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U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-SB/A
AMENDMENT NO. 2
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL
BUSINESS ISSUERS
UNDER SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
COLLEGE BOUND STUDENT ALLIANCE, INC.
(Name of Small Business Issuer in its charter)
COLORADO 84-1416023
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5275 DTC PARKWAY, SUITE 110, ENGLEWOOD, COLORADO 80111-5275
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (303) 804-0155
Securities to be registered under Section 12(b) of the Act: NONE
Securities to be registered under Section 12(g) of the Act:
COMMON STOCK, $0.001 PAR VALUE
(Title of class)
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
OVERVIEW
The Company was organized under the laws of the State of Colorado on July
15, 1993 under the name Winter Park Ventures, Inc. On April 22, 1997, the
Company changed its name to SportsStar Marketing, Inc. On July 13, 1999, the
Company changed its name to College Bound Student Alliance, Inc. after the
acquisition of College Bound Student Athletes, Inc. Effective August 1, 2000,
the Company will change its domicile to Nevada. The Company, using a staff of
regional directors and sales representatives nationwide, represents high school
students and student-athletes seeking financial, informational, recruiting, and
admissions assistance to attend college. The Company's offices are presently
located at 5275 DTC Parkway, Suite 110, Englewood, Colorado 80111-5275, and its
telephone number is (303) 804-0155. As of August 1, 2000, the offices will be
located at 333 South Allison Parkway, Suite 100, Lakewood, Colorado 80226-3115.
The Company was dormant until 1997. Chartwell International, Inc. became
the sole stockholder of the Company in early 1996 when it acquired the
Company's stock. Chartwell is still a principal shareholder of the Company.
In June 1997, the Company entered into an agreement with National College
Recruiting Association, Inc. ("NCRA"), a wholly-owned subsidiary of Chartwell
International. The term of the Agreement is for five years, with unlimited
five-year renewals under the same terms and conditions. As consideration for
the license, the Company agreed to pay NCRA an initial payment of $150,000
(later amended to $210,000) and 2.5% of the gross revenues realized from the
business operations of NCRA. The agreement also provided for an additional
license fee of $100,000 to be paid to NCRA upon receipt of $500,000 of
additional financing by the Company. As of April 30, 2000, $22,000 is still
owed to NCRA for license fee payments.
NCRA granted the Company an exclusive license for the use, rights, and
interests in and to all of the assets, including brand and trade names and
databases, constituting the business of NCRA, along with the rights to sell
new and service existing franchises of NCRA and to publish the Blue Chip
Illustrated magazine. NCRA owns the rights to a program to promote high
school athletes to colleges in the pursuit of scholarship money for the
athletes. The program's principal method of promotion is through profiles
prepared and distributed to various colleges. A profile is a one-page summary
about a student, containing information such as the student's name, address,
date of birth, name of high school, academic achievements, standardized test
scores, desired major, and photograph of the student, and, in the case of
student-athletes, athletic awards, achievements, and statistics.
The Company also licenses from NCRA the publishing rights to a magazine,
BLUE CHIP ILLUSTRATED, which highlights the leading high school athletes in the
country. College coaches and fans are typical subscribers of BLUE CHIP
ILLUSTRATED.
In April 1999, the Company acquired College Bound Student-Athletes, Inc., a
Wisconsin corporation ("CBS-Athletes"), for $1,307,146 in stock and debt.
CBS-Athletes engages in the same type of business as the NCRA profiling program.
On May 5, 2000, the Company acquired College Foundation Planners, Inc.
("CFPI"). CFPI, founded in 1982, provides services designed to assist students
in finding the best colleges for their needs, getting admitted to the desired
colleges, obtaining financing for college, and shortening the student's time
spent in college. CFPI is located in Tustin, California.
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SERVICES OFFERED
The Company believes that every person and especially college bound
students should have the opportunity to realize their full potential and live
a full life, which begins with education preparation and career planning. The
Company offers a placement service to college-bound students, their parents,
and college staff, which focuses on matching a student's talents and
abilities, via a student profile, with colleges that the student is qualified
to attend. The Company's business model centers around becoming one of the
few full-service providers of educational and career planning services. The
Company's academic services are combined with sports and fine arts special
interest areas, and vocational services, to provide a single solution for its
customers. The Company strives to develop a trusted advisor relationship with
students that complement those with parents, schools, teachers, and
counselors.
Students pay a fee to become a client of the Company. A corporate sponsor
that has set aside funds for students needing financial assistance may
underwrite this fee. Over the last 3 years the Company has received 125 such
corporate sponsorships from national, regional and local organizations
including, EUR AM, Coca-Cola, American Express, First National Bank, Saga Foods,
Chicago Bears, Pittsburgh Steelers, Denver Broncos, NFL Charities, Sevor
Corporation, World Wide Golf School, Orion Foods, Athletes Against Drugs,
Modell's, Ronald McDonald House charities, McDonalds Corporation, Citicorp,
YMCA, Chicago Public School System, Dermontii Dawson, Bank One, Youth Motivation
Program, Allsport/Tryone Keys, Aaron Glee and the New York Jets.
The Company's core business has been its College Bound Student
Scouting/Profiling program. The program assists high school athletic, fine arts,
or academic achievers with the college recruiting process, including completion
of a verified profile that is then distributed to the Company's proprietary
database of college coaches, athletic directors, and department heads to assist
the student in obtaining sports, academic, or fine arts scholarships. The
Company presently charges $995 for national program, $795 for regional program
of eight states, $695 for one-time national program, and $350 for each
additional area profiled.
The Company offers its products in services directly to students and their
parents via networking with high school coaches, direct mail, phone
solicitations, its internet website and seminar programs. The Company also
offers its services through corporate sponsorship programs.
After signing the contract at the family's home, the Company's
representative forwards a packet of information to the Company. The student's
file is then opened and a preliminary profile is prepared. After the preliminary
profile has been reviewed, a master version is prepared. The Company then
determines to which colleges the profile will be sent, based on the particular
package purchased by the student, on certain statistical requirements of the
student, and also on nonquantitative factors made on a case-by-case basis
pertaining to the student's strengths and weaknesses. The profile is mailed to
the selected colleges and the colleges' interest is tracked. The profile is
updated periodically and resubmitted if necessary.
The Company does not have any dependence on any one or small group of
direct customers or suppliers. Since the Company offers primarily counseling
services, its principal suppliers are commercial printing companies and office
supply companies. The loss of any one supplier would not affect the Company's
operations adversely.
With the acquisition of CFPI, the Company is also offering the products and
services to college bound students set forth below, described together with the
fees typically charged by the Company:
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1. SAT and ACT Preparation Course that helps identify weak areas in each of
the specific math, verbal and writing skills covered on these standardized
tests. The Company's program offers computerized tutorials, educational
tools, and personal assistance from a Company "coach." ($895)
2. College Major and Career Search assists the student using computerized
analysis and research and personal advice to determine which college major
and career a student is best suited for, hence shortening the student's
time spent in college. ($495)
3. Dream College Search and Selection assists students in learning how to plan
early in high school to meet the specific entrance requirements of their
dream college.($895)
4. Financial Aid Planning and MeritMoney(TM) Search is a complete course in
understanding college financial aid programs, how much college costs, and
what to do to dramatically reduce the costs. The program includes a
computerized search of colleges that offer Academic Scholarships with
criteria that match the student's personal qualifications. ($395)
5. College Admissions Applications assists the student in emphasizing their
academic and personal strengths and achievements that match the college
admissions profile. The program walks the student through the entire
application process and the importance of each of the documents and proper
presentation and content. ($895)
6. Financial Aid Service program assists students and/or parents in completing
federal and private college financial aid applications, while recognizing
special circumstances and conditions that may improve the assistance
available for particular students. The program also assists with reviews of
award letters, appeals applications and loan applications. ($990)
7. Becoming a Master Student program maximizes the value students receive from
their education by teaching them how to learn in the most effective way
possible. ($395)
8. College Survival Seminar program helps calm student fears about the
freshman experience and helps them gain insight from recent college
graduates about living away from home and includes a workbook and other
information. ($195)
Prior to the CFPI acquisition, a small number of these services were
subcontracted out on a limited basis or referred to other professionals, but
will now be offered directly by the Company.
The Company is hoping to expand its product/service offerings via future
acquisitions and the internal development of new products for alternative
education or training. The Company is currently seeking financing to complete
future acquisitions and to develop an Internet-driven delivery vehicle that
provides students, parents, high schools and college staffs worldwide with
comprehensive and cost-effective programs and services for helping to bring
students and colleges together. The focus of the Company will be to greatly
broaden its efforts in four distinct markets: the academics, fine arts and
athletics assistance markets currently being served by the Company, as well as a
vocational studies assistance market.
The Company typically charges fees ranging from $195 to $995 for each of
the services discussed above. Several discount packages that bundle some
services are also offered that range from $1,495 to $3,965. Because of the
recent acquisition of CFPI, all of the Company's pricing and service
offerings are presently under review. All prices are subject to change
without notice. The Company presently accepts various credit cards and
installment payments. A no-interest three-payment plan option, where payment
is made via automatic debits from the customer's checking account, is offered
in connection with some of CFPI's larger college partnership service packages
that bundle together several of the Company's programs/services. Refund
requests are rare; however, the Company does offer refunds occasionally when
the customer feels that it has not been provided any services of value in the
college recruiting/financial aid process.
The Company presently is not operating any student camps or publishing the
BLUE CHIP ILLUSTRATED magazine. Upon the receipt of additional financing, it
hopes to develop plans to start
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student camps specializing in athletes, fine arts and academically-focused
students and to reinitiate publishing and distributing the BLUE CHIP
ILLUSTRATED magazine in printed form and as an e-Magazine published on the
Internet. It is likely that the format will be revamped to include
advertising. The magazine primarily contained profiles of high school student
clients and related articles. It was published five times a year during 1997
and early 1998, and monthly until April 1999. College coaches and fans were
typical subscribers to the magazine, which was also given at no-charge to
selected college athletic and admissions department personnel as a part of
the Company's sports profiling services. The circulation of BLUE CHIP
ILLUSTRATED ranged from approximately 3,000 copies to 60,000 copies per issue
when included with STUDENT SPORTS magazine, published by Student Sports,
Inc., Anaheim, California.
MARKETING AND SALES
The Company markets its services largely through seminars, corporate
sponsors and through an organization of full and part-time regional directors
and sales representatives who live in the local area and who are familiar with
the high schools, students, teachers, and coaches in that area. One-on-one sales
are generally conducted at the student's home with the student's parents and the
student, targeting those students and athletes who meet minimum standards of
academic, fine arts, and athletic performance. Seminars are used to present
information about the Company's services to large groups and to enroll students
as new clients of the Company.
In August 1999, the Company entered into an agreement with Jack Renkens, a
motivational speaker who makes presentations to high school students, their
parents, coaches, and administrators about the college recruiting process. The
Company's website promotes Mr. Renkens as a speaker and Mr. Renkens features the
Company's services in his seminars.
The Company also engages in activities in the local communities where its
offices are located to promote its services. As an example, in February 2000,
the Company provided its college placement service as a contestant prize in a
scholarship pageant held in Denver, Colorado.
In July 2000, the Company expanded its website (www.cbsa.com) by providing
more disclosure of the Company's business plan and the ability to receive
potential customer leads and orders for some of the Company's products and
services. Additional e-commerce capabilities are planned for future updates to
the website.
Through April 2000, the Company has derived its revenues from the following
sources:
- DIRECT SALE OF STUDENT PROFILES. These are sold directly to students and
parents via seminars and/or direct contact through the Company's regional
directors and sales representatives. (Approximately 71% of total revenues
for fiscal 1999 and 65% for the nine months ended April 30, 2000)
- CORPORATE SPONSORSHIPS. National and local organizations cover the
students' fees for utilizing the Company's programs, primarily for public
relations and/or social responsibility objectives. These sponsorships are
allocated according to the donor's wishes where specified. In March 2000,
the Company received an unrestricted $500,000 corporate sponsorship from
EUR AM Consulting, a company not affiliated with the Company. In December
1999, NFL Charities awarded the Company a grant to assist students in each
NFL team market. This grant will allow the Company to assist over 40
students in 31 cities to gain exposure to college recruiters and university
admissions directors. (Approximately 1% of total revenues for fiscal 1999
and 35% for the nine months ended April 30, 2000)
The Company plans to broaden it revenue base with the acquisition of
CFPI and with the implementation of its business plan.
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FRANCHISES
The Company previously offered for sale and sold franchises for NCRA
businesses, which are the establishing, operating, and promoting of athletic
student profiling for college-bound athletes. For an initial franchise fee of
$10,000 to $40,000 (depending on territory size) and ongoing royalties for
each profile subscription sold, the Company granted the franchisee an
exclusive geographic area from which to solicit or promote subscriptions to
high school students, using the "NCRA" name, marketing materials, and
distribution network. The Company also provided training to the franchisee,
ongoing consulting and assistance, and subscriber services. Upon receipt from
a franchisee of a completed student profile, the Company prepared and
distributed the profile to a range of 220 colleges to 1,000 colleges
(depending on the student client's needs and interests), responded to
inquiries from colleges and subscribers, and updated the subscriber's profile.
Currently, there are less than 10 franchises active in the Company's
program and the Company has discontinued selling new franchises. The Company
plans to phase out franchising activities.
TRADEMARKS
In June 1999, the Company filed service mark applications with U.S. Patent
and Trademark Office to register the following marks: College Bound Alliance,
CBSA, College Bound Student Athletes and College Bound Student Alliance. These
applications are pending.
The Company acquired the design service mark registration for "CBSA" and
"College Bound Student-Athletes", registered on January 24, 1995 with the
U.S. Patent and Trademark Office, from CBS-Athletes.
NCRA has design service marks for "NCRA-National College Recruiting
Association" and "Blue Chip Illustrated", which were registered March 9, 1999
with the U.S. Patent and Trademark Office and which are licensed to the
Company.
COMPETITION
Management believes that the Company and its competitors are serving
less than 1% of the potential market. There are two primary types of student
recruiting: (i) Internet companies where, for a fee, the student places
his/her own information on an Internet site, and (ii) companies with
operations similar to those of the Company.
Based on information informally gathered by the Company, management
believes that admissions directors, department heads, and coaches do not express
a great deal of interest in Internet profiles due to the biased, undocumented
and unverified nature of the information presented.
Management knows of approximately two dozen companies, which appear to
offer services similar to those of the Company. While management believes
that the Company can continue to grow in spite of this competition, the
Company will need to continue and/or expand its marketing and sales efforts
to do so.
There can be no assurance that the Company will be able to maintain its
position in the industry. Barriers to entry into Internet-based businesses are
low and the development by others of new, improved or modified programs and/or
services could make the Company's products and/or services obsolete. Therefore,
even if the Company develops new and innovative services or products that prove
to be commercially feasible, there is no assurance that a new development by a
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competitor will not supersede any such services or products. The Company must,
therefore, continuously improve its services and develop new products in order
to be competitive. In this regard, the Company may not have sufficient resources
to undertake the research and development necessary to remain competitive in the
industry.
GOVERNMENT APPROVALS AND REGULATION
Few regulations control the Company's business and operations, other than
regulations applicable to businesses generally. It is possible, however, that
future laws and regulations may be adopted with respect to college financial aid
covering such issues as privacy, pricing, quality of services, and libel, among
others. Any such new legislation or regulation could have an adverse impact on
the Company's business.
The Company is subject to state and federal laws regarding its past sales
of franchises to a small number of its area regional directors and sales
representatives (less than 10% of the Company's area regional directors and
sales representatives are franchisees). The last franchise was sold in January
1999. The Company, however, has discontinued offering franchises and has no
plans to offer franchises in the future.
The National Collegiate Athletic Association (NCAA) has certain rules
pertaining to college student-athletes, which affect the Company's operations.
Management believes that the Company's operations are in compliance with NCAA
rules.
In December 1999, the Company became a member of the Better Business Bureau
serving Wisconsin.
EMPLOYEES
As of May 31, 2000, the Company had a total of 27 employees (18 full-time
and 9 part-time) in its Denver, Wisconsin, and California offices. In addition,
the Company has approximately 200 independent regional directors and sales
representatives located throughout the country paid on a commission basis.
The Company's future success depends in significant part upon the
service of its key senior management personnel and its continuing ability to
attract and retain highly qualified technical and managerial personnel. The
time that the officers and directors devote to the business affairs of the
Company and the skill with which they discharge their responsibilities will
substantially impact the Company's success. To the extent the services of
these individuals would be unavailable to the Company for any reason, the
Company would be required to identify, hire, train and retain other highly
qualified technical and managerial personnel to manage and operate the
Company. The Company's business could be adversely affected to the extent
such key individuals could not be replaced.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
PLAN OF OPERATION
The Company was dormant until 1997 when it changed its name to SportsStar
Marketing, Inc. It acquired College Bound Student Athletes, Inc. (CBS-Athletes)
in April 1999. Both companies had been experiencing operating losses through the
date of the combination, and have continued to experience losses after they
merged and restructured their combined businesses. The Company believes the
development of infrastructure for future growth and lack of liquid financial
resources are primarily responsible for the losses.
In August 1999 the Company hired a Chief Executive Officer and, in late
1999, completed a revised business plan. In February 2000 the Company completed
a $1,000,000 offering, the proceeds of which were used for the repayment of
debt, deferred compensation, and payments to vendors. It plans to increase sales
through development and/or acquisition of new products, expanding and upgrading
the number and quality of sales representatives, augmenting the personal
evaluation seminar program, and designing an effective Internet e-commerce
transaction site. To these ends, the Company has engaged an information
technology firm to further develop, as cash is available, its Internet and
e-commerce abilities. The information technology firm will work to implement
back office solutions to automate (1) production functions of fulfillment and
delivery and (2) accounting and management information systems. As a result, an
improved website was released in July 2000. The improved website allows the
Company to more fully describe its business plan and vision and to receive
potential customer leads and orders via the Internet for some of the Company's
products and services. Additional capabilities, such as on-line catalog and
product orders are planned for future upgrades to the website. Approximately
$32,000 has been spent through June 1, 2000 on website improvements and
management anticipates spending another $13,000 by July 31, 2000.
The Company acquired CFPI in May 2000 primarily to expand its product
line.
The Company believes cash expected to be generated from operations, the
recent $1 million financing in February 2000, and a $500,000 Corporate
Sponsorship received in March 2000 will satisfy its cash requirements through
at least November 2000.
The Company also plans to raise capital through equity or combined debt and
equity financing. The proceeds will be used to expand its product and service
lines, to further develop its Internet capabilities, to further develop the
corporate sponsorship program, for acquisitions, and for additional working
capital, however, there can be no assurance that it will raise any capital. The
Company has been building its corporate infrastructure since 1997. To fully
utilize the infrastructure and the associated expense of maintaining it, the
Company must continue to grow through expansion of product and service lines and
acquisitions.
Employees are expected to increase from 16 as of April 30, 2000 to
approximately 30 over the next twelve months, excluding part-time and contract
labor that the Company uses from time-to-time.
CFPI is expected to contribute $400,000 in gross revenues to the Company
in fiscal 2001. The effect on net income and earnings per share are projected
to be immaterial, as CFPI has historically operated on a break-even basis or
at a moderate loss. The Company plans to modify the products offered by CFPI
to increase the profit margins through production efficiencies and economies
of scale while retaining the highest quality standards. Further, the Company
will broaden its product offerings through these offerings and mass market
them through the Company's national sales force.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
Due to the acquisition of CBS-Athletes in April 1999, the results of
operations of CBS-Athletes have been included in the Company's financial
statements from April 15, 1999. The purchase price was allocated to the fair
value of identifiable assets and liabilities. The Company recorded three
intangible assets in connection with the acquisition: payment for a covenant not
to compete of $156,013, software of $73,300, and recruiting systems technology
of $1,057,108. These are reflected on the balance sheet as other assets.
The purchase price of $1,307,146 consisted of $1,039,900 debt, 545,000
shares of the Company's common stock, and an option to purchase up to 500,000
shares of the Company's common stock at $.50 per share. Additional payments of
up to $1.1 million and options to purchase 500,000 shares of the Company's
common stock could be made upon CBS-Athletes achieving certain performance
thresholds. It is presently uncertain whether such performance thresholds will
be met, but additional consideration, if any, will be recorded if and when said
thresholds are met.
The CBS-Athletes purchase agreement established these performance
thresholds for the former owners:
1. Average retail profile unit sales of 150 per month for 1 year after
the purchase.
2. Obtain $25,000 per month in new Corporate Sponsorships-not less than
$300,000 in 12 months.
3. Obtain 24 new college athletic director contracts during the initial
15-month period.
4. Reduce the fulfillment cost per student profile to $100 per unit
during the 12 months.
5. Achieve minimum 90% Satisfaction Rate during the 12-month period while
producing 150 units.
CBS-Athletes has not achieved these performance thresholds.
The financial statements do not reflect the CFPI acquisition, which
occurred in May 2000. CFPI was acquired for $360,000, consisting of $241,541
debt and 540,000 shares valued at $119,000 of the Company's stock. Of the
540,000 shares, 250,000 have been escrowed with an independent agent and will
be released upon CFPI reaching revenues of $431,600 in the year after the
first anniversary date of the closing and 40,000 will be issued to CFPI
employees upon the first anniversary date of the closing. Options to purchase
500,000 shares of the Company's common stock have been granted to the former
owner and operator of CFPI, which become vested and exercisable at a rate of
166,666 per year only to the extent CFPI achieves certain performance
thresholds over the next three years.
The Company's fiscal year end is July 31. The following is a summary of
certain selected financial information based on the audited consolidated
financial statements as of and for the years ended July 31, 1999 and 1998, and
the unaudited consolidated financial statements as of and for the nine months
ended April 30, 2000 and 1999. Reference should be made to the financial
statements attached to this registration statement to put the following summary
in context.
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<TABLE>
<CAPTION>
BALANCE SHEET DATA:
APRIL 30, 2000 JULY 31, 1999
-------------- -------------
<S> <C> <C>
Working capital deficiency $ (583,323) $ (790,972)
Long-term debt $ 249,995 $ 751,976
Total assets $ 2,002,040 $ 1,557,226
Stockholders' equity (deficit) $ 553,666 $ (103,967)
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS DATA:
NINE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, 2000 APRIL 30, 1999
----------------- -----------------
<S> <C> <C>
Revenues $ 1,527,649 $ 337,951
Loss from operations $ (445,925) $ (480,178)
Net loss $ (515,332) $ (481,109)
Net loss per share $ (0.03) $ (0.03)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JULY 31, 1999 JULY 31, 1998
------------- -------------
<S> <C> <C>
Revenues $ 706,886 $ 194,672
Loss from operations $ (761,310) $ (648,223)
Net loss $ (793,990) $ (657,427)
Net loss per share $ (0.05) $ (0.04)
</TABLE>
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section and elsewhere
herein.
RESULTS OF OPERATIONS: NINE MONTHS ENDING APRIL 30, 2000 VERSUS APRIL 30, 1999
GENERAL. While the majority of the Company's revenue is derived from
profile fees, the Company is beginning to diversify its revenue generation.
The Company's revenue in a particular period is directly related to the
number of profiles produced during the period. Management believes that the
Company's business is somewhat seasonal, with average revenue declining in
the period beginning at Thanksgiving and ending at the New Year's holiday,
and also declining in the spring. Profiling revenue represents revenue from
contracts as services are performed. Deferred revenue is recorded for cash
received in advance for services the Company is obligated to perform. The
cost of profiling revenue is mainly comprised of the cost of commissions,
production salaries, facility rental, postage and other direct service cost.
Other revenue represents the Company's revenue associated with sales
representative training and corporate sponsorships.
REVENUE. For the nine months ending April 30, 2000, total revenue increased
352% to $1,527,649 as compared to $337,951 for the same period in 1999. Revenues
are expected to continue increasing in fiscal 2001, primarily due to the
expansion of the corporate sponsorship program and the expansion of sales of
products developed from the CFPI acquisition. The revenue sources are planned to
diversify as more products are developed.
Profile revenue increased $816,976 or 476% for the first nine months of
fiscal year 2000 to $988,400 from $171,424 for the comparable period in 1999,
primarily as a result of the acquisition of CBS-Athletes in April 1999;
approximately $735,000 of the increase was attributable to CBS-
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Athletes. Revenue from profiling is planned to increase in fiscal 2001 as the
number of representatives grows and the sales per representative increases.
The Company has recently experienced substantial revenue growth; however,
there can be no assurance that the Company will continue to grow at historical
rates or at all. The Company's ability to generate increased revenue and achieve
profitability will depend upon its ability to increase sales through development
and/or acquisition of new products, expanding and upgrading the number of sales
representatives, developing the seminar program and designing an effective
Internet commerce site. The Company's ability to expand and develop these
channels depends on a number of factors beyond the Company's control, including
general business and economic conditions. Expansion and development of existing
and additional marketing and distribution channels will also depend, in part,
upon the Company's ability to secure additional technology, expertise and staff.
The Company's results have been affected by the interest expense and
amortization of intangibles related to the CBS-Athletes acquisition completed
in the second half of fiscal 1999. The Company's results have also been
affected by the costs associated with the integration of operational and
administrative functions and building infrastructure for future expansion.
There can be no assurance that the Company will be able to successfully
integrate the business it has acquired or in a timely manner in accordance
with its strategic objectives. Failure to integrate acquired businesses
effectively and efficiently could have a material adverse effect on the
Company's business, financial condition and results of operations.
Corporate sponsorships revenue increased $525,665 or 5257% for the nine
months ended April 30, 2000 to $535,665 from $10,000 for the comparable 1999
period. $500,000 of the 2000 sponsorships revenue were obtained from EUR AM
Consulting. While the Company will continue to search for similar sponsorships
in the future, there is no assurance that it will receive additional
sponsorships.
The Company has discontinued the sale of franchises and anticipates no
future revenue from sale of franchise regions. Accordingly, no franchise revenue
was received for the 2000 period as compared to $156,527 for the 1999 period.
COST OF SERVICES. The cost of services for the first nine months of fiscal
2000 increased $527,294 or 244% to $743,401 from $216,107 for the comparable
period in 1999. The increase in cost of services is attributable to the
acquisition of CBS-Athletes and the increase in profiles revenue. As a
percentage of profiles revenue, cost of services was 75.2% for the current
period, as compared to 126% for the prior period. Cost of services is comprised
primarily of sales commission, production costs, and marketing.
OPERATING EXPENSE. General and administrative expenses increased
$505,537 to $1,071,199 for the first nine months of fiscal 2000, as compared
to $565,662 for the comparable period in fiscal 1999. The increase results
from the operating expenses of CBS-Athletes included in fiscal 1999,
corporate expenses and additional management compensation for new staff.
Because of increased management staff and cost of new technology, the Company
anticipates general and administrative expenses to increase in the future.
Operating expenses are expected to increase and continue at their current
percentage of revenues due to the Company's integration of CFPI and
CBS-Athletes, development of products, and efforts to design processing to
reduce the cost of each product.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased $122,614 to $158,974 for the first nine months of fiscal 2000, as
compared to $36,360 for the comparable period in fiscal 1999. The additional
depreciation and amortization was recorded during the period primarily due to
the acquisition of CBS-Athletes, since the acquisition in April 1999 resulted
in intangible assets totaling $1,286,421 being recorded. These assets are
being amortized
11
<PAGE>
over a 10-year period. Amortization expense is expected to increase in fiscal
2001 due to the acquisition of CFPI, which was completed in May 2000.
OPERATING LOSS. The Company's operating loss for the first nine months
of fiscal 2000 is $445,925 as compared to an operating loss of $480,178 for
the comparable period in 1999. The decrease in operating loss is primarily
attributable to the increased general and administrative costs associated
with the CBS-Athletes acquisition, costs of merging operations and building
infrastructure, legal fees, higher investor and public relations expenses,
and higher amortization expenses, offset by the receipt of a $500,000
corporate sponsorship in fiscal 2000 not received in 1999. Of the operating
loss amount in fiscal 2000, $370,000 does not require an immediate outlay of
cash resources. The Company expects to report an operating loss in fiscal
2000 and through the first three quarters of fiscal 2001. The quarterly
losses are expected to decrease each quarter with a small operating profit
for fiscal 2001.
NON OPERATING INCOME (EXPENSE). Interest expense for the first nine
months of fiscal 2000 increased $68,476 as compared to the same period in
1999. The increase in interest expense relates to the financing of the
CBS-Athletes acquisition made by the Company in the second half of fiscal
1999 and notes payable entered into in March 2000. The Company's interest
expense is directly related to its level of borrowings and related interest
rates. Interest expense is expected to increase in fiscal 2001 due to the
acquisition of CFPI that was completed in May 2000 and if the Company obtains
debt financing to fund operations.
NET LOSS AND NET LOSS PER SHARE. The net loss for the first nine months of
fiscal 2000 was $515,332, as compared to $481,109 for the comparable period in
1999. The basic and diluted loss per share for the first nine months of fiscal
2000 was $0.03, as compared to net loss per share of $0.03 for the comparable
period in 1999. The Company has issued options to purchase 1,656,233 shares of
its common stock to employees as of April 30, 2000, which could potentially
dilute basic earnings per share in the future.
RESULTS OF OPERATIONS: FISCAL YEAR ENDED JULY 31, 1999 VERSUS JULY 31, 1998
REVENUE. For the fiscal year ending July 31, 1999, total revenue increased
$512,000 or 260% to $707,000 as compared to $195,000 for the fiscal year ending
July 31, 1998.
Profile revenue increased $391,000 or 360% for the fiscal year 1999 to
$499,000 from $108,000 for the fiscal year 1998, primarily as a result of the
acquisition of CBS-Athletes; $306,000 or 80% of the increase was attributable to
CBS-Athletes. Franchise fee revenue increased $92,000 or 140% for the fiscal
year 1999 to $157,000 from $65,000 for the fiscal year 1998.
Other revenue increased $29,000 or 130% to $51,000 for the fiscal year 1999
as compared to the same period in 1998 as a result of increased miscellaneous
income.
The Company has recently experienced substantial revenue growth,
however, there can be no assurance that the Company will continue to grow at
historical rates or at all. The Company's ability to generate increased
revenue and achieve profitability will depend upon its ability to increase
sales through development or acquisition of new products, expanding and
upgrading the number of sales representatives, expanding its seminar program
and designing an effective Internet e-commerce site. The Company's ability to
expand and develop these channels depends on a number of factors beyond the
Company's control, including general business and economic conditions.
Expansion and development of existing and additional marketing and
distribution channels will also depend, in part, upon the Company's ability
to secure additional technology, expertise and staff.
12
<PAGE>
The Company's results have been lowered by interest expense and
amortization of intangibles related to the acquisition completed in the
second half of fiscal 1999. The Company's results have also been affected by
the costs associated with the integration of operational and administrative
functions. There can be no assurance that the Company will be able to
integrate the business it has acquired successfully or in a timely manner in
accordance with its strategic objectives. Failure to integrate acquired
businesses effectively and efficiently could have a material adverse effect
on the Company's business, financial condition and results of operations.
COST OF SERVICES. The cost of operations for fiscal 1999 increased $241,000
or 140% to $413,000 from $172,000 for fiscal 1998. The increase in cost of
operations is attributable to the acquisition of CBS Athletes, developing
promotional materials and communication costs.
OPERATING EXPENSE. Selling, general and administrative expenses increased
$150,000 to $945,000 for fiscal 1999, as compared to $795,000 for the comparable
period in fiscal 1998. The increase results from the operating expenses of
CBS-Athletes included in fiscal 1999 and corporate and additional management
compensation for new staff. Because of increased management staff and cost of
new technology, the Company anticipates selling, general and administrative
expenses to increase in the future.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$62,000 to $110,000 for fiscal 1999, as compared to $48,000 for the comparable
period in fiscal 1998. The additional depreciation and amortization expense
recorded during the period is primarily attributable to the acquisition of
CBS-Athletes.
OPERATING LOSS. The Company's operating loss for fiscal 1999 is $761,000 as
compared to operating loss of $648,000 for the comparable period in 1998. The
increase in operating loss is primarily attributable to the increased general
and administrative expenses associated with the CBS-Athletes acquisition, costs
of merging operations, legal fees, and higher investor and public relations
expenses.
NON OPERATING INCOME (EXPENSE). Interest expense for fiscal 1999 increased
$32,000 to $41,000 from $9,000 as compared to the same period in 1998. The
increase in interest expense relates to the financing of the acquisition made by
the Company in the second half of fiscal 1999. The Company's interest expense is
directly related to its level of borrowings.
NET LOSS AND NET LOSS PER SHARE. The net loss for fiscal 1999 was $794,000,
as compared to net loss of $657,000 for the comparable period in 1998. The
diluted loss per share for fiscal 1999 was $0.05, as compared to net loss per
share of $0.04 for the comparable period in 1998. The Company has issued options
to purchase 1,126,233 shares of its common stock as of July 31, 1999, which
could potentially dilute basic earnings per share in the future.
FINANCIAL CONDITION
Total assets have increased steadily from $465,827 at July 31, 1998
to $2,002,040 at April 30, 2000, reflecting the Company's growth, both
internally and through acquisitions. The most significant increase occurred
during the 1999 fiscal year. At July 31, 1999, total assets were $1,557,226.
The Company recorded three intangible assets in connection with the
acquisition of CBS-Athletes in April 1999: payment for a covenant not to
compete of $156,013, software of $73,300, and recruiting systems technology
of $1,057,108. These are reflected on the balance sheet as other assets.
Property and equipment also increased as a result of the CBS-Athletes
acquisition from $36,624 at July 31, 1998 to $83,286 at July 31, 1999.
Total liabilities increased from $61,476 at July 31, 1998 to $1,661,193
at July 31, 1999. The increase was due to the acquisition of CBS-Athletes,
which was accomplished through the
13
<PAGE>
issuance of stock and notes, and to the growth of the Company during this
period. Current liabilities increased from $61,476 at July 31, 1998 to
$909,217 at July 31, 1999. The increase occurred primarily in current portion
of long-term debt payable to stockholder (which was related to the note given
by the Company for the acquisition), accounts payable (which was due to past
due accounts payable and revenues that did not meet pre-acquisition
projections in the CBS-Athletes transaction), accrued liabilities (which was
due to an increase in deferred salaries and accrued interest expense from the
CBS-Athletes acquisition), and due to related parties (which consists of
amounts due to Chartwell for unpaid royalties, management fees, and trade
credits). The balance sheet also reflected long-term debt of $751,976 at July
31, 1999, which was the notes given in connection with the CBS-Athletes
acquisition.
Stockholders' equity decreased from $404,351 at July 31, 1998 to $(103,967)
at July 31, 1999. While the Company issued 1,797,948 shares during the one-year
period for consideration of $285,672, this was offset by the loss of $793,990.
Total assets increased from $1,557,226 at July 31, 1999 to $2,002,040 at
April 30, 2000. Most of the increase is reflected in current assets, which
increased from $118,245 at July 31, 1999 to $615,056 at April 30, 2000. The
increase in cash was due to the completion of a $1,000,000 private placement in
February 2000 and the receipt of a $500,000 corporate sponsorship in March 2000.
Current liabilities increased from $909,217 at July 31, 1999 to
$1,198,379 at April 30, 2000, due to the maturation of long-term debt to
current. There was a corresponding decrease of long-term debt from $751,976
at July 31, 1999 to $249,995 at April 30, 2000. Overall, total liabilities
decreased from $1,661,193 at July 31, 1999 to $1,448,374 at April 30, 2000 as
payments were made with cash received during the nine-month period.
Stockholders' equity increased from a deficit of $103,967 at July 31, 1999
to $553,666 at April 30, 2000. The Company issued 3,640,138 shares for
consideration of $1,181,815 during the nine-month period, which offset the loss
of $515,332 for the period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity and capital resources
historically have been borrowings and sales of its equity securities. Cash used
for acquisitions and payment of operating costs has offset these sources of cash
flows.
During the year ended July 31, 1998, cash provided by sales of common stock
of $778,225 was used primarily for operating activities of $470,565. During the
year ended July 31, 1999, cash provided by an increase in a related party
payable and other financing activities totaling $232,275 were used for operating
activities of $316,200.
In February 2000, the Company completed the sale of 2,000,000 shares of
common stock for $1,000,000 and in March received a $500,000 corporate
sponsorship. The Company repaid $210,000 of acquisition-related debt and
other debt, approximately $76,000 of deferred compensation and $362,000 of
deferred vendor and accounts payable with the proceeds from these
transactions, offset by $548,917 of long-term debt maturing to current.
Accordingly, the working capital deficiency at April 30, 2000 decreased to
$583,323. The Company expects a working capital deficiency to continue until
additional funding is obtained and/or the Company reaches profitability.
Current assets increased to $615,056 as compared to $118,245 at July 31,
1999, due primarily to a $464,112 increase in cash. Current liabilities
increased to $1,198,379 at April 30, 2000 as compared to $909,217 at July 31,
1999, due to higher operating expenses and deferred payments in 2000.
14
<PAGE>
Management of the Company believes the cash received from the sale of
common stock and sponsorship, plus cash expected to be generated by operations,
will be sufficient to allow the Company to meet its obligations as they come due
through at least November 2000.
The Company also plans to raise capital through equity or combined debt and
equity financing. The proceeds will be used to expand its product and service
lines, to further develop its Internet capabilities, to further develop the
corporate sponsorship program, for acquisitions, and for additional working
capital, however, there can be no assurance that it will raise any capital. The
Company has been building its corporate infrastructure since 1997. To fully
utilize the infrastructure and the associated expense of maintaining it, the
Company must continue to grow through expansion of product and service lines and
acquisitions.
In May 2000, the Company entered into an investment agreement with Swartz
Private Equity, LLC. The investment agreement entitles the Company to issue and
sell, at its option, common stock for up to an aggregate of $30,000,000 from
time to time during a three-year period commencing on the effective date of a
registration statement (a "Put Right"). Management does not know to what extent
it will utilize this method of financing, but believed it to be prudent to have
the financing mechanism in place should the need arise. This investment
agreement will provide the Company with a financing alternative that can be
evaluated against other financing alternatives available to the Company. In
order to invoke a Put Right, the Company must have an effective registration
statement on file with the Securities and Exchange Commission registering the
resale of the common shares that may be issued as a consequence of the
invocation of the Put Right. If the Company does not use the Put Right
financing, it will still be obligated to pay a non-usage fee of a maximum of
$300,000 over the three-year period. During the term of the investment agreement
and for one year after its termination, the Company is prohibited from issuing
or selling any capital stock or securities convertible into the Company's
capital stock for cash in private capital raising transactions, without
obtaining the prior written approval of Swartz which Swartz has agreed to not
unreasonably withhold. In addition, Swartz has the option for 10 days after
receiving notice to purchase such securities on the same terms and conditions.
This right of first refusal does not apply to acquisitions, option plans or
strategic partnerships or joint ventures.
YEAR 2000 COMPLIANCE
The Company has determined that the Company's critical operating systems,
accounting systems, computer systems and business equipment are the major
resources that are affected by the Year 2000 issue. While certain of these
systems may need to be upgraded or replaced, the identified systems and or
programs are primarily "off the shelf" products with Year 2000 updates
available. The Company has determined these systems to be substantially
compliant. One proprietary software program requires updating to become
compliant. Actions are being taken to work around the issue and the impact is
minimal.
The total cost for the Year 2000 has been and is expected to be minimal.
Management believes that it has an effective plan in place to adequately
address the Year 2000 issue in a timely manner. Nevertheless, failure of third
parties upon which the Company's business relies could result in disruption of
the Company's supply of equipment and other general problems related to daily
operations. In addition, disruptions in the economy generally resulting from
Year 2000 issues could adversely affect the Company. Although, the Company
believes its Year 2000 plan will adequately address the Company's internal
issues, the overall risks associated with the Year 2000 issue cannot be fully
identified until the Company receives more responses from significant suppliers.
Thus far, the Company has had no significant disruptions due to Year 2000 issues
and it does not expect any disruptions in the future. It has expended no
financial or technical resources to remediate any Year 200 issues.
15
<PAGE>
ITEM 3. DESCRIPTION OF PROPERTY.
The Company leases approximately 4,080 square feet of office space from
Chartwell International, an affiliate, at 5275 DTC Parkway, Suite 150,
Englewood, Colorado, for monthly rent of $5,270. The lease expires July 31,
2000. See Part I - Item 7. Certain Relationships and Related Transactions.
The Company has entered into a new lease agreement with an unaffiliated
third party to lease approximately 6,140 square feet of office space at 333
South Allison Parkway, Suite 100, Lakewood, Colorado. The lease term commences
August 1, 2000 and expires July 31, 2005. Monthly rent will be $9,460.
CBS-Athletes leases approximately 4,700 square feet of office space from a
non-affiliated third party at N19 W6717 Commerce Court, Cedarburg, Wisconsin,
for monthly rent of $3,710. The lease expires August 31, 2000.
CFPI leases approximately 2,010 square feet of office space from a
non-affiliated third party at Suite 106 and 112, Tustin, California 92780. The
lease requires monthly rent of $2,714 and expires July 31, 2004.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table provides certain information as to the officers and
directors individually and as a group, and the holders of more than 5% of the
Common Stock of the Company, as of May 31, 2000:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF OWNER NUMBER OF SHARES OWNED PERCENT OF CLASS (1)
<S> <C> <C>
Chartwell International, Inc. 7,330,369 34.14%
5275 DTC Parkway, Suite 110 (2)
Englewood, CO 80111
Janice A. Jones 3,660,850 17.05%
5275 DTC Parkway, Suite 110 (3)
Englewood, CO 80111
Kevin W. Gemas 1,352,000 6.15%
N19 W6717 Commerce Court Cedarburg, Wisconsin (4)
53012
Constance Cooper 500,000 2.33%
14081 S. Yorba Street, Suite 106 (6)
Tustin, CA 92780
Rick N. Newton 255,000 1.18%
5275 DTC Parkway, Suite 110 (5)
Englewood, CO 80111
Jerome M. Lapin 250,000 1.15%
5275 DTC Parkway, Suite 110 (7)
Englewood, CO 80111
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS OF OWNER NUMBER OF SHARES OWNED PERCENT OF CLASS (1)
<S> <C> <C>
William R. Willard 112,000 0.52%
356 Playa Del Norte, No. 2 (8)
La Jolla, CA 92037
Serena V. Riedel 18,000 0.08%
5275 DTC Parkway, Suite 110
Englewood, CO 80111
Peter Lambert 0 --
3130 Wilshire Boulevard, 4th Floor
Santa Monica, CA 90400
Officers and Directors as a group 13,478,219 61.49%
(8 persons) (2)(3)(4)(5)(6)(7)(8)
</TABLE>
(1) This table is based on 21,470,890 shares of Common Stock outstanding on May
31, 2000. Where the persons listed on this table have the right to obtain
additional shares of common stock within 60 days from May 31, 2000, these
additional shares are deemed to be outstanding for the purpose of computing
the percentage of class owned by such persons, but are not deemed to be
outstanding for the purpose of computing the percentage of any other
person.
(2) According to a Form 10-SB filed by Chartwell International, Inc., Dr.
Janice A. Jones is the beneficial owner of 48% of Chartwell's common stock.
Dr. Jones is an officer and director of Chartwell. William R. Willard is a
director of Chartwell. The officers and directors of the Company may be
deemed to have beneficial ownership of the shares owned by record by
Chartwell.
(3) Includes 252,850 shares owned of record by John J. Grace (the spouse of
Janice A. Jones), shares issuable upon an option held by Mr. Grace to
purchase 200,000 shares from Chartwell, shares issuable upon an option
held by Dr. Jones to purchase 600,000 shares from Chartwell, 1,500,000
shares owned of record by Family Jewels II Limited Partnership (an entity
owned and controlled by Dr. Jones), and the right to convert debt into
1,000,000 shares held by The Chartwell Group, Inc. (a company owned and
controlled by Dr. Jones).
(4) These shares are owned of record by Kevin W. Gemas and Wayne O. Gemas as
joint tenants. Includes shares issuable upon exercise of an option to
purchase 500,000 shares. See Part I - Item 1. Description of Business.
Includes 352,000 shares held in escrow to secure payment of certain notes.
(5) Includes shares issuable upon exercise of an option to purchase 200,000
shares. See Part I, Item 6. Executive Compensation.
(6) Includes 250,000 shares held in escrow to secure performance of certain
revenue goals.
(7) Includes shares issuable upon exercise of an option to purchase 250,000
shares. See Part I, Item 6. Executive Compensation.
(8) Includes 64,000 shares owned of record by The Bridgestream Trust, an entity
owned and/or controlled by Mr. Willard.
17
<PAGE>
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
The officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Rick N. Newton 48 Chairman of the Board of Directors
Jerome M. Lapin 70 Chief Executive Officer and Director
Constance J. Cooper 64 Executive Vice President and Chief
Operating Officer - CFPI
Kevin Gemas 37 Chief Operating Officer - Profiles Division
Janice A. Jones 51 Corporate Secretary and Director
William R. Willard 57 Director
Peter Lambert 49 Director
Serena V. Riedel 30 Vice President - Administration
</TABLE>
The term of office of each director of the Company ends at the next annual
meeting of the Company's stockholders or when the director's successor is
elected and qualified. The next annual meeting of stockholders has been
tentatively scheduled for November 6, 2000 at the Company's offices. The term of
office of each officer of the Company ends at the next annual meeting of the
Company's Board of Directors, which is expected to take place immediately after
the next annual meeting of stockholders, or when such officer's successor is
elected and qualified.
RICK N. NEWTON has been the Chairman of the Board of Directors of the
Company since April 1999. From November 1996 to March1999, he was Director of
Corporate Finance Services at American Express Co., Denver, Colorado. From April
1990 to October 1996, he was CEO of Systems Science Institute. Mr. Newton has
more than 28 years of multi-industry experience ranging from start-up to Fortune
500 companies, and is primarily responsible for the Company's recent acquisition
of CBS-Athletes. He graduated from the University of Colorado with a Degree in
Engineering. Mr. Newton devotes approximately 20% of his time to the business of
the Company.
JEROME M. LAPIN has been Chief Executive Officer and a Director of the
Company since August 1999. From January 1994 to July 1999, Mr. Lapin was
President, CEO and Chairman of the Board of Directors of American Coin
Merchandising Corporation, a publicly traded company, (symbol ACMI), based in
Boulder, Colorado. Mr. Lapin was a co-founder of International House of Pancakes
in 1958. In 1966, he retired to Australia where he pursued private business
interests including World Hosts Pty, Ltd., which owned Caprice Restaurant and
established Orange Julius in Australia. In 1978 Mr. Lapin returned to the United
States and became President and CEO of Topsy's International, Inc., Kansas City,
Missouri, which acquired the Tastee Freez chain of 800 units. He was also
President of Sanwa Foods, Inc., a soup manufacturer in Los Angeles that was
subsequently acquired by Campbell Soups.
CONSTANCE J. COOPER has been the Executive Vice President of the Company
and CFPI Chief Operating Officer since May 5, 2000. Ms. Cooper founded
College Foundation Planners, Inc. (CFPI) in Tustin, California in 1982. CFPI
advises students and their parents on the availability of financial aid for
college, how to help families qualify for it and how to find the way through
the complex labyrinth of actually getting it. Her expertise in financial aid
planning for college has been featured
18
<PAGE>
in numerous interviews and articles, including Entrepreneur Magazine, Los
Angeles Times, Orange County Register and the OCN Cable News Channel. Ms.
Cooper earned her Masters degree in Education at California State University,
Long Beach. Her retirement as a professor from Fullerton College (25 years)
plus teaching in four high schools (8 years), prepared her to develop a
national program, The College Partnership-Registered Trademark-.
KEVIN GEMAS has been the Chief Operating Officer-Profiles Division of the
Company since April 1999. From January 1991 to April 1999, he was President of
College Bound Student-Athletes, Inc., Cedarburg, Wisconsin, which he founded in
1990. The Company acquired this company in April 1999. He graduated from Clemson
University in 1985 with a B.S. Degree in Business Administration. Mr. Gemas
devotes full-time to the business of the Company.
JANICE A. JONES, Ph.D., is the founder of the Company, and has been a
director of the Company since 1997 and its corporate secretary since 1998. In
addition, she founded and has been a director of Chartwell since its inception
in 1984 and its Chief Executive Officer since 1990, as well as President and a
director of NCRA. In 1979 she formed The Chartwell Group, Inc., an investment
banking and financial relations firm serving emerging growth companies. Dr.
Jones was engaged in investor relations for several companies from 1973 to 1982
including Cameron & Associates from 1976 to 1980. Dr. Jones holds Ph.D., 1980,
and Masters, 1976, degrees in Social Sciences from Yeshiva University, and a
B.A., 1973, from Hunter College. She received the Hunter College Hall of Fame
Award in 1986. In June 1995, Dr. Jones consented to the entry of an Order of the
Commission relative to Cease and Desist Proceedings instituted by the SEC.
Without admitting or denying the matters set forth therein, Dr. Jones was found
to have failed for three years and two months to file a Schedule 13G or
amendments thereto or to timely file Forms 3, 4 and 5 with respect to a public
company of which she was an officer, director and greater than 5% shareholder.
Dr. Jones devotes full-time to the business of the Company and Chartwell.
WILLIAM R. WILLARD has been a Director of the Company since June 1997.
Since 1997, he has also been a Director of Chartwell. Mr. Willard has been is
actively involved with public offerings, private placements mergers and
acquisitions and other corporate finance activities both domestically and
internationally at Bridgestream Partners, L.L.C. since May, 1992, where he is
Managing Partner and owns 100% of the membership interest. Prior to that time
he formed Willard Capital Group Ltd. in 1988. Prior to forming Willard
Capital Group Ltd., Mr. Willard was First Vice President in Corporate Finance
for Bateman Eichler, Hill Richards, Inc. Mr. Willard has diverse experience
at several other investment bankers, consulting firms and an advertising
firm. Mr. Willard received his B.S. in Political Science and International
Relations from the University of Wisconsin in 1965 and an M.B.A. in Finance
and International Business from the University of Chicago, Graduate School of
Business in 1971. He also attended the Sorbonne (Paris, France) where he
received his Cour Practique certificate. He serves on the boards of directors
of: Trans-Leasing International, Inc. (a reporting company under the
Securities Exchange Act of 1934), IDAS Corporation, E-2000, and Chick's
Natural. Mr. Willard devotes his time as required to the business of the
Company.
PETER LAMBERT has been a Director of the Company since May 2000. Since May
1999, Mr. Lambert has been the Executive Vice President and Chief Financial
Officer of Century Media, Inc., a television advertising agency based in Santa
Monica, California. From 1973 to 1997, Mr. Lambert was a commercial banker,
primarily with Lloyds Bank (1973 to 1978), The Bank of California (1978 to
1986), and Imperial Bank (1992 to 1997), handling a wide variety of businesses
including real estate developers, commercial property owners, service companies,
sports teams, high net-worth individuals, talent agencies, production companies,
restaurateurs, and collectors of corporate jets and thoroughbreds. Since 1997,
Mr. Lambert has been the Chief Financial Officer, and one of the principal
owners, of Century Entertainment, LLC, which provide consulting services to
entrepreneurs in the film services business that is highly concentrated in Los
Angeles. Mr. Lambert has an MBA
19
<PAGE>
from Loyola Marymount University in Los Angeles, a Bachelor's Degree in
Business Administration from the University of Southern California. Mr.
Lambert also graduated from Stanford's Graduate School of Credit and
Financial Management and the University of Oklahoma's National Commercial
Lending School.
SERENA V. RIEDEL has been the Vice President of Administration for the
Company since November 1998. She is also Director of Investor Relations for the
Company. From March 1998 to November 1998, she was Vice President of Operations
for Ryan Insurance Strategies Corporation, an insurance consulting company in
Denver, Colorado. From May 1989 to March 1998, Ms. Riedel held various executive
administrative assistant and clerical positions at four other companies. Ms.
Riedel devotes full-time as required to the business of the Company.
Dr. Jones may be deemed to be the "promoter" of the Company within the
meaning of the Rules and Regulations under federal securities laws.
ITEM 6. EXECUTIVE COMPENSATION.
The following table sets forth information for all persons who have served
as the chief executive officer of the Company during the last completed fiscal
year:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------------------------- ---------------------------------
AWARDS PAYOUTS
----------------------- -------
OTHER RESTRICTED SECURITIES
ANNUAL STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL COMPENSATION AWARD(S) OPTIONS/ LTIP COMPENSATION
POSITION YEAR SALARY ($) BONUS ($) ($) ($) SARS (#) PAYOUTS ($)
------------------ ---- ---------- --------- ------------ ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William Kroske 1999 $62,000 $-0- $-0- $16,578 -0- -0- $-0-
President (1)
</TABLE>
---------------
(1) William Kroske was the President of the Company from June 1997 to April
1999. From April to August 1999, Kevin Gemas served in an interim capacity.
No stock options or stock appreciation rights were granted to Mr. Kroske.
Since April 1997, the Company has issued 8,000 restricted shares of Common
Stock quarterly to each of Janice Jones, William Willard, and John Grace as
compensation for their services to the Company.
In February 1999, the Company entered into a employment agreement with
Arthur D. Harrison, to serve as interim Chief Financial Officer, pursuant to
which he is paid $15 per hour payable upon receipt of his billing invoice; $35
per hour payable upon receipt of financing of at least $750,000; and $90 per
hour in the form of a warrant or stock option based on current offering
valuation. Mr. Harrison received partial payments for his services in the form
of shares of the Company's Common Stock based on the prevailing market price at
the time. Through May 2000, he has been issued 100,526 shares of stock valued at
$19,276. Mr. Harrison had agreed to defer 50% of his compensation until the
Company received additional financing. However, he resigned effective May 1,
2000, and on May 4, 2000, he was given a note for $4,186 for the balance of his
deferred compensation. The note is due November 4, 2000 and accrues interest at
10% per annum.
20
<PAGE>
On March 29, 1999, in connection with the acquisition of CBS-Athletes, the
Company entered into an Employment Agreement with Kevin Gemas. Under the terms
of the Agreement, Mr. Gemas is to be employed by the Company for an initial term
of five years, with annual extensions thereafter by mutual consent of the
parties, at an annual salary of $90,000, subject to annual review. In addition,
Mr. Gemas receives a standard benefit package (health insurance, vacation pay,
sick pay, etc.) and an automobile allowance of $1,100 per month. Beginning in
April 2000, he is entitled to participate in the Company's executive management
bonus and stock option plans, when such plans are instituted.
On March 29, 1999, in connection with the acquisition of CBS-Athletes, the
Company entered into a Consulting Agreement with Wayne O. Gemas, father of Kevin
Gemas, Chief Operating Officer - Profiles Division of the Company. Pursuant to
the terms of the Consulting Agreement, Wayne Gemas will provide consulting
services to the Company on all matters pertaining to the business of the Company
for a period of 5 years and will receive $1,500.00 per month (including an
allowance for business expenses) for such services. In addition, Mr. Gemas is
entitled to health insurance coverage, with the premium for such policy to be
paid by the Company.
In April 1999, the Company entered into an employment agreement with Rick
Newton, Chairman of the Board of Directors. Pursuant to the terms of the
agreement, Mr. Newton received 55,000 restricted shares of Common Stock upon
acceptance of his engagement and an option to purchase up to 1,000,000 shares of
Common Stock at $0.50 per share. The option is exercisable for a five-year
period and vests at the rate of 200,000 shares per year. Upon reaching operating
profitability of $100,000 per year, Mr. Newton will receive an annual salary of
$25,000. On August 10, 1999, the Board of Directors rescinded the five-year
option to purchase up to 1,000,000 shares, but granted Mr. Newton the option to
purchase up to 60,000 shares at $0.50 per share, the amount vested since the
beginning of his employment. This option expires April 16, 2004. On May 31,
2000, Mr. Newton was granted a five-year option to purchase up to 250,000 shares
at $0.50 per share. This option is vested as to 140,000 shares and will vest as
to the remaining 110,000 shares on April 19, 2001 if he has performed as
Chairman of the company through November 6, 2000.
On August 9, 1999, the Company entered into an Employment and Stock
Option Agreement with Jerome M. Lapin, the Chief Executive Officer of the
Company. Mr. Lapin's employment agreement renews automatically for successive
one-year terms unless his employment is terminated. He is paid an annual
salary of $60,000 and was granted five-year options to purchase 500,000
shares of Common Stock at $0.272 per share, half of which vested on August 9,
1999 and the remainder of which will vest August 9, 2000. Mr. Lapin has
agreed that during his employment with the Company and for a period of three
years from the termination of his employment that he will not directly or
indirectly, own, manage, operate, control, be employed by, perform services
for, consult with, solicit business for, participate in, or be connected with
the ownership, management, operation, or control of (i) any business which is
materially similar to or competitive with the Company's business in the
United States or (ii) any of the Company's then existing vendors, affiliates,
or customers in the United States. Mr. Lapin's salary was increased effective
March 1, 2000 to $80,000 per year. He was also granted an additional option
to acquire 50,000 shares exercisable at $0.50 per share, vesting March 1,
2001. Mr. Lapin has deferred payment of his salary. At April 30, 2000,
$44,000 in salary had been accrued.
On September 1, 1999, the Company entered into a letter agreement with
John J. Grace, the spouse of Janice Jones and an officer, director, and
principal shareholder of the Company, with regard to his compensation for
services rendered July 1, 1999 through December 31, 1999. Mr. Grace billed
the Company for actual time worked at the rate of $100 as follows: $25 per
hour payable upon receipt of billings, $50 per hour payable upon receipt of
financing of $500,000 or more, and $25 per hour in stock. For the fiscal year
ended July 31, 1999 and nine months ended April 30, 2000, Mr. Grace earned
$-0- and $119,125, respectively, and received $22,000 in March
21
<PAGE>
2000. Mr. Grace has agreed to defer receipt of compensation until the Company
receives additional financing. This contract has been extended to August 31,
2000.
Beginning March 2000, Dr. Jones is paid an annual salary of $50,000. She
has agreed to defer 50% of her compensation until the Company receives
additional financing.
On May 5, 2000 in connection with the acquisition of College Foundation
Planners, Inc (CFPI), the Company entered into an Employment Agreement with
Constance Cooper. Under the terms of the Agreement, Ms. Cooper is to be
employed by the Company for an initial term of three years, with annual
extensions thereafter by mutual consent of the parties, at an annual salary
of $54,000, beginning on March 1, 2001. Ms. Cooper is entitled to a bonus
equal to 50% of the CFPI's annual pre-tax cash flow (Net Income) from $50,000
to $150,000 and a bonus equal to 25% of pre-tax Cash Flow (Net Income) over
$150,000 to $300,000. In addition, Ms. Cooper receives a car allowance of
$380 per month. She was also granted four-year option to purchase 500,000
shares of Common Stock at $0.50 per share or the then current market value up
to $1.00, that vest at a rate of 166,666 shares per year over the next three
years, providing certain milestones are met.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In June 1997, the Company entered into an agreement with National
College Recruiting Association, Inc. ("NCRA"), a wholly-owned subsidiary of
Chartwell International, Inc. Chartwell International was at the time and
still is a principal shareholder of the Company. Chartwell became the sole
stockholder of the Company in early 1996 when it acquired the Company's
stock. Dr. Janice A. Jones, an officer and director of the Company, is and
was at the time the Agreement was entered into, an officer, director and
principal shareholder of Chartwell. NCRA granted the Company an exclusive
license for the use, rights, and interests in and to all of the assets
constituting the business of NCRA, along with the rights to sell new and
service existing franchises of NCRA and to publish the Blue Chip Illustrated
magazine. The term of the Agreement is for five years, with unlimited
five-year renewals under the same terms and conditions. As consideration for
the license, the Company agreed to pay NCRA an initial payment of $150,000
(later amended to $210,000) and 2.5% of the gross revenues realized from the
business operations of NCRA. The agreement also provided for an additional
license fee of $100,000 to be paid to NCRA upon receipt of $500,000 of
additional financing by the Company. As of April 30, 2000, $22,000 is still
owed to NCRA for license fee payments.
Since June 1997, the Company has been leasing office space on a
month-to-month basis from Chartwell International, Inc. Rental expense was
$37,545 and $39,775 for the years ended July 31, 1999 and 1998, respectively.
On February 26, 1998, the Company entered into a Management Services
Agreement with Chartwell International, Inc. Chartwell agreed to raise capital
for the Company as required; provide accounting and financial services; provide
acquisition services; communicate with major investors, business partners and
legal counsel; assist in the utilization of trade credits; assist in the
preparation of business plans; and assist with external promotional
announcements. The Company agreed to pay Chartwell $7,500 per month beginning
February 1, 1998 until the Company's revenues exceed $4,000,000 per year. At
that time, Chartwell's fee would increase to 2-1/2% of total revenues. The
Company also agreed to reimburse Chartwell for its out of pocket expenses
incurred by Chartwell on behalf of the Company. Management fee expense was
$90,000 and $45,000 for the years ended July 31, 1999 and 1998, respectively.
This agreement was terminated February 29, 2000.
22
<PAGE>
On June 15, 1999, the Company borrowed $5,000 from Arthur E. Harrison, the
Company's Chief Financial Officer. The related promissory note was due December
15, 1999 with simple interest at the rate of 10% per annum. Rick N. Newton and
Janice A. Jones, officers and directors of the Company, personally guaranteed
the payment of the note. This note was paid in February 2000.
On June 15, 1999, the Company also borrowed $5,000 from Chartwell
International. The related promissory note was due December 15, 1999 with simple
interest at the rate of 10% per annum. This note was paid in February 2000.
On July 28, 1999, the Company borrowed $50,000 from Spring Sun Holdings,
Ltd., a non-affiliated third party. The related promissory note was guaranteed
by Chartwell International, Inc. and secured by 135,135 shares of the Company's
Common Stock owned by Chartwell. The note accrued interest at the rate of 10%
per annum and was due January 28, 2000. The Company tendered payment of this
note at maturity.
On January 28, 2000 and February 1, 2000, the Company borrowed $52,500 and
$17,500, respectively, from Chartwell International, Inc., a principal
shareholder of the Company and a company of which Janice Jones is an officer,
director and principal shareholder. Janice Jones is also an officer, director,
and principal shareholder of the Company. The notes are unsecured and accrue
interest at the rate of 10% per annum. These loans are still outstanding and
Chartwell has agreed to extend the maturity date of these loans to March 1,
2001.
ITEM 8. DESCRIPTION OF SECURITIES.
The authorized capital stock of the Company consists of 40,000,000 shares
of Common Stock, each with $0.001 par value per share, and 10,000,000 shares of
Preferred Stock, each with $0.001 par value per share.
COMMON STOCK
Each share of Common Stock has one vote with respect to all matters voted
upon by the shareholders. The shares of Common Stock do not have cumulative
voting rights.
Holders of Common Stock are entitled to receive dividends, when and if
declared by the Board of Directors, out of funds of the Company legally
available therefor. The Company has never declared a dividend on its Common
Stock and has no present intention of declaring any dividends in the future.
Holders of Common Stock do not have any preemptive rights or other rights
to subscribe for additional shares, or any conversion rights. Upon a
liquidation, dissolution, or winding up of the affairs of the Company, holders
of the Common Stock will be entitled to share ratably in the assets available
for distribution to such stockholders after the payment of all liabilities.
The outstanding shares of the Common Stock of the Company are fully paid
and non-assessable.
The registrar and transfer agent for the Company's Common Stock is
Corporate Stock Transfer, Inc., 3200 Cherry Creek Drive South, Suite 430,
Denver, Colorado 80209.
23
<PAGE>
PREFERRED STOCK
The Articles of Incorporation permit the Board of Directors, without
further shareholder authorization, to issue Preferred Stock in one or more
series and to fix the price and the terms and provisions of each series,
including dividend rights and preferences, conversion rights, voting rights,
redemption rights, and rights on liquidation, including preferences over the
Common Stock, all of which could adversely affect the rights of the holders of
the Common Stock. The Board of Directors has not issued nor established a series
of Preferred Stock.
24
<PAGE>
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS.
The Company's Common Stock is not traded on a registered securities
exchange, or on NASDAQ. The Company's Common Stock has been quoted on the OTC
Bulletin Board since February 1998, and currently trades under the symbol
"GRAD". The following table sets forth the range of high and low bid quotations
for each fiscal quarter within the last two fiscal years, as well as the current
fiscal year. These quotations reflect inter-dealer prices without retail
mark-up, mark-down, or commissions and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED HIGH BID LOW BID
<S> <C> <C>
April 30, 1998 $1.81 $0.25
July 31, 1998 $1.44 $0.69
October 31, 1998 $0.75 $0.13
January 31, 1999 $0.36 $0.09
April 30, 1999 $0.49 $0.20
July 31, 1999 $0.60 $0.22
October 31, 1999 $0.52 $0.18
January 31, 2000 $0.71 $0.15
April 30, 2000 $1.60 $0.20
</TABLE>
On June 30, 2000, the closing price for the Common Stock was $0.30.
As of May 3, 2000, there were 156 record holders of the Company's Common
Stock. Based on reports from Investor Communication Services, the Company
believes that there are approximately 1,770 beneficial shareholders
Since the Company's inception, no cash dividends have been declared on the
Company's Common Stock.
The Securities and Exchange Commission (SEC) has adopted rules that
regulate broker-dealer practices in connection with transactions in "penny
stocks". Generally, penny stocks are equity securities with a price of less than
$5.00 (other than securities registered on certain national exchanges or quoted
on the NASDAQ system). If the Company's shares are traded for less than $5 per
share, as they currently are, the shares will be subject to the SEC's penny
stock rules unless (1) the Company's net tangible assets exceed $5,000,000
during the Company's first three years of continuous operations or $2,000,000
after the Company's first three years of continuous operations; or (2) the
Company has had average revenue of at least $6,000,000 for the last three years.
The penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document prescribed by the SEC that provides information about penny
stocks and the nature and level of risks in the penny stock market. The
broker-dealer also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction, and monthly account statements showing the
market value of each penny stock held in the customer's account. In addition,
the penny stock rules require that prior to a transaction in a
25
<PAGE>
penny stock not otherwise exempt from those rules, the broker-dealer must make a
special written determination that the penny stock is a suitable investment for
the purchaser and receive the purchaser's written agreement to the transaction.
These requirements may have the effect of reducing the level of trading activity
in the secondary market for a stock that becomes subject to the penny stock
rules. As long as the Company's Common Stock is subject to the penny stock
rules, the holders of the Common Stock may find it difficult to sell the Common
Stock of the Company.
ITEM 2. LEGAL PROCEEDINGS.
None.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
In January 2000, the Company engaged KPMG LLP as its independent
auditor for the fiscal year ending July 31, 1999. The decision to engage KPMG
LLP was approved by the Board of Directors of the Company. The Company dismissed
its former independent auditor, Grant Thornton LLP effective upon the
appointment of KPMG LLP.
Grant Thornton LLP audited the Company's financial statements for the
fiscal year ended July 31, 1998. The report of Grant Thornton LLP on those
financial statements did not contain an adverse opinion or a disclaimer of an
opinion. The report was not modified as to audit scope or accounting principles,
but was modified with respect to the Company's ability to continue as a going
concern. For the past two fiscal years and during the subsequent interim period
preceding the date of the change in independent auditor, there were no
disagreements with Grant Thornton LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure that
would have caused Grant Thornton LLP to make reference in their report to such
disagreements.
The Company has requested Grant Thornton LLP to furnish it with a letter
addressed to the Securities and Exchange Commission stating that it agrees
with the statements in the preceding paragraph. A copy of that letter will be
filed as Exhibit 16 to this registration statement once it is received.
During the past two fiscal years and the subsequent interim period
preceding the date of change in independent auditor, the Company has not
consulted KPMG LLP regarding: (i) the application of accounting principles to a
completed or proposed transaction; or (ii) the type of audit opinion that might
be rendered on the Company's financial statements.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.
During the past three years, the Company has sold shares of Common Stock
which were not registered under the Securities Act of 1933, as amended, as
follows:
On June 16, 1997, 400,000 shares of Common Stock were authorized for
issuance to officers, directors, and other founders of the Company, for a total
value of $500.
On June 27, 1997, the Company issued 11,646,000 shares of Common Stock to
Chartwell International, Inc. for cash and other assets valued at $69,000.
26
<PAGE>
In July 1997, the Company sold 1,350,000 shares of Common Stock to 19
investors for cash of $118,000, net of offering costs, pursuant to the exemption
from registration contained in Rule 504 promulgated under the Securities Act of
1933.
In August and September 1997, 750,000 shares of Common Stock were issued to
the principals of Corporate Relations Group for cash and services valued at
$75,000.
In September 1997, 100,000 shares of Common Stock were issued to 2
investors, Olympus Capital, Inc. and Pow Wow, Inc., in consideration for making
bridge loans to the Company. The shares were valued at $10,000.
From August 1997 through May 1998, 75,632 shares of Common Stock were
issued to officers and directors of the Company for services valued at $15,816.
In January 1998, the Company sold 1,540,000 shares of Common Stock to 40
investors for cash of $745,000, net of offering costs, pursuant to the exemption
from registration contained in Rule 504 promulgated under the Securities Act of
1933.
In October 1997, 23,500 shares of Common Stock were issued to 10
individuals to buy back franchises. The shares were valued at $6,150.
In July 1998, the Company accrued 101,668 shares of issuance to employees.
The shares were valued at $53,624 and were actually issued in December 1998.
From December 1998 to May 1999, the Company issued 236,001 shares of Common
Stock to directors of the Company (William Willard, Janice Jones, and William
Kroske) and an advisor to the Company (John Grace) for services valued at
$21,274.
From December 1998 to March 1999, the Company issued 173,656 shares of
Common Stock to employees for compensation in the amount of $15,758.
From December 1998 to March 1999, the Company issued 471,795 shares of
Common Stock to certain parties for services valued at $41,770 and to secure the
payment of certain amounts owed by the Company. The shares issued for security
(450,100) are held in escrow.
In February 1999, the Company issued 42,000 shares of Common Stock to 4
persons for cash, net of offering costs, of $12,311, pursuant to the exemption
from registration contained in Rule 504.
In April 1999, the Company issued 500,000 shares of Common Stock to
Wayne and Kevin Gemas as part of the purchase price for CBS-Athletes, and
22,500 shares of Common Stock to 6 employees and consultants of CBS-Athletes.
The shares were valued at $133,028. In addition, options to purchase 500,000
shares of Common Stock at $0.50 per share, and additional options to purchase
500,000 shares of Common Stock contingent upon attaining certain performance
thresholds were issued to Wayne and Kevin Gemas. The issued options at $0.50
were valued at $61,531. An additional 25,000 shares, valued at $5,528, were
issued to one of the CBS-Athletes consultants in August 1999.
In May 1999, 351,996 shares of Common Stock were issued and held in escrow
to secure the payment of a note in the amount of $176,000. These shares were not
valued since they are held in escrow. These shares were cancelled in January
2000 and 352,000 shares reissued in the names of Kevin and Wayne Gemas. The
shares are still held in escrow.
27
<PAGE>
In August 1999, the Company issued 42,990 shares of Common Stock to
officers, directors, and an advisor of the Company (Art Harrison, Janice Jones,
William Willard, and John Grace) for compensation of $15,843.
In August 1999, the Company issued 1,347 shares of Common Stock to Marcus
McCarty for compensation of $397.
In August 1999, the Company issued 55,000 shares of Common Stock to The
Taxin Network for services valued at $12,161.
In October 1999, the Company issued 125,000 shares of Common Stock to
Patrick Darrel Hackman for investor relation services valued at $20,100.
In November 1999, the Company issued 360,000 shares of Common Stock to
Johnson & Associates for investor/public relations services valued at $53,064.
In January 2000, the Company issued 140,000 shares of Common Stock to
Charlie Jarvis for website creation services valued at $37,520.
In February 2000, the Company issued 145,033 shares of Common Stock to
officers, directors and advisors of the Company (Arthur Harrison, Janice Jones,
William Willard, and John Grace) for compensation $26,530.
In February 2000, the Company issued 3,278 shares of Common Stock to Daniel
J. Miske in lieu of legal fees of $791.
In February 2000, the Company offered and sold 2,000,000 shares of Common
Stock at $.50 per share for a total of $1,000,000 pursuant to Rule 504 of
Regulation D to 8 persons in the State of Nevada and one accredited investor in
the State of Colorado. The offering was registered by qualification in the State
of Nevada. No underwriters were used in connection with the offering. The
purchasers in descending order of our February 2000 504 offering were as
follows:
<TABLE>
<CAPTION>
Investor Name Shares Purchased Proceeds
---------------------------- ---------------- --------
<S> <C> <C>
1. Oriental New Investments 1,000,000 $ 500,000
2. Michael Chueh 300,000 $ 150,000
3. Diane Marie Wiley 233,000 $ 116,500
4. Rocio Trujillo 224,000 $ 112,000
5. Wall Street Partners 200,000 $ 100,000
6. Angela Gornec 20,000 $ 10,000
7. Arthur Gearhart 10,000 $ 5,000
8. Terry McGowan 8,000 $ 4,000
9. Marion Porter 5,000 $ 2,500
--------- ------------
TOTAL 2,000,000 $ 1,000,000
========= ============
</TABLE>
In February 2000, the Company issued 8,000 shares of Common Stock to Serena
Riedel, an employee of the Company, for compensation of $4,342.
In May 2000, the Company issued 500,000 shares of Common Stock to
Constance J. Cooper as part of the purchase price for CFPI. The shares were
valued at $119,394. In addition, options to purchase 500,000 shares of Common
Stock at the higher of $0.50 per share or market value on September 5, 2000,
contingent upon CFPI attaining certain performance thresholds were issued to
Constance J. Cooper.
28
<PAGE>
In May 2000, the Company issued 2,000 shares of Common Stock each to
Anthony Shouse, the controller of the Company, and John Grace, in consideration
for their agreement to defer part of their compensation. The shares were valued
at $1,148. Also in May 2000, the Company issued 51,990 shares of Common Stock to
officers, directors, and advisors of the Company (Arthur Harrison, Janice Jones,
William Willard, and John Grace) for compensation of $14,926.
In May 2000, the Company issued 10,000 shares and 150,000 shares of Common
Stock to Lovelock79.com and Maple, Poplar & Ash Ltd., respectively, as payment
for services. The shares were valued at $2,412 and $36,180, respectively.
In May 2000, the Company granted to Swartz Private Equity, LLC warrants to
purchase 445,000 shares of common stock during a five-year period at an exercise
price of the lower of $.50 per share or the lowest reset price. The terms of the
warrant provide that the purchase price will be reset every six months.
No underwriters were used in connection with any of the stock transactions
described above. Except for those transactions for which the Company has relied
upon the exemption from registration contained in Rule 504, the Company has
relied upon Section 4(2) of the Securities Act of 1933. All of the purchasers
were deemed to be sophisticated with respect to an investment in securities of
the Company by virtue of their financial condition and/or relationship to
members of management of the Company. The Company affixed appropriate legends to
the stock certificates issued in the transactions
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 7-109-101 et seq. of the Colorado Business Corporation Act and
Article VIII of the Company's Articles of Incorporation permit the Company to
indemnify its officers and directors and certain other persons against expenses
in defense of a suit to which they are parties by reason of such office, so long
as the persons conducted themselves in good faith and the persons reasonably
believed that their conduct was in the Company's best interests or not opposed
to the Company's best interests, and with respect to any criminal action or
proceeding, had no reasonable cause to believe their conduct was unlawful.
Indemnification is not permitted in connection with a proceeding by or in the
right of the corporation in which the officer or director was adjudged liable to
the corporation or in connection with any other proceeding charging that the
officer or director derived an improper personal benefit, whether or not
involving action in an official capacity.
PART F/S
See pages beginning with F-1.
29
<PAGE>
COLLEGE BOUND STUDENT ALLIANCE, INC.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
(unaudited)
April 30, 2000 July 31, 1999
-------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 546,495 $ 82,383
Accounts receivable, net 63,840 21,052
Other 4,721 14,810
----------- -----------
Total current assets 615,056 118,245
Equipment, net 72,291 83,286
Recruiting systems technology, net 1,116,870 1,231,595
Trademarks and licensing, net 192,723 119,000
Other assets 5,100 5,100
----------- -----------
TOTAL ASSETS $ 2,002,040 $ 1,557,226
=========== ===========
Current liabilities:
Notes payable $ -- $ 50,000
Current portion of capital lease obligation -- 3,372
Current portion of long-tem debt payable to stockholder 548,917 132,348
Accounts payable 274,298 374,252
Accrued liabilities 115,128 128,697
Notes payable to related parties 145,000 86,000
Due to related parties 78,828 98,340
Deferred revenue 36,208 36,208
----------- -----------
Total 1,198,379 909,217
Long-term notes and interest payable, less current portion 249,995 751,976
----------- -----------
TOTAL LIABILITIES 1,448,374 1,661,193
Stockholders' equity (deficit)
Common stock 20,773 17,785
Additional paid in capital 2,530,919 1,360,977
Accumulated deficit (1,998,026) (1,482,729)
----------- -----------
Total stockholders' equity (deficit) 553,666 (103,967)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,002,040 $ 1,557,226
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-1
<PAGE>
COLLEGE BOUND STUDENT ALLIANCE, INC.
Condensed Consolidated Statements of Operations
for the nine month periods ending April 30
<TABLE>
<CAPTION>
(unaudited) (unaudited)
2000 1999
------------ ------------
<S> <C> <C>
Revenue
Profiles $ 988,400 $ 171,424
Corporate sponsorships 535,665 10,000
Franchises -- 156,527
Other 3,584 --
------------ ------------
Total revenue 1,527,649 337,951
Cost of services 743,401 216,107
General and administrative 1,071,199 565,662
Depreciation and amortization 158,974 36,360
------------ ------------
Operating loss (445,925) (480,178)
Interest expense, net 69,407 931
------------ ------------
NET LOSS $ (515,332) $ (481,109)
============ ============
Net loss per share - basic and diluted $ (0.03) $ (0.03)
============ ============
Weighted average number of common shares outstanding -
basic and diluted 18,863,459 15,845,462
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-2
<PAGE>
COLLEGE BOUND STUDENT ALLIANCE, INC.
Condensed Consolidated Statements of Cash Flows
for the nine month periods ending April 30
<TABLE>
<CAPTION>
(unaudited) (unaudited)
2000 1999
----------- -----------
<S> <C> <C>
Net loss $(515,332) $ (481,109)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 158,974 36,360
Change in allowance for doubtful accounts (28,000) 10,000
Non-cash stock issuances 172,930 212,867
--------- -----------
(211,428) (221,882)
Net cash provided (used) by operating activities (74,598) 247,145
Net cash used by investing activities (120,823) (1,073,754)
Net cash provided by financing activities 870,961 910,664
--------- -----------
Net increase (decrease) in cash and cash equivalents 464,112 (137,827)
Cash and cash equivalents at beginning of period 82,383 173,832
--------- -----------
Cash and cash equivalents at end of period $ 546,495 $ 36,005
========= ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-3
<PAGE>
COLLEGE BOUND STUDENT ALLIANCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR NINE MONTHS ENDING APRIL 30, 2000
1. ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) HISTORY AND BUSINESS ACTIVITY
College Bound Student Alliance, Inc., (the "Company") was incorporated
in the State of Colorado on July 15, 1993 under the name Winter Park
Ventures. The Company was inactive until 1997. On April 22, 1997, the
Company amended it articles of incorporation and changed its name to
SportsStar Marketing, Inc. On July 13, 1999, the Company changed to
its current name after the acquisition of College Bound Student
Athletes, Inc.
The Company's business objective is to expand the choices of colleges
for qualified students and to assist parents and students who have the
opportunity to access financial aid opportunities. This is the
Company's only business segment. The Company is transitioning from a
principally franchise based sales force to primarily a direct sales
force and other marketing channels. The Company uses a central
production and distribution facility to prepare the finished product
and distribute to appropriate colleges. The Company's main product
line includes profiling, higher education aids and learning programs,
financial aid and merit award searches and academic and personal
development programs. The Company also licenses the right to publish
the magazine "BlueChip Illustrated".
Beginning in April 1999, the consolidated financial statements include
the financial statements of the Company and its wholly owned
subsidiary, College Bound Student-Athletes, Inc. (CBS-Athletes). All
inter-company balances and transactions have been eliminated in
consolidation.
(b) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less as cash equivalents.
(c) TRADE CREDITS
The Company accounts for trade credits according to Financial
Accounting Standards Board Emerging Issues Task Force abstract No.
93-11. Trade credits are recorded at cost, and represent purchasing
value for goods and services in established barter markets. The
Company considers these credits as the equivalent of cash for purchase
of certain goods and services, but reviews its trade credits
periodically to assess their carrying amounts.
(d) LICENSING RIGHTS
Licensing rights are recorded at cost and are amortized on a
straight-line basis over the term of the agreement, which is five
years.
F-4
<PAGE>
(e) NET LOSS PER SHARE
The Company computes earnings (loss) per share in accordance with the
requirements of Statement of Financial Accounting Standards No. 128,
Earnings Per Share, (SFAS No. 128). SFAS No. 128 requires the
disclosure of basic earnings per share and diluted earnings per share.
Basic earnings per share is computed by dividing income available to
common stockholders by the weighted average number of common shares
outstanding. Diluted earnings per share is computed by dividing income
available to common stockholders by the weighted average number of
common shares outstanding increased for potentially dilutive common
shares outstanding during the period. The dilutive effect of stock
options, warrants, and their equivalents is calculated using the
treasury stock method.
Net loss per common share - basic and diluted is computed based on the
weighted average number of shares of common stock outstanding during
the period. Basic loss per common share and loss per common share -
assuming dilution, are the same for the periods ended April 30, 2000
and 1999 because of the antidilutive effect of stock options and
awards when there is a net loss. The Company has outstanding options
to purchase 1,656,233 and 1,126,233 shares of its common stock as of
April 30, 2000 and July 31,1999, respectively, which could potentially
dilute basic earnings per share in the future.
(f) EQUIPMENT
Equipment is recorded at cost and depreciation is recorded using the
straight-line method over the estimated useful lives of the assets
ranging from five to seven years for furniture and equipment and three
years for vehicles.
(g) REVENUE RECOGNITION
The Company recognizes profile fee revenue from students as the
services are performed. Deferred revenue is recorded for cash received
in advance for services the Company is obligated to perform. The
Company recognizes franchise fee revenue from an individual franchise
sale when all the initial services of the Company, as required by the
franchise agreement, have been performed. Corporate Sponsorships,
which are not restricted as to use by the sponsor, are recognized as
revenue when received in accordance with Statement of Financial
Accounting Standards No. 116 "Accounting for Contributions Received
and Contributions Made."
F-5
<PAGE>
(h) INCOME TAXES
The Company has accounted for income taxes in accordance with
Statement of Financial Accounting Standards No. 109 (SFAS No. 109),
Accounting for Income Taxes. Under SFAS No. 109, income taxes are
accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in operations in the period that includes the enactment
date.
(i) STOCK OPTION PLAN AND STOCK OPTION AGREEMENTS
The Company accounts for stock options issued to employees in
accordance with the provisions of Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense is recorded on the date
of grant only if the current fair value of the underlying stock
exceeds the exercise price. The Company has adopted Statement of
Financial Accounting Standards No. 123 (SFAS No. 123), Accounting for
Stock-Based Compensation, which permits entities to recognize as
expense over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS No. 123 also allows
entities to continue to apply the provisions of APB Opinion No. 25 and
provide pro forma net income (loss) disclosures for employee stock
option grants as if the fair-value-based method defined in SFAS No.
123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosures
required by SFAS No. 123 for stock options issued to employees. All
stock options issued to non-employees are accounted for using the
provisions of SFAS No. 123.
(j) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results could differ
significantly from those estimates.
The accompanying condensed consolidated financial statements have been prepared,
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
condensed consolidated financial statements
F-6
<PAGE>
be read in connection with the financial statements and notes thereto for the
year ended July 31, 1999, included elsewhere herein.
In the opinion of the Company, the accompanying condensed consolidated financial
statements include all adjustments (consisting of normal recurring accruals and
adjustments) required to present fairly the Company's financial position at
April 30, 2000 and the results of their operations for each of the nine month
periods ended April 30, 2000 and 1999.
The operating results for the nine months ended April 30, 2000 are not
necessarily indicative of the results that may be expected for the year ended
July 31, 2000.
2. LIQUIDITY
In February 2000, the Company completed the sale of 2,000,000 shares of common
stock for $1,000,000 and in March received a $500,000 corporate sponsorship. The
Company repaid $160,000 of acquisition and other debt, $76,000 of deferred
compensation and $362,000 of deferred vendor and accounts payable with the
proceeds from these transactions. Management of the Company believes the cash
received from the sale of common stock and sponsorship, plus cash generated from
operations, will be sufficient to allow the Company to meet its obligations as
they come due through at least November 2000.
The Company's internal sources of liquidity include the continuing commitment of
certain management personnel to defer a portion or all of their compensation
until cash flow improves, the commitment of certain major
stockholders/noteholders to defer payments on their notes until cash flow
improves and the ability of a significant stockholder to contribute funding if
needed.
3. BUSINESS COMBINATION
On April 15, 1999, the Company acquired CBS Athletes, for $1,307,000, consisting
of $1,039,900 debt, 545,000 shares of the Company's stock, and options to
purchase 500,000 shares of the Company's common stock at $0.50 per share.
Additional payments of up to $1.1 million and options to purchase 500,000 shares
of the Company's common stock could be made upon CBS Athletes achieving certain
performance thresholds. It is presently not probable that such performance
thresholds will be met. Additional consideration, if any, would be recognized at
the point that meeting the thresholds becomes probable.
The acquisition has been accounted for by the purchase method and the results of
operation have been included in the Company's financial statements from April
15, 1999. The purchase price was allocated to the fair value of identifiable
assets and liabilities. In connection with the purchase, the Company recorded
three intangible assets: payment for a covenant not to compete of $156,013 which
is being amortized over the covenant period of three years on a straight-line
basis; software of $73,300 which is being amortized on a straight line basis
over five years; and recruiting systems technology of $1,057,108 which is being
amortized on a straight line basis over ten years. These intangible assets have
been recorded as other assets.
F-7
<PAGE>
The following unaudited pro forma financial information presents the combined
results of operations of the Company and CBS Athletes as if the acquisition had
occurred at the beginning of fiscal 1999, after giving effect to certain
adjustments including amortization of intangibles, additional depreciation
expense and increased interest expense on debt related to the acquisition. The
pro forma financial information does not necessarily reflect the results of
operations that would have occurred had the Company and CBS-Athletes constituted
a single entity during such period.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
APRIL 30, 1999
-----------------
<S> <C>
Net sales $ 1,302,395
===========
Net loss $ (614,455)
===========
Net loss per share - basic and diluted $ (0.04)
===========
</TABLE>
4. EQUIPMENT
Equipment at April 30, 2000 and July 31, 1999 consisted of the following:
<TABLE>
<CAPTION>
2000 1999
-------- -------
<S> <C> <C>
Furniture and equipment $ 93,639 89,659
Vehicle 14,076 14,076
-------- -------
Less accumulated depreciation (35,424) (20,449)
-------- -------
$ 72,291 83,286
======== =======
</TABLE>
Depreciation expense for the nine months ended April 30, 2000 and 1999, was
$14,974 and $4,275, respectively.
5. NOTES PAYABLE TO RELATED PARTIES
On March 1, 2000, the Company borrowed $52,500 from Chartwell International,
Inc. with an interest rate of 10% per annum payable monthly. The principal is
payable on the earlier of March 1, 2001 or receipt of $1,000,000 of long-term
financing, as defined in the agreement.
On March 1, 2000, the Company borrowed $17,500 from Chartwell International,
Inc. with an interest rate of 10% per annum payable monthly, the principal is
payable on the earlier of March 1, 2001 or receipt of $1,000,000 of long-term
financing, as defined in the agreement.
On March 1, 2000, the Company signed a note for past due amounts of $19,010 to
Chartwell International, Inc., without interest payable monthly at a rate of
$1,000.00 per month commencing March 1, 2000 or the unpaid principal is payable
on receipt of $1,200,000 of long-term financing, as defined in the agreement.
F-8
<PAGE>
On March 1, 2000, the Company signed a note for past due amounts of $25,000 from
National Collegiate Recruiting Associates, Inc. a wholly owned subsidiary of
Chartwell International, Inc. without interest payable monthly at the rate of
$1,000.00 per month commencing March 1, 2000, the unpaid principal balance is
payable on the receipt of $1,200,000 of long-term financing, as defined in the
agreement.
On March 1, 2000, the Company signed a note for $36,665 in trade credits from
Chartwell International, Inc. with an interest rate of 10% per annum compounded
quarterly, the principal and accrued interest is payable on the earlier of
August 1, 2001 or receipt of $1,500,000 of long-term financing, as defined in
the agreement. Cumulative principal and interest are payable in trade credits or
in cash at the discretion of the Company.
6. LONG-TERM DEBT PAYABLE TO STOCKHOLDER
Notes payable to stockholder as of April 30, 2000 and July 31, 1999
consisted of the following:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Note payable to stockholder for acquisition of CBS Athletes, plus
accrued interest $460,795 $527,951
Note payable to stockholder assumed in connection with acquisition
of CBS Athletes 202,674 208,888
Note payable to stockholder for agreement not to compete in
connection with acquisition of CBS Athletes 135,443 147,485
-------- --------
798,912 884,324
Less current portion 548,917 132,348
-------- --------
$249,995 $751,976
======== ========
</TABLE>
In December 1999 and March 2000, the former owner of CBS-Athletes and the
Company entered into amendments to require payments on debt acquired or
issued in connection with the acquisition of CBS-Athletes as follows:
1. $600,000 non-interest bearing note and $75,000 other note: $160,000 is
due upon obtaining $1 million in financing (payment was made in March
2000) and the remainder of the unpaid balance upon receiving an
additional $3,500,000 in financing or $20,000 on July 1, 2000; $20,000
on October 1, 2000; $20,000 on January 1, 2001; $20,000 on March 1,
2001, and the balance on March 15, 2001.
2. $176,000 covenant not to compete: 36 equal monthly installments of
$4,889 beginning December 15, 1999.
3. $208,888, 8% note final payment due November 15, 2004: 60 equal
monthly installments of interest and principal of $4,446 beginning
December 15, 1999.
In March 2000, payments of $160,000 were made on the $675,000
above-mentioned notes.
F-9
<PAGE>
Aggregate annual maturities of notes payable as of July 31, 1999, assuming
the Company does not obtain additional financing which causes acceleration
of the payment of this debt, follows:
<TABLE>
<CAPTION>
July 31:
<S> <C>
2000 $ 132,348
2001 532,494
2002 95,381
2003 61,877
2004 47,568
Thereafter 14,656
---------
$ 884,324
=========
</TABLE>
7. RELATED PARTY TRANSACTIONS
The Company entered into a consulting agreement with the former owner of
CBS-Athletes for $1,500 per month for five years beginning as of the date
when the first $100,000 payment is made on the Acquisition Note. In March
2000, $160,000 was paid against the purchase price, which triggered
payments to start under the consulting agreement. The first $1,500 payment
was made April 2000 and will be made monthly for the next five years.
The Company leases office space on a month-to-month basis from Chartwell
International, Inc. (Chartwell). Rental expense was $59,310 and $30,140 for
the nine month periods ended April 2000 and 1999, respectively.
Beginning February 1, 1998, the Company entered a three-year agreement with
Chartwell whereby Chartwell's management performs certain management
functions for the Company in exchange for $7,500 per month. Management fee
expense was $52,500 and $67,500 for the nine-month periods ended April 30,
2000 and 1999, respectively. The management agreement was cancelled
February 29, 2000.
The Company has acquired licensing rights through an agreement with
National College Recruiting Association, Inc. (NCRA), which is a wholly
owned subsidiary of Chartwell. The license provides the Company with
exclusive use, rights and interest in the NCRA name, franchise program,
operating franchisees, franchise fees, operating systems and technology,
the "Blue Chip Illustrated" magazine and the 900 Sports line, for a
five-year period renewable for an unspecified number of five year terms.
The fee for the license includes a payment of $210,000 to NCRA, plus 2.5%
of gross revenue from licensed operations and an additional payment of
$100,000 upon the Company raising an additional $500,000 in capital. The
additional license fee was recognized and the Company paid $75,000 of the
fee in February and March 2000.
The Company offered for sale and sold franchises whereby the purchaser
may, for a fee and royalties, secure the use of NCRA's name, distribution
network and marketing materials. Under the terms of the franchise
agreement, prior to the opening of the franchise, the Company makes
available to the franchisee, training at a NCRA facility, sales and start
up consulting, and the right to operate a NCRA franchise using the NCRA
name and trademark. During the operation of the franchise, the Company is
required to
F-10
<PAGE>
provide, among other things, ongoing training and consulting, subscriber
services and access to advertising materials and supplies generally for an
additional fee.
The Company has recorded its licensing rights at cost, $310,000, and is
amortizing the asset over a five-year period using the straight-line method.
8. INCOME TAXES
Income tax benefit differed from the amounts computed by applying the U.S.
Federal income tax rate of 34% as a result of the following:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
APRIL 30, 2000 JULY 31, 1999
----------------- -------------
<S> <C> <C>
Computed "expected" tax benefit $ 175,213 269,957
Increase (decrease) in tax benefit resulting
from:
State income taxes, net of federal benefit 17,006 26,009
Increase in valuation allowance (192,219) (295,966)
--------- --------
Income tax expense (benefit) $ -- --
========= ========
</TABLE>
The Company has a net operating loss carry forward of approximately $2.0
million as of April 30, 2000 available to offset future U.S. tax
liabilities, which expires beginning in 2018 and is the Company's only
significant deferred tax asset. Due to historical operating losses, the
Company has provided a valuation allowance against this asset. Accordingly,
no deferred tax asset has been included in the accompanying balance sheets.
9. STOCKHOLDERS' EQUITY (DEFICIT)
The Company has 10,000,000 shares of authorized preferred stock, par value
$0.001, issuable from time to time in different series with rights and
privileges to be determined by the Board of Directors. No preferred stock has
been issued.
10. EMPLOYMENT AGREEMENT
In August 1997, the Chairman of the Board entered into an agreement which
gives the Chairman a five-year option to purchase 1,000,000 shares of the
Company's common stock at $.50 per share which was the fair value of the
common stock on the grant date. The agreement was later modified and options
granted are as follows: 311,233 shares to the former Chairman (all vested),
200,000 shares to the existing Chairman, vested as of April 19, 2000, and
110,000 shares for the period April 19, 2000 to November 6, 2000 vesting
April 19, 2001.
F-11
<PAGE>
11. STOCK OPTIONS
The per share weighted average fair value of stock options granted during the
nine months ended April 30, 2000 and the year ended July 31, 1999 was $.23 and
$.30, respectively, on the date of grant using the Black Scholes option pricing
model with the following assumptions: no expected dividend yield, risk free
interest rate of 6%, volatility of 115%, and expected option lives ranging from
3 to 5 years.
The Company applies APB Opinion No. 25 in accounting for its stock options
issued to employees and, accordingly, no compensation cost has been recognized
in the accompanying financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Company's net loss would have increased to the
pro forma amounts indicated below for the nine months ended April 30, 2000 and
the year ended July 31, 1999:
<TABLE>
<CAPTION>
2000 1999
---------- --------
<S> <C> <C>
Net loss as reported $ (515,332) (793,990)
========== ========
Net loss, pro forma $ (652,292) (850,285)
========== ========
Net loss per share - basic and diluted
pro forma $ (.03) (.05)
========== ========
</TABLE>
The above pro forma disclosures are not necessarily representative of the effect
on the reported net loss for future periods because options vest over several
years and additional awards are generally made each year.
Stock option activity was as follows:
<TABLE>
<CAPTION>
Number of shares Range of exercise Weighted average
prices exercise price
---------------- ------------------ ----------------
<S> <C> <C> <C>
Balance at July 31, 1997 10,000 $0.50 $ 0.50
Granted 311,233 $0.50 $ 0.50
Canceled (10,000) $0.50 $ 0.50
---------
Balance at July 28, 1998 311,233 $0.50 $ 0.50
Granted 815,000 $0.50 to $1.00 $ 0.51
Balance at July 31, 1999 1,126,233 $0.50 to $1.00 $ 0.51
Granted 535,000 $0.27 to $0.50
Canceled (5,000) $0.50 $ 0.50
---------
Balance at April 30, 2000 1,656,233 $0.27 to $1.00 $ 0.47
=========
Number of options
exercisable at April 30, 2000 1,291,233 $0.27 to $1.00 $ 0.47
=========
</TABLE>
Canceled options are a result of employee terminations and forfeitures.
F-12
<PAGE>
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
REMAINING NUMBER
EXERCISE NUMBER CONTRACTUAL EXERCISABLE AT
PRICE OUTSTANDING LIFE (YEARS) APRIL 30, 2000
-------- ----------- ------------ --------------
<S> <C> <C> <C>
$ .27 250,000 5.5 250,000
.50 1,396,233 4.8 1,031,233
1.00 10,000 1.5 10,000
--------- ---------
1,656,233 1,291,233
========= =========
</TABLE>
The Company has agreements to grant additional options to certain employees. The
Chairman of the Board is granted additional 200,000 options for each year of
service, which vest after the year such service is completed. The CEO is to
receive 250,000 options on the anniversary date of employment. The Chief
Financial Officer, hired May 1, 2000, is to receive 250,000 options vesting 20%
per year over the next five years on the anniversary date of employment. The
Corporate Controller is to receive 100,000 options vesting 20% per year over the
next four years on the anniversary date of employment. In March 2000, the
Company granted options for an additional 50,000 shares to the CEO, which vest
in March 2001. All mentioned option plans are included in the options
outstanding at April 30, 2000.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash, accounts receivable, notes payable, accounts
payable, accrued liabilities, notes payable to related parties and due to
related parties approximate fair value because of the short maturity or duration
of these instruments. The carrying amount of long-term debt approximates fair
value as the interest rates are considered market rates, for long-term debt
which is not interest bearing, the discount used for financial reporting
purposes is the incremental borrowing rate and, accordingly, discounted value
approximates fair value.
13. SUBSEQUENT EVENTS
On May 5, 2000, the Company acquired College Foundation Planners, Inc. (CFPI),
for a contractual purchase price of up to $360,000, consisting of $241,000 debt
and 540,000 shares valued at $119,000 of the Company's stock. The contractual
purchase price is based on CFPI having defined net assets and maintaining
defined revenue thresholds for periods before and after closing of the purchase.
If the thresholds are not reached, the purchase price will be lowered. Two
hundred fifty thousand of the 540,000 shares issued have been placed in escrow
with an independent agent and will be released depending upon CFPI attaining
contractual revenue thresholds in the next year. Options to purchase 500,000
shares of the Company's common stock have been granted to the former owner and
operator of CFPI as part of the employment contract, which become vested and
exercisable only to the extent CFPI achieves contractual performance thresholds
over the next three years, which if attained will be recognized as expense in
the periods earned.
F-13
<PAGE>
The following unaudited pro forma financial information presents the combined
results of operations of the Company and CFPI as if the acquisition had occurred
at the beginning of fiscal 2000 and 1999, after giving effect to certain
adjustments including amortization of intangibles, additional depreciation
expense and increased interest expense on debt related to the acquisition. The
pro forma financial information does not necessarily reflect the results of
operations that would have occurred had the Company and CFPI constituted a
single entity during such periods.
<TABLE>
<CAPTION>
NINE MONTH
PERIOD ENDED YEAR ENDED
APRIL 30, 2000 JULY 31, 1999
-------------- -------------
<S> <C> <C>
Net sales $ 1,861,624 1,791,022
=========== ==========
Net loss $ (635,760) (672,630)
=========== ==========
Net loss per share - basic and diluted $ (.03) (.04)
=========== ==========
</TABLE>
In May 2000, the Company entered into an investment agreement with Swartz
Private Equity, LLC. The investment agreement entitles the Company to issue and
sell, at its option, common stock for up to an aggregate of $30,000,000 from
time to time during a three-year period commencing on the effective date of a
registration statement (a "Put Right"). Management does not know to what extent
it will utilize this method of financing, but believed it to be prudent to have
the financing mechanism in place should the need arise. This investment
agreement will provide the Company with a financing alternative that can be
evaluated against other financing alternatives available to the Company. In
order to invoke a Put Right, the Company must have an effective registration
statement on file with the Securities and Exchange Commission registering the
resale of the common shares which may be issued as a consequence of the
invocation of the Put Right. If the Company does not use the Put Right
financing, it will still be obligated to pay a non-usage fee of a maximum of
$300,000 over the three-year period. During the term of the investment agreement
and for one year after its termination, the Company is prohibited from issuing
or selling any capital stock or securities convertible into the Company's
capital stock for cash in private capital raising transactions, without
obtaining the prior written approval of Swartz which Swartz has agreed to not
unreasonably withhold. In addition, Swartz has the option for 10 days after
receiving notice to purchase such securities on the same terms and conditions.
This right of first refusal does not apply to acquisitions, option plans or
strategic partnership or joint ventures.
F-14
<PAGE>
COLLEGE BOUND STUDENT ALLIANCE, INC.
AND SUBSIDIARY
Consolidated Financial Statements
July 31, 1999 and 1998
(With Independent Auditors' Report Thereon)
F-15
<PAGE>
Independent Auditors' Report
Board of Directors
College Bound Student Alliance, Inc. and subsidiary:
We have audited the accompanying consolidated balance sheet of College Bound
Student Alliance, Inc. and subsidiary (Company) as of July 31, 1999, and the
related consolidated statement of operations, stockholders' equity (deficit) and
cash flows for the year then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit. The
financial statements of College Bound Student Alliance, Inc. as of and for the
year ended July 31, 1998, were audited by other auditors, whose report dated
December 7, 1998 on those statements included an explanatory paragraph due to
uncertainty relating to the Company's ability to continue as a going concern.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1999 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of College
Bound Student Alliance, Inc. and subsidiary as of July 31, 1999, and the results
of their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
KPMG LLP
Denver, Colorado
January 19, 2000, except as to
note 2, which is as of
March 9, 2000
F-16
<PAGE>
COLLEGE BOUND STUDENT ALLIANCE, INC.
AND SUBSIDIARY
Consolidated Balance Sheets
July 31, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
----------- ----------
<S> <C> <C>
Current assets:
Cash $ 82,383 173,832
Trade credits -- 49,513
Accounts receivable, net of allowance for doubtful accounts of
$28,000 in 1999 21,052 --
Other current assets 14,810 11,917
Current portion of notes receivable -- 16,090
Receivable from related party -- 660
----------- ----------
Total current assets 118,245 252,012
Notes receivable less current portion -- 7,963
Property and equipment, net 83,286 36,624
Licensing rights, net of accumulated amortization of $91,000 and
$47,250 in 1999 and 1998, respectively 119,000 162,750
Organization costs -- 1,378
Other assets, net of accumulated amortization of $54,826 in 1999 1,236,695 5,100
----------- ----------
Total assets $ 1,557,226 465,827
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable $ 50,000 --
Current portion of capital lease obligation 3,372 --
Current portion of long-term debt payable to stockholder 132,348 --
Accounts payable 374,252 37,910
Accrued liabilities 128,697 23,566
Notes payable to related parties 86,000 --
Due to related parties 98,340 --
Deferred revenue 36,208 --
----------- ----------
Total current liabilities 909,217 61,476
----------- ----------
Long-term liabilities -
long-term debt payable to stockholder, less current portion 751,976 --
----------- ----------
Total liabilities 1,661,193 61,476
Stockholders' equity (deficit):
Preferred stock, $.001 par value, 10,000,000 shares authorized,
none issued or outstanding -- --
Common stock, $.001 par value, 40,000,000 shares authorized;
17,784,748 and 15,986,800 shares issued and outstanding at
July 31, 1999 and 1998, respectively 17,785 15,987
Additional paid in capital 1,360,977 1,077,103
Accumulated deficit (1,482,729) (688,739)
----------- ----------
Total stockholders' equity (deficit) (103,967) 404,351
----------- ----------
Commitments and contingent liabilities (notes 3, 6, 7, 8 and 11)
Total liabilities and stockholders' equity (deficit) $ 1,557,226 465,827
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-17
<PAGE>
COLLEGE BOUND STUDENT ALLIANCE, INC.
AND SUBSIDIARY
Consolidated Statements of Operations
Years ended July 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
Revenue:
Profile fees $ 499,154 107,543
Franchise fees 156,627 64,682
Other 51,105 22,447
------------ -----------
706,886 194,672
Costs and expenses:
Cost of services 413,015 --
Selling, general and administrative expenses 945,077 794,839
Depreciation and amortization 110,104 48,056
------------ -----------
1,468,196 842,895
------------ -----------
Loss from operations (761,310) (648,223)
Interest expense (41,014) (9,204)
Other income, net 8,334 --
------------ -----------
Loss before income taxes (793,990) (657,427)
Provision for income taxes -- --
------------ -----------
Net loss $ (793,990) (657,427)
============ ===========
Net loss per share - basic and diluted $ (0.05) (0.04)
============ ===========
Weighted average number of common shares outstanding 16,711,127 15,607,360
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-18
<PAGE>
COLLEGE BOUND STUDENT ALLIANCE, INC.
AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
Years ended July 31, 1999 and 1998
<TABLE>
<CAPTION>
Additional Total
paid in Accumulated stockholders'
Shares Amount capital deficit equity (deficit)
---------- ------- ---------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Balance at July 31, 1997 13,396,000 $13,396 174,104 (31,312) 156,188
Common stock issued for services 750,000 750 74,250 -- 75,000
Common stock issued to investors for bridge loan 100,000 100 9,900 -- 10,000
Common stock issued to officers and directors for services 75,632 76 15,740 -- 15,816
Common stock issued to repurchase franchises 23,500 23 6,127 -- 6,150
Common stock issued for cash, net of offering costs 1,540,000 1,540 743,460 -- 745,000
Common stock accrued but not issued 101,668 102 53,522 -- 53,624
Net loss -- -- -- (657,427) (657,427)
---------- ------- ---------- ---------- --------
Balance at July 31, 1998 15,986,800 15,987 1,077,103 (688,739) 404,351
Common stock issued for cash 42,000 42 12,269 -- 12,311
Common stock issued to directors for services 236,001 236 21,038 -- 21,274
Common stock issued to employees for compensation 173,656 174 15,584 -- 15,758
Common stock issued for services 471,795 472 41,298 -- 41,770
Common stock issued for acquisition 522,500 522 132,506 -- 133,028
Common stock options issued for acquisition -- -- 61,531 -- 61,531
Common stock held in escrow 351,996 352 (352) -- --
Net loss -- -- -- (793,990) (793,990)
---------- ------- ---------- ---------- --------
Balance at July 31, 1999 17,784,748 $17,785 1,360,977 (1,482,729) (103,967)
========== ======= ========== ========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-19
<PAGE>
COLLEGE BOUND STUDENT ALLIANCE, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended July 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (793,990) (657,427)
Adjustments to reconcile net loss to net cash used in
operating activities:
Provision for doubtful accounts 18,000 --
Depreciation and amortization 112,069 48,056
Issuance of common stock for director services 21,274 --
Issuance of common stock for employee compensation 15,758 --
Issuance of common stock for services 13,581 95,975
Trade credits exchanged for services -- 27,182
Notes receivable exchanged for franchises -- (24,713)
Changes in operating assets and liabilities:
Accounts receivable 6,225 --
Other current assets (4,858) (6,197)
Accrued liabilities (46,113) 23,566
Accounts payable 341,854 22,993
----------- --------
Net cash used in operating activities (316,200) (470,565)
----------- --------
Cash flows from investing activities:
Purchase of property and equipment (2,000) (28,124)
Purchase of CBSA 24,446 --
Other assets (29,970) --
----------- --------
Net cash used in investing activities (7,524) (28,124)
----------- --------
Cash flows from financing activities:
Payments on capital leases (1,291) --
Proceeds from notes payable 50,000 778,225
Proceeds from notes payable to related parties 11,000 --
Collections on notes receivable 24,713 390
Decrease (increase) in related party payable 147,853 (144,043)
----------- --------
Net cash provided by financing activities 232,275 634,572
----------- --------
Net increase (decrease) in cash (91,449) 135,883
Cash at beginning of year 173,832 37,949
----------- --------
Cash at end of year $ 82,383 173,832
=========== ========
Supplemental disclosure of cash flow information:
Cash paid for interest for the years ended July 31, 1999
and 1998 was $2,340 and $6,583, respectively
Schedule of non-cash investing and financing activities:
The Company purchased all the outstanding stock of
College Bound Student-Athletes, Inc. Assets were
acquired and liabilities assumed were as follows:
Fair value of assets acquired $ 1,519,006 --
Long-term debt assumed (964,901) --
Common stock and fair value of stock options issued (194,559) --
----------- --------
Other liabilities assumed $ 359,546 --
=========== ========
The Company received $31,000 in trade credits in settlement of a note
receivable during the year ended July 31, 1998
</TABLE>
See accompanying notes to consolidated financial statements.
F-20
<PAGE>
COLLEGE BOUND STUDENT ALLIANCE, INC.
and subsidiary
Notes to Consolidated Financial Statements
July 31, 1999 and 1998
(1) ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) HISTORY AND BUSINESS ACTIVITY
College Bound Student Alliance, Inc. (Company) was incorporated in the
State of Colorado on July 15, 1993 under the name Winter Park Ventures. The
Company was inactive until 1997. On April 22, 1997, the Company amended its
articles of incorporation and changed its name to SportStar Marketing, Inc.
On July 13, 1999, the Company changed to its current name after the
acquisition of College Bound Student Athletes, Inc.
The Company's business objective is to expand the choices of qualified
colleges for qualified students and assists parents and students who have
the opportunity to qualify for the financial aid opportunities available to
them. This is the Company's only business segment. The Company is
transitioning from a franchise based sales force to a direct sales force
and other marketing channels. The Company uses a central production and
distribution facility to prepare the finished product and distribute to the
appropriate colleges. The Company's main product line includes profiling,
higher education aids and learning programs, financial aid and merit award
searches and academic and personal development programs. The Company also
holds the rights to publish the magazine "BlueChip Illustrated".
During fiscal 1999, the consolidated financial statements include the
financial statements of the Company and its wholly owned subsidiary,
College Bound Student-Athletes Inc. All intercompany balances and
transactions have been eliminated in consolidation.
(b) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less as cash equivalents.
(c) TRADE CREDITS
The Company accounts for trade credits according to Financial Accounting
Standards Board Emerging Issues Task Force abstract No. 93-11. Trade
credits are recorded at cost, and represent purchasing value for goods and
services in established barter markets. The Company considers these credits
as the equivalent of cash for purchase of certain goods and services, but
reviews its trade credits periodically to assess their carrying amounts.
(d) LICENSING RIGHTS
Licensing rights are recorded at cost and are amortized on a straight-line
basis over the term of the agreement, which is five years.
(e) NET LOSS PER SHARE
The Company computes earnings (loss) per share in accordance with the
requirements of Statement of Financial Accounting Standards No. 128,
EARNINGS PER SHARE, (SFAS No. 128). SFAS No. 128 requires the disclosure of
basic earnings per share and diluted earnings per
F-21
<PAGE>
COLLEGE BOUND STUDENT ALLIANCE, INC.
and subsidiary
Notes to Consolidated Financial Statements
July 31, 1999 and 1998
share. Basic earnings per share is computed by dividing income available to
common stockholders by the weighted average number of common shares
outstanding. Diluted earnings per share is computed by dividing income
available to common stockholders by the weighted average number of common
shares outstanding increased for potentially dilutive common shares
outstanding during the period. The dilutive effect of stock options,
warrants, and their equivalents is calculated using the treasury stock
method.
Net loss per common share - basic and diluted is computed based on the
weighted average number of shares of common stock outstanding during the
year. Basic loss per common share and loss per common share - assuming
dilution, are the same for the years ended July 31, 1999 and 1998 because
of the antidilutive effect of stock options and awards when there is a net
loss. The Company has issued options to purchase 1,126,233 and 311,233
shares of its common stock as of July 31, 1999 and 1998, respectively,
which could potentially dilute basic earnings per share in the future.
(f) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciation is recorded
using the straight-line method over the estimated lives of the assets
ranging from five to seven years for furniture and equipment and three
years for vehicles.
(g) REVENUE RECOGNITION
The Company recognizes profile fee revenue from students as the services
are performed. Deferred revenue is recorded for cash received in advance
for services the Company is obligated to perform. The Company recognizes
franchise fee revenue from an individual franchise sale when all the
initial services of the Company, as required by the franchise agreement,
have been performed.
(h) INCOME TAXES
The Company has accounted for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS No. 109), ACCOUNTING FOR
INCOME TAXES. Under SFAS No. 109, income taxes are accounted for under the
asset and liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in operations in the period that includes the enactment date.
(i) STOCK OPTION PLAN AND STOCK OPTION AGREEMENTS
The Company accounts for stock options issued to employees in accordance
with the provisions of Accounting Principles Board (APB) Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED
F-22
<PAGE>
COLLEGE BOUND STUDENT ALLIANCE, INC.
and subsidiary
Notes to Consolidated Financial Statements
July 31, 1999 and 1998
TO EMPLOYEES, and related interpretations. As such, compensation expense is
recorded on the date of grant only if the current market price of the
underlying stock exceeds the exercise price. The Company has adopted
Statement of Financial Accounting Standards No. 123 (SFAS No. 123),
ACCOUNTING FOR STOCK-BASED COMPENSATION, which permits entities to
recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 also
allows entities to continue to apply the provisions of APB Opinion No. 25
and provide pro forma net income (loss) disclosures for employee stock
option grants as if the fair-value-based method defined in SFAS No. 123 had
been applied. The Company has elected to continue to apply the provisions
of APB Opinion No. 25 and provide the pro forma disclosures required by
SFAS No. 123 for stock options issued to employees. All stock options
issued to non-employees are accounted for using the provisions of SFAS No.
123.
(j) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ significantly from
those estimates.
(k) RECLASSIFICATION
Certain financial statement reclassifications have been made to 1998
amounts to conform to the presentation used in 1999.
(2) LIQUIDITY
In February of 2000, the Company completed a sale of 2,000,000 shares of
common stock for $1,000,000 and received in March of 2000, $500,000 of
corporate sponsorship. Management of the Company believes the cash received
from the sale of common stock and sponsorship, plus any cash generated from
operations, will be sufficient to allow the Company to meet its obligations
as they come due through at least August 1, 2000.
(3) BUSINESS COMBINATION
On April 15, 1999, the Company acquired College Bound Student Athletes,
Inc. (CBS Athletes), for $1,307,146, consisting of $1,039,900 debt, 545,000
shares of the Company's common stock, and options to purchase 500,000
shares of the Company's common stock at $0.50 per share. Additional
payments of up to $1.1 million and options to purchase 500,000 shares of
the Company's common stock could be made upon CBS Athletes achieving
certain performance thresholds. It is presently not probable that such
performance thresholds will be met. Additional consideration, if any, would
be recognized at the point that meeting the thresholds becomes probable.
The acquisition has been accounted for by the purchase method and the
results of operations of CBS Athletes have been included in the Company's
financial statements from April 15, 1999. The
F-23
<PAGE>
COLLEGE BOUND STUDENT ALLIANCE, INC.
and subsidiary
Notes to Consolidated Financial Statements
July 31, 1999 and 1998
purchase price was allocated to the fair value of identifiable assets and
liabilities. In connection with the purchase, the Company recorded three
intangible assets: payment for a covenant not to compete of $156,013 which
is being amortized over the covenant period of three years on a
straight-line basis; software of $73,300 which is being amortized on a
straight line basis over five years; and recruiting systems technology of
$1,057,108 which is being amortized on a straight line basis over ten
years. These intangible assets have been recorded as other assets.
The following unaudited pro forma financial information presents the
combined results of operations of the Company and CBS Athletes as if the
acquisition had occurred at the beginning of fiscal 1999 and 1998, after
giving effect to certain adjustments including amortization of intangibles,
additional depreciation expense and increased interest expense on debt
related to the acquisition. The pro forma financial information does not
necessarily reflect the results of operations that would have occurred had
the Company and CBSA constituted a single entity during such periods.
<TABLE>
<CAPTION>
Year ended Year ended
July 31, 1999 July 31, 1998
------------- -------------
<S> <C> <C>
Net sales $ 1,357,630 1,913,838
=========== ==========
Net loss $ 753,045 (602,382)
=========== ==========
Net loss per share - basic and diluted $ (.05) (.04)
============ ==========
</TABLE>
(4) PROPERTY AND EQUIPMENT
Property and equipment at July 31, 1999 and 1998 consisted of the
following:
<TABLE>
<CAPTION>
1999 1998
--------- -------
<S> <C> <C>
Furniture and equipment $ 89,659 46,923
Vehicle 14,076 --
--------- -------
103,735 46,923
Less accumulated depreciation (20,449) (10,299)
--------- -------
$ 83,286 36,624
========= =======
</TABLE>
Depreciation expense for the years ended July 31, 1999 and 1998, was
$11,719 and $5,689, respectively.
F-24
<PAGE>
COLLEGE BOUND STUDENT ALLIANCE, INC.
and subsidiary
Notes to Consolidated Financial Statements
July 31, 1999 and 1998
(5) NOTES RECEIVABLE
Notes receivable consist of the following at July 31:
<TABLE>
<CAPTION>
1998
-------
<S> <C>
Promissory note, balance due on or before November 1, 2000;
interest at an annual rate of 8%, secured by franchise $ 4,553
Promissory note, monthly installments of $250, balance due
December 30, 1999; interest at an annual rate of 5%,
secured by franchise 5,750
Promissory note, $8,000 due December 1998 plus 6% interest,
$5,750 due June 1, 1999 plus 6% interest, secured by franchise 13,750
-------
24,053
Less current portion 16,090
-------
$ 7,963
=======
</TABLE>
(6) NOTE PAYABLE AND NOTES PAYABLE TO RELATED PARTIES
On July 28, 1999, the Company borrowed $50,000 from a third party with an
interest rate of 10% per annum, the principal and accrued interest of which
is payable on January 28, 2000.
Notes payable to related parties include notes payable to stockholders and
employees. Interest is accrued at rates ranging from 8% to 10% per annum
and the notes payable, including accrued interest, are due upon the
Company's obtaining defined additional financing.
(7) LONG-TERM DEBT PAYABLE TO STOCKHOLDER
Notes payable to related parties as of July 31, 1999 consisted of the
following:
<TABLE>
<S> <C>
Note payable to stockholder for acquisition of CBS Athletes $527,951
Note payable to stockholder assumed in connection with acquisition
of CBS Athletes 208,888
Note payable to stockholder for agreement not to compete
in connection with acquisition of CBS Athletes 147,485
--------
884,324
Less: current portion 132,348
--------
$751,976
========
</TABLE>
F-25
<PAGE>
COLLEGE BOUND STUDENT ALLIANCE, INC.
and subsidiary
Notes to Consolidated Financial Statements
July 31, 1999 and 1998
In December 1999 and March 2000, the former owner of CBS Athletes and the
Company entered into an amendment to require payments on debt acquired or
issued in connection with the acquisition of CBS Athletes as follows:
1. $600,000 non-interest bearing note and $75,000 other note: $160,000 is
due upon obtaining $1 million in financing (payment was made in March
2000) and the remainder of the unpaid balance upon receiving an
additional $3,500,000 in financing or $20,000 on July 1, 2000; $20,000
on October 1, 2000; $20,000 on January 1, 2001; $20,000 on March 1,
2001, and the balance on March 15, 2001.
2. $176,000 covenant not to compete: 36 equal monthly installments of
$4,889 beginning December 15, 1999.
3. $208,888, 8% note final payment due November 15, 2004: 60 equal
monthly installments of interest and principal of $4,446 beginning
December 15, 1999.
In March 2000, payments of $160,000 were made on the $675,000
above-mentioned notes.
Aggregate maturities of notes payable as of July 31, 1999 assuming the
Company does not obtain additional financing which causes acceleration of
the payment of this debt follows:
<TABLE>
<S> <C>
July 31:
2000 $ 132,348
2001 532,494
2002 95,381
2003 61,877
2004 47,568
Thereafter 14,656
---------
$ 884,324
=========
</TABLE>
(8) RELATED PARTY TRANSACTIONS
The Company entered into a consulting agreement with the former owner of
CBSA for $1,500 per month for five years beginning as of the date when the
first $100,000 payment is made on the Acquisition Note. No payments were
made on the Acquisition Note and no amounts have been expensed or are
payable as of July 31, 1999 related to this consulting agreement.
The Company leases office space on a month-to-month basis from Chartwell
International, Inc. (Chartwell). Rental expense was $37,545 and $39,775 for
the years ended July 31, 1999 and 1998, respectively.
F-26
<PAGE>
COLLEGE BOUND STUDENT ALLIANCE, INC.
and subsidiary
Notes to Consolidated Financial Statements
July 31, 1999 and 1998
Beginning February 1, 1998, the Company entered into a three-year agreement
with Chartwell whereby Chartwell's management performs certain management
functions for the Company in exchange for $7,500 per month. Management fee
expense was $90,000 and $45,000 for the years ended July 31, 1999 and 1998,
respectively. Included in due to related parties is $98,340 and $0 payable
to Chartwell at July 31, 1999 and 1998, respectively.
The Company has acquired licensing rights through an agreement with
National College Recruiting Association, Inc. (NCRA), which is a wholly
owned subsidiary of Chartwell. The license provides the Company with
exclusive use, rights and interest in the NCRA name, franchise program,
operating franchisees, franchise fees, operating systems and technology,
the "Blue Chip Illustrated" magazine and the 900 Sports line, for a
five-year period renewable for an unspecified number of five year terms.
The fee for the license includes a payment of $210,000 to NCRA, plus 2.5%
of gross revenue from licensed operations and an additional payment of
$100,000 upon the Company raising an additional $500,000 in capital.
The Company, through the NCRA license, offered for sale and sold franchises
whereby the purchaser may, for a fee and royalties, secure the use of
NCRA's name, distribution network and marketing materials. Under the terms
of the franchise agreement, prior to the opening of the franchise, the
Company makes available to the franchisee, training at a NCRA facility,
sales and start up consulting, and the right to operate a NCRA franchise
using the NCRA name and trademark. During the operation of the franchise,
the Company is required to provide, among other things, ongoing training
and consulting, subscriber services and access to advertising materials and
supplies generally for an additional fee.
The Company has recorded its licensing rights at cost, $210,000, and is
amortizing the asset over a five-year period using the straight-line
method.
(9) INCOME TAXES
Income tax benefit differed from the amounts computed by applying the U.S.
Federal income tax rate of 34% for fiscal 1999 and 1998 as a result of the
following:
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
Computed "expected" tax benefit $ 269,957 223,525
Increase (decrease) in tax benefit resulting
from:
State income taxes, net of federal benefit 26,009 21,695
Increase in valuation allowance (295,966) (245,220)
--------- --------
Income tax expense (benefit) $ -- --
========= ========
</TABLE>
The Company has a net operating loss carryforward of approximately $1.4
million available to offset future U.S. tax liabilities, which expires
beginning in 2018 and is the Company's only significant
F-27
<PAGE>
deferred tax asset. Due to historical operating losses, the Company has
provided a valuation allowance against this asset. Accordingly, no deferred
tax asset has been included in the accompanying balance sheets.
(10) STOCKHOLDERS' EQUITY (DEFICIT)
The Company has 10,000,000 shares of authorized preferred stock, par value
$.001, issuable from time to time in different series with rights and
privileges to be determined by the Board of Directors. No specific series
of preferred stock have yet been established.
At July 31, 1998, the Company had an obligation to issue 101,668 shares of
common stock to employees and directors of the Company. Consideration had
been exchanged but the shares had not been issued at year end. These shares
are considered issued and outstanding at July 31, 1998.
(11) EMPLOYMENT AGREEMENT
In August 1997, the Chairman of the Board entered into an agreement which
gives the Chairman a five-year option to purchase 1,000,000 shares of the
Company's common stock at $.50 per share which was the fair value of the
common stock on the grant date. The shares vest at the rate of 200,000
shares per year.
(12) STOCK OPTIONS
The per share weighted average fair value of stock options granted during
1999 and 1998 was $.30 and $.34, respectively, on the date of grant using
the Black Scholes option pricing model with the following assumptions: no
expected dividend yield, risk free interest rate of 6%, volatility of 175%,
and expected option lives ranging from 3 to 5 years.
The Company applies APB Opinion No. 25 in accounting for its stock options
issued to employees and, accordingly, no compensation cost has been
recognized in the accompanying financial statements. Had the Company
determined compensation cost based on the fair value at the grant date for
its stock options under SFAS No. 123, the Company's net loss would have
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998
---------- --------
<S> <C> <C>
Net loss as reported $ (793,990) (657,427)
========== ========
Net loss, pro forma $ (850,285) (657,427)
========== ========
Net loss per share - basic and diluted
pro forma $ (.05) (0.04)
========== ========
</TABLE>
The above pro forma disclosures are not necessarily representative of the
effect on the reported net loss for future periods because options vest
over several years and additional awards are generally made each year.
F-28
<PAGE>
COLLEGE BOUND STUDENT ALLIANCE, INC.
and subsidiary
Notes to Consolidated Financial Statements
July 31, 1999 and 1998
Stock option activity during the years indicated was as follows:
<TABLE>
<CAPTION>
Number of Range of
shares exercise prices
---------- ---------------
<S> <C> <C>
Balance at July 31, 1997 10,000 $ .50
Granted 311,233
Canceled (10,000)
-----------
Balance at July 28, 1998 311,233 .50
Granted 815,000 .50 - 1.00
-----------
Balance at July 31, 1999 1,126,233 .50 - 1.00
===========
Number of options exercisable at July 31, 1999 321,233 .50 - 1.00
===========
</TABLE>
Canceled options are a result of employee terminations or forfeitures.
<TABLE>
<CAPTION>
Weighted
average
remaining Number
Number contractual life exercisable at
Exercise price outstanding (years) July 31, 1999
-------------- ----------- ---------------- --------------
<S> <C> <C> <C>
$ .50 1,116,233 3.8 311,233
1.00 10,000 1.6 10,000
--------- --------
1,126,233 321,233
========= ========
</TABLE>
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash, accounts receivable, notes payable, accounts
payable, accrued liabilities, notes payable to related parties and due to
related parties approximates fair value because of the short maturity or
duration of these instruments. The carrying amount of long-term debt
approximates fair value as the interest rates are considered market rates.
F-29
<PAGE>
PART III
The following exhibits are included with this registration statement:
<TABLE>
<CAPTION>
REGULATION
S-B NUMBER DOCUMENT
<S> <C>
2.1 Stock Purchase Agreement with Wayne O. Gemas (1)
2.2 Amendments to Stock Purchase Agreement with Wayne O. Gemas
2.3 Agreement to Acquire College Foundation Planners, Inc. by College
Bound Student Alliance, Inc.
3.1 Amended and Restated Articles of Incorporation (1)
3.2 Bylaws (1)
10.1 Agreement with National College Recruiting Association (1)
10.2 Management Services Agreement with Chartwell International, Inc. (1)
10.3 Office Lease with Chartwell International, Inc. (1)
10.4 Office Lease with The Intrepid Company (1)
10.5 Consulting Agreement with Wayne O. Gemas (1)
10.6 Executive Employment Agreement with Kevin Gemas (1)
10.7 Employment Agreement with Arthur D. Harrison (1)
10.8 Employment Agreement with Rick N. Newton (1)
10.9 Promissory Note to Arthur D. Harrison dated June 15, 1999 (1)
10.1 Employment and Stock Option Agreement with Jerome M. Lapin dated
August 9, 1999 (1)
10.11 Promissory Note to Chartwell International, Inc. dated January 28,
2000, as amended (1)
10.12 Promissory Note to Chartwell International, Inc. dated February 1,
2000, as amended (1)
10.13 Amendment to Agreement with National College Recruiting Association
10.14 Investment Agreement with Swartz Private Equity, LLC
10.15 Promissory Notes and Security Agreement to Constance J. Cooper
10.16 Employment Agreement with Constance J. Cooper
10.17 Office lease with SanTom Holdings, L.L.C.
16 Letter from Grant Thornton LLP (to be filed when received)
21 Subsidiaries of the Registrant
27 Financial Data Schedule
</TABLE>
(1) Previously filed
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
COLLEGE BOUND STUDENT ALLIANCE, INC.
Date: July 18, 2000 By: /s/ Jerome M. Lapin
----------------------------------
Jerome M. Lapin
Chief Executive Officer
