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U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-SB/A
AMENDMENT NO. 4
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)
NEVADA 84-1416023
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 SOUTH ALLISON PARKWAY, SUITE 100, LAKEWOOD, COLORADO 80226
(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 changed 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 located at
333 South Allison Parkway, Suite 100, Lakewood, Colorado 80226-3115, and its
telephone number is (303) 804-0155.
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 $945,901 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.
The Company does not provide any performance or satisfaction
guarantees. The Company provides a service that cannot guarantee or promise that
the client will receive a scholarship; however the Company's service is designed
to enhance the student's college exposure and
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opportunities. The Company cannot begin to decide what kind and/or how much a
scholarship will be for the student, since that decision is made by third
parties that use the Company's service to find out about college bound high
school students. The Company will refund the full client payment up to
midnight of the third business day after the service agreement is signed. Any
refund outside of the three-business day policy is decided on a case-by-case
basis by a management committee at the request of the client. Such 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 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)
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- 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.
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.
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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
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
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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.
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.
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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.
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 $147,485, 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 $945,901 consisted of 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 $434,414, consisting primarily of
$241,541 debt and 540,000 shares valued at $148,500 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
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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.
<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 $ 2,063,150 $ 1,623,132
Stockholders' equity (deficit) $ 614,776 $ (38,061)
---------------------------------------- --------------------------- ---------------------------
STATEMENTS OF OPERATIONS DATA:
---------------------------------------- --------------------------- ---------------------------
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, 2000 APRIL 30, 1999
---------------------------------------- --------------------------- ---------------------------
<S> <C> <C>
Revenues $ 1,527,649 $ 337,951
Loss from operations $ (513,138) $ (575,531)
Net loss $ (582,545) $ (576,462)
Net loss per share $ (0.03) $ (0.04)
---------------------------------------- --------------------------- ---------------------------
<CAPTION>
---------------------------------------- --------------------------- ---------------------------
YEAR ENDED YEAR ENDED
JULY 31, 1999 JULY 31, 1998
---------------------------------------- --------------------------- ---------------------------
<S> <C> <C>
Revenues $ 706,886 $ 194,672
Loss from operations $ (866,363) $ (648,223)
Net loss $ (899,043) $ (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.
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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-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
$470,661 to $1,131,676 for the first nine months of fiscal 2000, as compared to
$661,015 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.
11
<PAGE>
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased $129,350 to $165,710 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 $1,277,893 being recorded. These assets are being
amortized 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 $513,138 as compared to an operating loss of $575,531 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 $582,545, as compared to $576,462 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 $0.04 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-
12
<PAGE>
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 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 $255,130 to $1,050,130 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
$62,104 to $110,104 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
$866,363 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
$899,043, 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
$2,063,150 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 $1,623,132. 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 $147,485,
software of
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<PAGE>
$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 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
$(38,061) at July 31, 1999. While the Company issued 1,797,948 shares during
the one-year period for consideration of $456,631 this was offset by the loss
of $899,043.
Total assets increased from $1,623,132 at July 31, 1999 to $2,063,150
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 $38,061 at July 31,
1999 to $614,776 at April 30, 2000. The Company issued 3,640,138 shares for
consideration of $1,244,232 during the nine-month period, which offset the loss
of $582,545 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
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<PAGE>
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.
Eur-Am is an international company with a multi-million dollar
charitable contribution budget. The Eur-Am $500,000 sponsorship was a result of
Eur-Am becoming convinced that the Company makes a significant positive
contribution to the success of college bound students. Accordingly, it made an
oral commitment to the Company in a telephone conversation that it would support
the Company with funding. There were no conditions or limitations attached to
this donation. The only relationship is one of support from a corporation
concerned with optimizing educational opportunities for students. The Company
intends to seek Eur-Am's ongoing support in the future.
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. If the Company does not "Put" at least
$2,000,000 worth of common stock to Swartz during each year following the date
on which the registration statement is declared effective by the SEC, it must
pay Swartz an annual non-usage fee. The fee equals the difference between
$200,000 and 10% of the value of the shares of common stock Put to Swartz during
that annual period. The fee is due and payable on the last business day of each
one-year period. Each annual non-usage fee is payable to Swartz, in cash, within
five (5) business days of the date it accrued. The Company is not required to
pay the annual non-usage fee to Swartz in years it has met the Put requirements.
The Company is also not required to deliver the non-usage fee payment until
Swartz has paid the Company for all Puts that are due.
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
15
<PAGE>
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. The Company preliminarily indicated in its agreement with
Swartz that it expects to use the proceeds received from Swartz for working
capital, strategic alliances (including potential acquisitions), capital
expenditures and general corporate purposes. These purposes were established as
of the date of the agreement with Swartz, and the Company has the right to
change the purpose for which the funds will be used without giving notice to
Swartz.
The Company anticipates raising a minimum of $2,000,000 in capital each
year for the next three years through the Swartz Private Equity, LLC agreement
and/or other alternative economically prudent instruments. Additionally, the
Company intends to secure a bank financing for working capital of $500,000 to
$1,000,000. The Company will fund a portion of its capital needs out of expected
cash flows from operations. Funding development and acquisitions out of
operations may slow growth.
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.
ITEM 3. DESCRIPTION OF PROPERTY.
The Company has entered into a 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 commenced
August 1, 2000 and expires July 31, 2005. Monthly rent is $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 expired August 31, 2000.
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<PAGE>
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 (4)
Cedarburg, Wisconsin 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
William R. Willard 112,000 0.52%
356 Playa Del Norte, No. 2 (8)
La Jolla, CA 92037
Peter Lambert 0 --
3130 Wilshire Boulevard, 4th Floor
Santa Monica, CA 90400
Officers and Directors as a group 13,460,219 60.03%
(7 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.
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<PAGE>
(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.
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
</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
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<PAGE>
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 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.
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<PAGE>
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 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.
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
NAME AND ANNUAL STOCK UNDERLYING ALL OTHER
PRINCIPAL COMPENSATION AWARD(S) OPTIONS/ LTIP COMPEN-
POSITION YEAR SALARY ($) BONUS ($) ($) ($) SARS (#) PAYOUTS SATION ($)
-------------- ------------ ----------- ------------ ------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William 1999 $62,000 $-0- $-0- $16,578 -0- -0- $-0-
Kroske
President
(1)
</TABLE>
20
<PAGE>
---------------
(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.
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.
21
<PAGE>
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 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
22
<PAGE>
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.
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.
23
<PAGE>
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.
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.
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
24
<PAGE>
<CAPTION>
FISCAL QUARTER ENDED HIGH BID LOW BID
<S> <C> <C>
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 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
25
<PAGE>
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 is
filed as an Exhibit 16 to this registration statement.
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.
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.
26
<PAGE>
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 $28,718.
From December 1998 to March 1999, the Company issued 173,656 shares of
Common Stock to employees for compensation in the amount of $21,272.
From December 1998 to March 1999, the Company issued 471,795 shares of
Common Stock to certain parties for services valued at $56,387 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 $16,619, 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 $198,934. 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 $7,462, 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.
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 $21,387.
In August 1999, the Company issued 1,347 shares of Common Stock to
Marcus McCarty for compensation of $536.
In August 1999, we issued 30,000 shares of Common Stock to Michael
Johnson for compensation of $11,880.
In August 1999, the Company issued 55,000 shares of Common Stock to The
Taxin Network for services valued at $16,451.
In October 1999, the Company issued 125,000 shares of Common Stock to
Patrick Darrel Hackman for investor relation services valued at $27,134.
In November 1999, the Company issued 360,000 shares of Common Stock to
Johnson & Associates for investor/public relations services valued at $71,633.
In January 2000, the Company issued 140,000 shares of Common Stock to
Charlie Jarvis for website creation services valued at $50,649.
27
<PAGE>
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 $35,814.
In February 2000, the Company issued 3,278 shares of Common Stock to
Daniel J. Miske in lieu of legal fees of $1,068.
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 0,000 $ 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 $5,861.
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 $161,174. 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.
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 $1,548. 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 $20,149.
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 $3,256 and
$48,841, 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
28
<PAGE>
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
<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 1,177,980 1,297,501
Trademarks and licensing, net 192,723 119,000
Other assets 5,100 5,100
----------- -----------
TOTAL ASSETS $ 2,063,150 $ 1,623,132
=========== ===========
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 2,764,295 1,531,936
Accumulated deficit (2,170,292) (1,587,782)
----------- -----------
Total stockholders' equity (deficit) 614,776 (38,061)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,063,150 $ 1,623,132
=========== ===========
</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 1,131,676 661,015
Depreciation and amortization 165,710 36,360
------------ ------------
Operating loss (513,138) (575,531)
Interest expense, net 69,407 931
------------ ------------
NET LOSS $ (582,545) $ (576,462)
============ ============
Net loss per share - basic and diluted $ (0.03) $ (0.04)
============ ============
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 $(582,545) $ (576,462)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 165,710 36,360
Change in allowance for doubtful accounts (28,000) 10,000
Non-cash stock issuances 233,407 308,220
--------- -----------
(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 $945,901,
consisting of 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 $147,485 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 $ (681,668)
===========
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 $ 198,065 305,675
Increase (decrease) in tax benefit resulting
from:
State income taxes, net of federal benefit 19,224 29,668
Increase in valuation allowance (217,289) (335,343)
--------- --------
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 $ (582,845) (899,043)
========== ========
Net loss, pro forma $ (719,202) (955,338)
========== ========
Net loss per share - basic and diluted
pro forma $ (0.04) (0.06)
========== ========
</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 $434,414, consisting primarily of
$241,000 debt and 540,000 shares valued at $148,500 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 $ (702,973) (777,683)
=========== ==========
Net loss per share - basic and diluted $ (0.04) (0.05)
=========== ==========
</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 1,302,601 5,100
----------- ----------
Total assets $ 1,623,132 465,827
=========== ==========
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 1,531,936 1,077,103
Accumulated deficit (1,587,782) (688,739)
----------- ----------
Total stockholders' equity (deficit) (38,061) 404,351
----------- ----------
Commitments and contingent liabilities (notes 3, 6, 7, 8 and 11)
Total liabilities and stockholders' equity (deficit) $ 1,623,132 465,827
=========== ==========
</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 1,050,130 794,839
Depreciation and amortization 110,104 48,056
------------ -----------
1,573,249 842,895
------------ -----------
Loss from operations (866,363) (648,223)
Interest expense (41,014) (9,204)
Other income, net 8,334 --
------------ -----------
Loss before income taxes (899,043) (657,427)
Provision for income taxes -- --
------------ -----------
Net loss $ (899,043) (657,427)
============ ===========
Net loss per share - basic and diluted $ (0.05) (0.04)
============ ===========
Weighted average number of common shares outstanding 16,863,226 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 37,160 -- 37,396
Common stock issued to employees for compensation 173,656 174 79,612 -- 79,786
Common stock issued for services 471,795 472 66,201 -- 66,673
Common stock issued for acquisition 522,500 522 198,412 -- 198,934
Common stock options issued for acquisition -- -- 61,531 -- 61,531
Common stock held in escrow 351,996 352 (352) -- --
Net loss -- -- -- (899,043) (899,043)
---------- ------- ---------- ---------- --------
Balance at July 31, 1999 17,784,748 $17,785 1,531,936 (1,587,782) (38,061)
========== ======= ========== ========== ========
</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 $ (899,043) (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 37,396 --
Issuance of common stock for employee compensation 79,786 --
Issuance of common stock for services 38,484 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 $ 1,584,912 --
Long-term debt assumed (964,901) --
Common stock and fair value of stock options issued (260,465) --
----------- --------
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 $945,901, consisting of 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 $147,485 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 $ 858,098 (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 $ 305,675 223,525
Increase (decrease) in tax benefit resulting
from:
State income taxes, net of federal benefit 29,668 21,695
Increase in valuation allowance (335,343) (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 $ (899,043) (657,427)
========== ========
Net loss, pro forma $ (918,540) (657,427)
========== ========
Net loss per share - basic and diluted
pro forma $ (0.05) (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 (1)
2.3 Agreement to Acquire College Foundation Planners, Inc. by
College Bound Student Alliance, Inc. (1)
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)
29
<PAGE>
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 (1)
10.14 Investment Agreement with Swartz Private Equity, LLC (1)
10.15 Promissory Notes and Security Agreement to Constance J. Cooper
(1)
10.16 Employment Agreement with Constance J. Cooper (1)
10.17 Office lease with SanTom Holdings, L.L.C. (1)
16 Letter from Grant Thornton LLP (1)
21 Subsidiaries of the Registrant (1)
27 Financial Data Schedule (1)
</TABLE>
(1) Previously filed
30
<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: December 1, 2000 By: /s/ Jerome M. Lapin
-----------------------------------------
Jerome M. Lapin
Chief Executive Officer
31
