22 per share. Although the Company intends to vigorously defend
its position, there can be no assurance that a favorable outcome will
be obtained or that, if the matter were resolved in favor of the
plaintiff, there would not be a material adverse effect on the Company.
22
<PAGE> 23
CollegeClub.com, Inc.
Debtor-In-Possession
Consolidated Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
September 30,
2000
-------------
ASSETS
<S> <C>
Current assets
Cash and cash equivalents ............................................................. $ 82,000
Accounts receivable, net .............................................................. 449,000
Other current assets .................................................................. 219,000
-------------
Total current assets ................................................................ 750,000
Property and equipment, net ........................................................... 11,593,000
Other Assets .......................................................................... 144,000
-------------
Total assets ......................................................................... $ 12,487,000
=============
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities
Accrued compensation ................................................................... 904,000
Accrued liabilities .................................................................... 408,000
Note payable ........................................................................... 442,000
-------------
Liabilities not subject to compromise ............................................... 1,754,000
Liabilities subject to compromise (Note 3).............................................. 19,594,000
-------------
Total liabilities ................................................................... 21,348,000
Commitments and contingencies (Note 10)
Mandatorily Redeemable Preferred Stock
Preferred stock, $.001 par value, authorized 26,213,537 shares:
Series A convertible preferred stock, designated 1,536,537 shares, 1,536,516 shares
issued and outstanding; liquidation preference of $2,110,000 .......................... 2,110,000
Series B convertible preferred stock, designated 8,000,000 shares, 7,414,027 shares
issued and outstanding; liquidation preference of $21,130,000.......................... 20,526,000
Series B-1 convertible preferred stock, designated 777,000 shares, 763,178 shares
issued and outstanding; liquidation preference of $2,610,000 .......................... 2,610,000
Series C convertible preferred stock, designated 12,700,000 shares, 11,348,863 shares
issued and outstanding; liquidation preference of $58,901,000 ......................... 36,680,000
Series C-1 convertible preferred stock, designated 1,700,000 shares, 1,636,977 shares
issued and outstanding; liquidation preference of $8,496,000 .......................... 5,664,000
Series C-2 convertible preferred stock, designated 1,500,000 shares, 970,874 shares
issued and outstanding liquidation preference of $4,922,300 ........................... --
-------------
67,590,000
Stockholders' deficit
Common stock, $0.001 par value; 81,700,000 authorized shares;
26,174,824 shares issued and outstanding .......................................... 26,000
Additional paid-in capital ........................................................ 61,304,000
Accumulated deficit ............................................................... (131,716,000)
Unearned compensation ............................................................. (6,065,000)
-------------
Total stockholders' deficit ................................................... (76,451,000)
-------------
Total liabilities, mandatorily redeemable preferred stock
and stockholders' deficit ................................................... $ 12,487,000
=============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
23
<PAGE> 24
CollegeClub.com, Inc.
Debtor-In-Possession
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 2000
---- ----
<S> <C> <C>
Revenue ........................................................ $ 800,000 $ 5,394,000
Cost and expenses
Production and technology, excluding stock-based
compensation expense of $150,000 and ($4,000),
respectively ........................................... 1,947,000 7,977,000
Selling and marketing, excluding stock-based compensation
expense of $1,500,000 and ($43,000), respectively ...... 6,846,000 14,810,000
General and administrative, excluding stock-based
compensation expense of $1,051,000 and $195,000,
respectively ........................................... 2,902,000 23,951,000
Depreciation and amortization ............................. 507,000 12,293,000
Impairment of goodwill (Note 8) ........................... -- 33,738,000
Stock-based compensation .................................. 2,701,000 148,000
------------ ------------
Total costs and expenses........................... 14,903,000 92,917,000
------------ ------------
Loss from operations ........................................... (14,103,000) (87,523,000)
------------ ------------
Interest expense, net ..................................... (211,000) (41,000)
Other income, net ......................................... 181,000 --
Loss on sale of assets (Note 6)............................ -- (7,931,000)
------------ ------------
Net loss before reorganization ................................. (14,133,000) (95,495,000)
------------ ------------
Reorganization costs (Note 4) .................................. -- 1,219,000
Net loss ....................................................... ($14,133,000) ($96,714,000)
============ ============
Basic and diluted net loss per share ........................... ($ 0.87) ($ 4.06)
============ ============
Shares used in computing basic and diluted net loss per share .. 16,189,515 23,809,871
============ ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements
24
<PAGE> 25
CollegeClub.com, Inc.
Debtor-In-Possession
Consolidated Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For The Nine Months
Ended September 30,
1999 2000
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($14,133,000) ($96,714,000)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 507,000 12,293,000
Impairment of goodwill -- 33,738,000
Non-cash compensation (net), expenses and gains 2,780,000 226,000
Loss on sale of assets -- 7,931,000
Write-off of advance to employee -- 100,000
Non-cash marketing expense associated with in-kind
contributions -- 6,118,000
Increase (decrease) in cash resulting from changes in:
Accounts receivable, net (474,000) 878,000
Other current assets (99,000) (55,000)
Other assets (13,000) 1,249,000
Accounts payable 746,000 8,254,000
Accrued compensation (150,000) 1,445,000
Accrued liabilities 58,000 54,000
Software license deposit (500,000) --
Deferred revenue 775,000 (418,000)
------------ ------------
Net cash used in operating activities (10,503,000) (24,901,000)
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (1,177,000) (5,556,000)
Cash acquired in business acquisitions 176,000 --
Proceeds from sale of assets -- 1,858,000
Issuance of advances to employees (100,000) --
------------ ------------
Net cash used in investing activities (1,101,000) (3,698,000)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of convertible debt 7,396,000 --
Proceeds from borrowing of short term facility (post-petition) -- 437,000
Proceeds from issuance of Series B convertible preferred stock 6,515,000 --
Proceeds from issuance of Series B-1 convertible preferred stock 476,000 --
Proceeds from issuance of common stock 10,000 320,000
Payments on capital lease obligation (280,000) (1,816,000)
Payments on long-term debt (527,000) --
------------ ------------
Net cash provided by (used in) financing activities 13,590,000 (1,059,000)
------------ ------------
Net increase (decrease) in cash and cash equivalents 1,986,000 (29,658,000)
Cash and cash equivalents, beginning of year 409,000 29,740,000
------------ ------------
Cash and cash equivalents, end of period $ 2,395,000 $ 82,000
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
25
<PAGE> 26
CollegeClub.com, Inc.
Debtor-In-Possession
Consolidated Statements of Cash Flows (Continued)
(Unaudited)
<TABLE>
<CAPTION>
For The Nine Months
Ended September 30,
1999 2000
------------ ----------
<S> <C> <C>
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of property and equipment through capital lease agreements 757,000 3,953,000
Conversion of subordinated convertible notes and unpaid accrued interest to
Series B convertible preferred stock 8,318,000 --
Purchase of Campus 24, Inc. in exchange for Series B convertible preferred
stock 1,111,000 --
Purchase of CollegeBeat.com, Inc. in exchange for Series B convertible
preferred stock 425,000
Issuance of convertible preferred stock in conjunction with
in-kind contributions 6,248,000 4,922,000
Services rendered in exchange for common stock and warrants -- 585,000
Purchase of Versity.com, Inc. in exchange for common stock -- 33,139,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE> 27
CollegeClub.com, Inc.
Debtor-In-Possession
Notes to Unaudited Financial Statements
September 30, 2000
1. The financial statements include the accounts of CollegeClub.com, Inc.,
(the "Company") without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. Although
the Company believes that the disclosures are adequate to make the
information presented not misleading, it is suggested that these
financial statements be read in connection with the audited financial
statements and notes thereto included elsewhere in this Form 8-K/A
filed with the Securities and Exchange Commission.
The accompanying unaudited financial statements contain all
adjustments, consisting of normal recurring adjustments, necessary for
a fair presentation of the financial position, results of operations,
and cash flows for the periods presented.
2. BANKRUPTCY
On August 21, 2000 (the "Petition Date") CollegeClub.com, Inc. and
certain of its subsidiaries filed a voluntary petition under Chapter 11
of the Bankruptcy Code in the United States Bankruptcy Court for the
Southern District of California (the "Bankruptcy Court"). These related
proceedings are being jointly administered under the caption "In re
CollegeClub.com, Inc.", Case No. 00-8305-A11. The following
subsidiaries were not included in the bankruptcy filings: Versity.com,
Inc. and IZIO Corporation. Simultaneously with the initial filing, a
motion was filed in order to obtain approval for the sale of
substantially all the Company's and certain subsidiaries' assets to
Student Advantage, Inc. ("Student Advantage").
On October 24, 2000, the Bankruptcy Court entered an order approving
the sale of substantially all of the assets of CollegeClub,
CollegeStudent and Campus 24 to Student Advantage in exchange for
$7,515,000 in cash and 1,324,761 shares of Student Advantage's common
stock. Student Advantage also assumed certain liabilities of
CollegeClub. In addition, pursuant to the terms of the sale, if certain
web site revenue performance goals are met during 2001, Student
Advantage will pay up to an additional $5.0 million in cash to
the Company.
In November 2000, the Company sold certain assets of its subsidiary,
IZIO Corporation, relating to its course management software, in
exchange for approximately $400,000 in cash. The proceeds from the sale
will be used to settle all of IZIO's liabilities. Any remaining
proceeds will be distributed to Versity.com, Inc.'s creditors as
consideration for their claims. It is unknown at this time whether the
remaining proceeds will be sufficient for Versity's creditors claims
and whether Versity creditors would be included in any CollegeClub
settlement.
As a result of the asset sales, the Company currently intends to
liquidate its assets and distribute the proceeds to creditors.
Currently, the amount of settlement a creditor should receive cannot
be estimated as the aggregate settlement amount will be paid out of a)
cash generated through the sale of the Company's remaining assets and
b) 1,324,761 shares of Student Advantage common stock owned by the
Company, the value of which will be dependent upon the market price of
the Student Advantage common stock around the date of distribution.
Under the Bankruptcy Code, actions to collect pre-petition indebtedness
are stayed and other contractual obligations may not be enforced
against the Company. In addition, the Company may reject executory
contracts and lease obligations. Parties affected by these rejections
may file claims with the Bankruptcy Court.
The accompanying financial statements have been prepared on a going
concern basis, which contemplates continuity of operations, realization
of assets and liquidation of liabilities in the ordinary course of
business. However, as a result of the Chapter 11 filing and
circumstances relating to this event, including the Company's losses
from operations, such realization of assets and liquidation of
liabilities is subject to significant uncertainty. While under the
protection of Chapter 11, the Company may sell or otherwise dispose of
assets, and liquidate or settle liabilities, for amounts other than
those reflected in the financial statements. Further, any plan of
liquidation could materially change the amounts reported in the
financial statements, which do not give effect to all adjustments of
the carrying value of assets or liabilities that might be necessary as
a consequence of liquidation.
3. LIABILITIES SUBJECT TO COMPROMISE
Certain claims against the Company in existence as of the Petition date
are reflected in the September 30, 2000 balance sheet as "liabilities
subject to compromise." The principal categories of these claims are
identified below. All amounts below may be subject to future adjustment
depending on Bankruptcy Court action, further developments with respect
to disputed claims, or other events. Additional claims may arise
resulting from rejection of additional executory contracts or unexpired
leases by the Company. Student Advantage did not assume any of these
liabilities, except for approximately $3,248,000 of capital leases.
<TABLE>
<S> <C>
Accounts Payable $ 13,305,000
Accrued wages, benefits, and taxes 1,167,000
Accrued liabilities 520,000
Note payable 492,000
Capital lease obligations 4,032,000
Deferred Revenue 78,000
--------------
19,594,000
==============
</TABLE>
As a result of the bankruptcy filing, no payments will be made on any
pre-petition debt without
27
<PAGE> 28
Bankruptcy Court approval or until a plan defining the repayment terms
has been approved by the Bankruptcy Court.
4. REORGANIZATION COSTS
Reorganization costs recorded during the post-petition period consisted
of the following:
<TABLE>
<S> <C>
Retention Bonus $ 811,000
Professional fees 408,000
----------
$1,219,000
==========
</TABLE>
In conjunction with the Company's petition for relief under the federal
bankruptcy code, management and the board of directors approved and
communicated to the Company's employees the terms of a retention plan
which provided for bonuses to be paid to employees who provided
services to the Company during the debtor-in-possession period. The
Company has recorded retention bonuses in the amount of $811,000 during
the nine months ended September 30, 2000 related to these bonuses. On
October 31, 2000, the Company paid approximately $1,400,000 in
retention bonuses including $589,000 in bonuses incurred subsequent to
September 30, 2000. In conjunction with the sale of certain assets and
liabilities to Student Advantage, Student Advantage reimbursed
$796,000 of these bonus amounts to the Company.
During the nine months ended September 30, 2000, the Company recorded
$408,000 in professional fees related primarily to legal and accounting
services related to the Chapter 11 filing and incurred during the
debtor-in-possession period.
5. ACQUISITIONS
In April 2000, the Company acquired for a purchase price of $33,139,000
all of the outstanding common and preferred stock of Versity.com, Inc.
("Versity"), a company that primarily operated an online academic
community for college students that provides free lecture notes,
research resources and collaborative study tools. In exchange for all
of the outstanding options, common and preferred stock of Versity, the
Company issued a) 5,819,978 shares of common stock with a fair value of
$5.07 per share and b) options with a fair value of $4.63 per share to
purchase 784,422 shares of the Company's common stock at an exercise
price of $2.00 per share. The acquisition has been accounted for under
the purchase method of accounting and the operating results of Versity
have been included in the Company's results of operations beginning on
the acquisition date. The purchase price was allocated to identifiable
assets and liabilities based on their estimated fair values, with the
excess of the purchase price over the fair value of the net liabilities
acquired reflected as goodwill, as follows:
Current assets $ 77,000
Fixed assets 537,000
Deferred compensation 545,000
Goodwill 33,904,000
Liabilities assumed (1,924,000)
-----------
33,139,000
===========
The pro forma results of operations for the nine months ended
September 30, 2000 below represent the effect on the Company's
results of operations as if the acquisition of Versity had
occurred on January 1, 2000, instead of on the acquisition date.
Net revenue $ 5,504,000
Net loss $(103,375,000)
Net loss per common share $(3.96)
6. SALE OF ASSETS
On July 28, 2000, the Company sold certain assets of its subsidiary,
eStudentLoan, LLC, relating to its student loan search engine business,
in exchange for approximately $910,000 in cash. The Company recorded
a loss on the sale of eStudentLoan, LLC of $3,898,000 in the results of
operations for the nine months ended September 30, 2000. The sale
agreement also included terms whereby CollegeClub could repurchase
eStudentLoan for a premium if certain criteria were met. The repurchase
arrangement expired in October 2000.
On August 20, 2000, the Company sold certain assets of its subsidiary,
CollegeStudent.com Inc., relating to its on-line college bookstore
("CollegeStore Online"), in exchange for approximately $948,000 in
cash. The Company recorded a loss on the sale of certain assets of
CollegeStudent.com, Inc. of $4,033,000 in the results of operations for
the nine months ended September 30, 2000.
7. STRATEGIC INVESTMENT
During March 2000, the Company entered into an agreement with a
strategic partner and its affiliates. The Company sold 970,874 shares
of Series C-2 convertible preferred stock in exchange for television
advertisement slots throughout the partner's network for a period of
one year. The estimated fair value of the Series C-2 preferred stock of
$4,922,000 has been recorded to the preferred stock accounts, with an
equal amount related to future advertising recorded as a reduction of
convertible preferred stock which will be recognized as selling and
marketing expense as the services are delivered. No advertising was
delivered by the strategic partner during the nine months ended
September 30, 2000. In October 2000, the Bankruptcy Court approved the
assignment of the agreement to Student Advantage.
8. GOODWILL
As of September 30, 2000, the Company determined that goodwill was
impaired based upon Statement of Financial Accounting Standards
("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of. Because the operations
of the entities to which the goodwill related had ceased and
employees had been terminated, estimated future cash flows from
these entities were insufficient to recover the goodwill carrying
values. Accordingly, the Company recorded an impairment loss of
$33,738,000 in the results of operations for the nine months ended
September 30, 2000.
28
<PAGE> 29
9. STRATEGIC MARKETING RELATIONSHIP
In September 1999, the Company entered into an agreement with a strategic
partner whereby the Company issued 1,769,922 shares of Series B convertible
preferred stock and 761,259 shares of Series B-1 convertible preferred
stock in exchange for $1,400,000 in cash, $130,000 of tangible equipment
and a commitment for the delivery of certain proprietary advertising
content and promotional items from the partner as well as online promotion
throughout the partner's network of websites for a period of three years.
The estimated fair value of the future promotional commitments of
approximately $6,118,000 was recorded as a reduction of convertible
preferred stock during the year ended December 31, 1999.
During the nine months ended September 30, 2000, the Company amortized
$1,700,000 to selling and marketing expense associated with advertising
delivered by the strategic partner. In connection with the Company's
bankruptcy filing and sale of substantially all its assets to Student
Advantage, the strategic partner was no longer obligated to deliver future
advertising and promotional items to the Company. Accordingly, the
remaining unamortized amount of $4,418,000 recorded as a reduction of
convertible preferred stock, was written off.
10. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is subject to legal proceedings which arise in the normal
course of business. The ultimate liability resulting from these legal
proceedings can not be reasonably estimated. As discussed in Note 2, the
claims and litigation relating to pre-petition periods have been stayed as
a result of the Chapter 11 filing.
29
<PAGE> 30
ITEM 7. (b) (1) UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION OF
STUDENT ADVANTAGE, INC.
On October 31, 2000 Student Advantage, Inc. (the "Company") purchased
certain assets and assumed certain liabilities of CollegeClub.com, Inc.
("CollegeClub"). On July 28, 2000, Student Advantage also acquired certain
assets of eStudentLoan, LLC ("eStudentLoan") a wholly-owned subsidiary of
CollegeClub. The unaudited pro forma combined condensed balance sheet assumes
that the CollegeClub transaction took place on September 30, 2000. The unaudited
pro forma combined condensed balance sheet combines the unaudited historical
condensed balance sheet of Student Advantage and CollegeClub as of September 30,
2000. The unaudited pro forma combined condensed statements of operations assume
that the transactions had been consummated at the beginning of the periods
presented. The unaudited pro forma combined statement of operations for the nine
months ended September 30, 2000 combine the unaudited historical statements of
operations of Student Advantage and CollegeClub for nine months ended September
30, 2000. The unaudited combined condensed statement of operations for the year
ended December 31, 1999 combines the audited historical statement of operations
of Student Advantage and CollegeClub for the year ended December 31, 1999. The
pro forma combined statement of operations for the nine months ended September
30, 2000 presents the statement of operations through the loss from operations
rather than total net loss because CollegeClub's statement of operations for
that period includes significant nonrecurring charges related to reorganization
costs and losses recognized on the disposal of assets.
The pro forma information is presented for illustrative purposes only and
does not purport to be indicative of the operating results or financial position
that would actually have occurred if the transaction had been in effect on the
dates indicated, nor is it indicative of future operating results or financial
position. The pro forma adjustments are based upon available information and
assumptions that the Registrant believes are reasonable in the circumstances.
The pro forma information should be read in conjunction with the Company's
December 31, 1999 financial statements and notes thereto contained in Form 10-K
dated March 31, 2000 and CollegeClub's December 31, 1999 financial statements
included within this Form 8K/A.
These transactions are accounted for under the purchase method of
accounting. The purchase price is allocated to the tangible and intangible
assets purchased, as well as liabilities assumed, based upon their respective
fair values. The allocation of the purchase price included in the pro forma
condensed financial information is preliminary. The final values may differ from
those set forth herein. The Company believes, however, that the final allocation
will not be materially different from the pro forma allocation.
30
<PAGE> 31
Student Advantage, Inc.
Pro Forma Condensed Combined Balance Sheet
As of September 30, 2000
<TABLE>
<CAPTION>
STUDENT PRO FORMA PRO FORMA
ADVANTAGE COLLEGECLUB ADJUSTMENTS COMBINED
------------- -------------- ------------ -------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 19,418,000 $ 82,000 ($8,311,000)(a)
442,000 (d)
(82,000)(b) $ 11,549,000
Accounts receivable, net 6,052,000 449,000 (449,000)(b) 6,052,000
Prepaid and other current assets 2,388,000 219,000 3,350,000 (c)
(442,000)(d)
(58,000)(b) 5,457,000
------------- ------------- ------------ -------------
Total current assets 27,858,000 750,000 (5,550,000) 23,058,000
Property and equipment, net 5,330,000 11,593,000 (447,000)(b) 16,476,000
Investments 5,627,000 -- -- 5,627,000
Goodwill and other intangibles, net 10,386,000 -- 2,353,000 (e) 12,739,000
Other assets -- 144,000 (144,000)(b) --
------------- ------------- ------------ -------------
Total assets $ 49,201,000 $ 12,487,000 ($3,788,000) $ 57,900,000
============= ============= ============ =============
Liabilities, Convertible Preferred
Stock and Stockholders' Deficit
Current liabilities
Accounts payable 4,723,000 -- -- 4,723,000
Accrued wages, benefits and related
taxes 1,541,000 904,000 (904,000)(b) 1,541,000
Accrued liabilities 6,881,000 408,000 (408,000)(b) 6,881,000
Transaction costs -- -- 630,000 (f) 630,000
Note payable -- 442,000 (442,000)(d) --
Current portion of capital lease
obligation -- 1,099,000 (g) 1,099,000
Deferred revenue 7,918,000 -- -- 7,918,000
------------- ------------- ------------ -------------
Total current liabilities not
subject to Compromise 21,063,000 1,754,000 (25,000) 22,792,000
Liabilities Subject to Compromise -- 19,594,000 (3,248,000)(g)
(16,346,000)(b) --
------------- ------------- ------------ -------------
Total current liabilities 21,063,000 21,348,000 (19,619,000) 22,792,000
Capital lease obligations, net of
current portion -- -- 2,149,000 (g) 2,149,000
Total Liabilities 21,063,000 21,348,000 (17,470,000) 24,941,000
Convertible Preferred Stock -- 67,590,000 (67,590,000)(h) --
Stockholder's deficit
Common stock 361,000 26,000 (26,000)(h)
13,000 (a) 374,000
Paid-in capital 89,244,000 61,304,000 (61,304,000)(h)
4,808,000 (a) 94,052,000
Notes Receivable from Stockholders (50,000) -- -- (50,000)
Unearned compensation (1,119,000) (6,065,000) 6,065,000 (h) (1,119,000)
Accumulated deficit (60,298,000) (131,716,000) 131,716,000 (h) (60,298,000)
------------- ------------- ------------ -------------
Total stockholders' deficit 28,138,000 (76,451,000) 81,272,000 32,959,000
------------- ------------- ------------ -------------
Total liabilities, convertible
preferred stock and
stockholders' deficit $ 49,201,000 $ 12,487,000 $ (3,788,000) $ 57,900,000
============= ============= ============ =============
</TABLE>
See accompanying notes.
31
<PAGE> 32
Student Advantage, Inc.
Pro Forma Combined Statement of Operations
For the Nine Month Period ended September 30, 2000
<TABLE>
<CAPTION>
STUDENT PRO FORMA PRO FORMA
ADVANTAGE COLLEGECLUB ADJUSTMENTS COMBINED
--------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
REVENUE $ 35,348,000 $ 5,394,000 $ 40,742,000
COST AND EXPENSES
Cost of revenue 15,317,000 -- 15,317,000
Product development and technology 12,315,000 7,977,000 (415,000)(i) 19,877,000
Sales and marketing 13,316,000 14,810,000 (1,234,000)(i) 26,892,000
General and administrative 7,320,000 23,951,000 (512,000)(i) 30,759,000
Depreciation and amortization 3,946,000 12,293,000 (9,853,000)(j)
1,087,000 (e) 7,473,000
Impairment of goodwill -- 33,738,000 (33,738,000)(j) --
Stock-based compensation 616,000 148,000 -- 764,000
------------ ------------ ----------- ------------
Total costs and expenses 52,830,000 92,917,000 (44,665,000) 101,082,000
Loss from operations $(17,482,000) $(87,523,000) $44,665,000 $(60,340,000)
============ ============ =========== ============
</TABLE>
See accompanying notes.
32
<PAGE> 33
Student Advantage, Inc.
Pro Forma Combined Statement of Operations
For the year ended December 31, 1999
<TABLE>
<CAPTION>
STUDENT PRO FORMA PRO FORMA
ADVANTAGE COLLEGECLUB ADJUSTMENTS COMBINED
--------- ----------- ----------- --------
<S> <C> <C> <C> <C>
REVENUE $ 27,644,000 $ 2,913,000 -- $ 30,557,000
COST AND EXPENSES
Cost of revenue 15,543,000 -- -- 15,543,000
Product development and technology 9,654,000 3,483,000 -- 13,137,000
Sales and marketing 11,704,000 12,503,000 -- 24,207,000
General and administrative 8,543,000 7,010,000 -- 15,553,000
Depreciation and amortization 1,994,000 1,498,000 1,528,000 (e)
(786,000)(j) 4,234,000
Stock-based compensation 1,119,000 4,151,000 -- 5,270,000
------------- ------------- ---------- ------------
Total costs and expenses 48,557,000 28,645,000 742,000 77,944,000
Loss from operations (20,913,000) (25,732,000) (742,000) (47,387,000)
Interest income (expense), net 1,358,000 (351,000) -- 1,007,000
Other, net -- 318,000 -- 318,000
------------- ------------- ---------- ------------
Net loss $(19,555,000) (25,765,000) (742,000) $(46,062,000)
============ ============= ========== ============
Net Loss per share $ (0.71) $ (1.60)
============ ============
Weighted Average Shares 27,410,000 28,734,761
============ ============
</TABLE>
See accompanying notes.
33
<PAGE> 34
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
Pro forma adjustments to reflect the acquisition of CollegeClub and eStudentLoan
give effect to the following:
(a) On October 31, 2000, Student Advantage completed the acquisition of
substantially all of the assets of CollegeClub in a transaction accounted
for as a purchase (see Item 2 "Acquisition or Disposition of Assets"). The
aggregate consideration paid by Student Advantage for the acquired assets
is as follows:
<TABLE>
<S> <C>
Cash $ 7,515,000
Cash paid for Retention Bonuses 796,000
Common stock, $.01 par, 1,324,761 shares 4,821,000
Transaction costs 630,000
-----------
Total purchase price $13,762,000
===========
</TABLE>
The fair value of Student Advantage's common stock issuable to effect the
purchase is estimated to be approximately $3.64 per share. This share value
is based on the average closing price of Student Advantage's common stock
for the three days before and after October 24, 2000, the day the
Bankruptcy Court entered an order approving the sale. The share value has
been discounted at 13% (based on an independent appraisal) to reflect the
lack of liquidity associated with lock-up provisions in the stock
agreements.
In conjunction with CollegeClub's petition for relief under the federal
bankruptcy code, CollegeClub's board of directors approved a retention plan
which provided for bonuses to be paid to employees who provided services to
CollegeClub during the debtor-in-possession period. CollegeClub paid
approximately $1,400,000 in retention bonuses on the closing date of the
sale to Student Advantage. Student Advantage reimbursed $796,000 of these
bonuses.
The transaction is accounted for under the purchase method of accounting.
The purchase price is allocated to tangible and intangible assets
purchased, as well as liabilities assumed, based upon their respective fair
market values. The allocation of the purchase price included in the pro
forma condensed financial information is preliminary. Certain assets may be
written down to fair market value and goodwill may be allocated to specific
intangible assets based on the results on an independent appraisal.
(b) These adjustments reflect the elimination of assets and liabilities not
acquired or assumed by Student Advantage.
(c) Student Advantage acquired rights under an agreement with a strategic
partner of CollegeClub, which provides access to television advertisement
slots throughout the partner's network, with a total fair value estimated
at $3,350,000 after an amendment to the agreement. In connection with the
agreement, CollegeClub had exchanged convertible preferred shares for the
right to advertisement slots and as a result, had reflected the value of
this agreement as a reduction to convertible preferred stock.
(d) Prior to the acquisition, Student Advantage provided CollegeClub with
debtor-in-possession financing under a line of credit. The balance
outstanding under this line of credit was credited against the cash
purchase price at the closing. As of September 30, 2000 there was $442,000
outstanding under this financing agreement.
(e) In connection with the transaction, Student Advantage acquired net assets
with an estimated fair value of $11,409,000, resulting in goodwill of
$2,353,000, which will be amortized over two years. The adjustments reflect
the amortization of goodwill over the estimated useful life of two years as
if the acquisition had occurred as of the beginning of the periods
presented.
In addition, Student Advantage recorded goodwill of approximately
$1,054,000 in connection with the acquisition of eStudentLoan, on July 28,
2000. The adjustments reflect amortization of this goodwill over the
estimated useful life of three years as if the acquisition had occurred as
of the beginning of the periods presented.
(f) Reflects the estimated transaction costs resulting from the acquisition of
CollegeClub, principally legal and accounting fees.
(g) Student Advantage assumed some of CollegeClub's obligations under capital
leases, which have been classified as liabilities subject to compromise in
CollegeClub's balance sheet as of September 30, 2000.
(h) Represents the elimination of CollegeClub's capital accounts, including
convertible preferred stock, common stock, paid-in-capital, unearned
compensation and accumulated deficit.
(i) Student Advantage did not purchase certain assets or operations of
CollegeClub, including Versity.com, IZIO and CollegeStore Online. These
adjustments reflect the elimination of the operating results of
Versity.com and IZIO, which were acquired by CollegeClub during 2000.
Although Student Advantage did not acquire CollegeStore Online, those
activities were operated as an integrated component of the operations of
CollegeClub, as a result, it is not practical to identify and eliminate the
operating results associated with those activities. Management does not
consider the CollegeStore Online operating results material to the total
operations of CollegeClub.
(j) Since this transaction is an acquisition of certain assets of CollegeClub,
the goodwill amortization expense and impairment charges recognized by
CollegeClub have been eliminated from the combined pro forma results and
the goodwill amortization resulting from this transaction has been
included, as disclosed in Note (e).
34
<PAGE> 35
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Student Advantage, Inc.
(Registrant)
Dated: January 16, 2001 By: /s/ Kenneth S. Goldman
----------------------------------------
Kenneth S. Goldman, Executive Vice President
and Chief Financial Officer (Principal
Financial and Accounting Officer)
35
<PAGE> 36
EXHIBIT INDEX
2.1* Asset Purchase Agreement, dated as of August 21, 2000, by and among
Student Advantage, Inc., CollegeClub.com, Inc., CollegeStudent.com,
Inc. and Campus 24, Inc.
2.2* Amendment No. 1 to the Asset Purchase Agreement, dated as of October
19, 2000, by and among Student Advantage, Inc., CollegeClub.com, Inc.,
CollegeStudent.com, Inc. and Campus 24, Inc.
2.3* Asset Purchase Agreement, dated as of July 28, 2000, by and among
Student Advantage, Inc., ESL Acquisition Co., eStudentLoan, LLC,
CollegeStudent.com, Inc. and CollegeClub.com, Inc.
23.1 Consent of PricewaterhouseCoopers LLP.
--------------------------
* Previously filed.
36
