U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2000
Commission File Number: 0-30323
College Bound Student Alliance, Inc.
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(Exact name of small business issuer as specified in its charter)
Nevada 84-1416023
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(State of other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
333 South Allison Parkway, Suite 100
Lakewood, Colorado 80226-3115
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(Address of principal executive offices including zip code)
(303) 804-0155
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No___
As of December 15, 2000, the Registrant had 23,684,404 shares of common stock,
$0.001 par value per share, outstanding.
Transitional Small Business Disclosure Format (check one): Yes__ No X
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INDEX
Page
Number
Part I. Financial Information
Item I. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as
of October 31, 2000 and July 31, 2000 3
Condensed Consolidated Statements of Operations,
Three Months Ended October 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows,
Three Months Ended October 31, 2000 and 1999 5
Notes to Condensed Consolidated Financial
Statements 6-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-15
Part II. Other Information
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
2
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College Bound Student Alliance, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
October 31, 2000 July 31, 2000
---------------- -------------
<S> <C> <C>
Current assets:
Cash $ 245,527 231,271
Amounts due from customer contracts acquired 716,825 1,796,784
Accounts receivable, net 65,485 18,398
Deferred customer contract expenses 204,766 -
Other - 10,340
---------- ----------
Total current assets 1,232,603 2,056,793
Property and equipment, net 456,465 494,791
Trademarks and licenses, net 157,314 175,072
Intangible and other assets, net 2,612,907 2,703,187
---------- ----------
Total assets $4,459,289 5,429,843
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable $ 5,193 5,511
Current maturities of long-term debt to related parties 744,583 803,006
Current portion of capital lease obligation 30,993 25,975
Notes payable and due to related parties 473,520 249,826
Accounts payable 623,627 555,552
Accrued liabilities 567,938 541,130
Deferred revenue 913,507 423,640
---------- ----------
Total current liabilities 3,359,361 2,604,640
Long-term liabilities
Long-term debt to related parties, less current maturities 2,072,845 2,143,376
Capital lease obligation, less current portion 58,282 66,636
---------- ----------
Total liabilities 5,490,488 4,814,652
Stockholders' equity (deficit)
Common stock 23,582 23,482
Additional paid-in capital 3,548,889 3,521,489
Deferred compensation (13,397) (22,178)
Accumulated deficit (4,590,273) (2,907,602)
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Total stockholders' equity (deficit) (1,031,199) 615,191
---------- ----------
Total liabilities and stockholders' equity (deficit) $4,459,289 5,429,843
========== ==========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
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College Bound Student Alliance, Inc.
Condensed Consolidated Statements of Operations
for the three month periods ending October 31
(Unaudited)
2000 1999
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Revenue:
Student services $ 782,496 341,625
Corporate sponsor contributions 3,800 -
Other 101 17,500
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Total revenue 786,397 359,125
Cost of services 575,994 209,290
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Gross profit 210,403 149,835
Selling, general and administrative 1,675,174 395,510
Depreciation and amortization 134,519 57,958
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Operating loss (1,599,290) (303,633)
Interest expense, net (83,381) (24,024)
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Net loss $ (1,682,671) (327,657)
============ =========
Net loss per share - basic and diluted $ (.07) (0.02)
============ =========
Weighted average number of common
shares outstanding - basic and diluted 23,488,253 18,063,950
============ =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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College Bound Student Alliance, Inc.
Condensed Consolidated Statements of Cash Flows
for the three month periods ending October 31
(Unaudited)
2000 1999
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Net loss $(1,682,671) (327,657)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 134,519 57,958
Amortization of deferred compensation 8,781 -
Change in allowance for doubtful accounts (23,655) -
----------- ---------
Changes in operating assets and liabilities 1,606,632 159,147
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Net cash provided (used) by operating activities 43,606 (110,552)
Net cash provided by investing activities 2,384 -
Net cash provided (used) by financing activities:
Payments on notes payable and long-term debt
to related parties, net (55,898) -
Common stock issued 27,500 54,258
Other (3,336) (535)
----------- ---------
Net cash provided (used) by financing activities (31,734) 53,723
Net increase (decrease) in cash 14,256 (56,829)
Cash at beginning of period 231,271 82,383
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Cash at end of period $ 245,527 25,554
=========== =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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College Bound Student Alliance, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2000 (Unaudited)
(1) Basis of Preparation
The accompanying unaudited condensed consolidated financial statements
have been prepared 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 we believe that the disclosures are adequate
to make the information presented not misleading, it is suggested that these
condensed consolidated financial statements be read in connection with the
financial statements and notes thereto included in the Company's annual report
on Form 10-KSB for the year ended July 31, 2000.
In our opinion, the accompanying unaudited condensed consolidated
financial statements include all adjustments (consisting of normal recurring
accruals and adjustments) required to present fairly our financial position at
October 31, 2000 and July 31, 2000, and the results of operations and cash
flows for each of the three month periods ended October 31, 2000 and 1999.
The operating results for the three months ended October 31, 2000 are not
indicative of the results that may be expected for the year ended July 31,
2001.
(2) Liquidity
Management believes that it has sufficient resources to meet its needs in
the foreseeable future. In May 2000, we entered into a common stock put
agreement with Swartz Private Equity, LLC that entitles us to issue and sell,
at our 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. Management believes the cash expected to be received
from financing of amounts due from customer contracts ($1,926,000 at October
31, 2000), the sale of common stock less accelerated debt payments that will
be required, expected cash from corporate sponsor contributions, cash expected
to be generated from operations, and payment extensions on related party
advances, notes and debt, if necessary, will be sufficient to allow us to meet
our non-deferrable obligations through at least July 31, 2001.
(3) Amounts Due From Active Customer Contracts
As of October 31, 2000, we estimate off-balance sheet amounts due
from active customer contracts of $1,926,000, net of $464,000 for estimated
uncollectible accounts. This balance compares to $1,796,784, net of reserves
of $433,060 at July 31, 2000.
In the acquisition of College Resource Management, Inc, CBSA acquired
$1,796,784 in amounts due from customer contracts at July 31, 2000. In
the first quarter of fiscal year 2001, we collected $1,079,959 against
this balance.
(Continued)
6
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College Bound Student Alliance, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2000 (Unaudited)
(4) Revenue Recognition
Revenue is recognized consistent with Staff Accounting Bulletin No. 101
(SAB 101). For customer agreements where there are multiple deliverables, and
fair value of the deliverables is not determinable, revenue is recognized over
the service period on the straight line basis. The majority of the Company's
contracts include a service component which is contractually available over
the one year contract period. Customers pay the contracted fees at the
beginning of the contract, in four equal installments in the first four months
of the contract, monthly over the contract period, or weekly over the contract
period. For those that pay at the beginning of the contract, revenue is
deferred and recognized ratably on a straight-line basis over 12 months. For
those that pay over four months a portion of the first payment is deferred and
all payments thereafter are deferred and revenue is recognized ratably on a
straight-line basis over the contract period. For those that pay in monthly
or weekly installments revenue is recognized consistent with contractual
collections and, accordingly, receivables and deferred revenues are not
recognized at contract initiation.
Management estimates that approximately 90 percent of the direct costs of
performing its obligations under the agreements is incurred in the first 60
days after contract initiation. Direct and incremental costs in acquiring
contracts are deferred and recognized over the contract period. Management
estimates that approximately 70 percent of the costs of performing its
obligations are expensed in the first 60 days after contract initiation.
Accordingly, as this is the first period in which the Company has revenue
under these contract provisions, expenses recognized are disproportionately
high as compared to reported revenue.
Revenue for services, other than those services offered as a result of
the CRM acquisition, are recognized as the services are delivered as the fair
value of those services are readily determinable based on established price
lists, and there is no continuing service obligation after delivery of the
customer selected service.
The accounting method described above varies from the principles used in
valuing the assets and deferred revenue in the acquisition of CRM at July 31,
2000 as provided by APB Opinion 16. Such differences (approximately $1.3
million) relate principally to the Amounts Due from Customer Contracts
Acquired, for which collections are applied against said balances rather than
recognized in revenue as collected, and differences in computing deferred
revenue during the quarter ended October 31, 2000 as provided by SAB 101. The
adverse effect of this difference will gradually be eliminated over the
remaining three quarters of fiscal 2001.
Given the significant variance in accounting principles applied in
purchase accounting versus those applied subsequent to the July 31, 2000
acquisition of CRM, the company has provided the following supplementary
information to assist the reader of the condensed consolidated financial
statements in understanding the operating results for the quarter ending
October 31, 2000.
(Continued)
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College Bound Student Alliance, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2000 (Unaudited)
October 31, July 31,
2000 2000
(Predecessor)
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Number of contracts sold, net of
cancellations 2,646 2,494
----------- ----------
Estimated value of contracts sold, less
estimated reserves $1,579,662 $1,488,918
----------- ----------
Open customer contract receivables, net
of reserves $1,926,000 $1,796,784
----------- ----------
Cash collected from customers in period $1,942,261 $1,839,551
----------- ----------
Number of open customer contracts 6,360 5,974
----------- ----------
The number of weekend workshops vary from quarter to quarter depending on
holidays; there were 12 and 9 workshop weekends in the fiscal quarters ended
October 31 and July 31, 2000, respectively.
Beginning in January 2001, we are considering delivering most or all our
customer services under contract in 60 to 90 days. Accordingly, a substantial
portion of the revenues under these contracts will be deferred over 2 to 3
month periods instead of 12 months for the contracts signed during calendar
2000.
(5) Stock Options
In October, our Chief Executive Officer exercised 100,000 options to
purchase our common stock. The exercise price was $0.275 per share yielding
the company $27,500.
(6) Net Loss Per Share
Net loss per share - basic and diluted is computed on the weighted
average number of shares of common stock outstanding during the quarter.
Basic net loss per share and net loss per share assuming dilution, are the
same for the three-month periods ended October 31, 2000 and 1999, because of
the antidilutive effect of stock options and awards when there is a loss.
(7) Deferred Customer Contract Expenses
Deferred customer contract expenses are comprised of actual sales
commissions, production and delivery expenses incurred subsequent to the
signing of the customer contract. These expenses represent the direct
incremental expenses incurred by the Company related to the fulfillment of
customer contracts. The expenses are amortized on the straight-line basis
over the twelve-month term of the contract.
(Continued)
8
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College Bound Student Alliance, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2000 (Unaudited)
(8) Legal Proceedings
On May 26, 2000, the Federal Trade Commission ("FTC") commenced an
investigation against CRM with respect to its past consumer trade
practices involving advertising, promotions and sales. To date, no
legal action has been filed by the FTC. Our legal counsel is involved
in ongoing settlement discussions with the FTC and we currently
anticipate that, in order to avoid future costly litigation, we will
settle the matter during the fiscal year ending July 31, 2001 by signing
a cease and desist order with no admission of liability and paying a
relatively small settlement amount. FTC staff and our counsel have
agreed to a settlement order which will be signed by CRM (and CBSA)
anticipating FTC approval prior to the fiscal year end of July 31, 2001.
In the very unlikely event that our settlement discussions are
ultimately not successful, we could be required to pay a significant
fine, but only if an action is ultimately brought by the FTC and the FTC
prevails on the merits.
On August 1, 2000, the Attorney General of Kansas commenced an
investigation against CRM based on a small number of consumer complaints
regarding CRM's past consumer trade practices in that state. To date,
no legal action has been filed and no allegation of wrongdoing has been
made. Our legal counsel has initiated settlement discussions with the
Kansas Attorney General and we currently anticipate that, in order to
avoid future costly litigation, we will settle the matter during the
fiscal year ending July 31, 2001 by signing a cease and desist order
with no admission of liability. If our settlement discussions are not
successful, we might be fined or other administrative action could be
taken, but only if an action is ultimately brought and the Kansas
Attorney General prevails on the merits, which we think is unlikely.
On September 19, 2000, the Attorney General of Minnesota and Mike Hatch
filed suit in District Court, Second Judicial District, County of
Ramsey, against CRM alleging deceptive trade practices, consumer fraud
and false advertising. The plaintiffs in the case are seeking
injunctive and other relief. Our legal counsel is involved in ongoing
settlement discussions with the plaintiffs in the case. Based on these
discussions we currently anticipate that we will settle the matter by
signing a cease and desist order with no admission of liability and by
possibly paying a small settlement amount. If our settlement
discussions are not successful we might be fined or other administrative
action could be taken in the event that the case proceeds and the
plaintiffs ultimately prevail on the merits, which we think is not
likely.
The Company is also involved in claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position or results of operations.
9
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ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
College Bound Student Alliance, Inc. (CBSA) is a full-service education
and career preparation company. CBSA's breadth of services and products
combined with the experience of helping over 100,000 students achieve
their higher education dreams makes it a market leader. The company
offers customers a comprehensive set of service and product offerings that
focus on helping students and families achieve their career and higher
educational goals.
CBSA primarily provides career assessment, college preparation, and
admissions services to high school students and their families as they
plan and prepare for the student's future education. Services include
career counseling, assessment, SAT/ACT preparation courses, college
financial planning, and college selection.
The company also specializes in services that assist the athletic, fine
arts, and outstanding academic students in positioning him/herself for the
best possible collegiate opportunities by initiating a high level
recruiting posture and assistance with the recruiting process.
CBSA's products and services provide students and their families with
customized information based on their unique interests, abilities, and
financial information.
The Company reports an operating loss of $1,599,290 for the fiscal
quarter ended October 31, 2000. The Company's principal operation operates at
a pre-tax profit margin of about 16% before corporate expenses. The Company
overall has operated at about breakeven for the quarter ended October 31,
2000, before considering unusually high professional fees of approximately
$150,000 relating to the Company's initial SEC registration filings,
amortization of assets relating to acquisitions of approximately $100,000 and
costs relating to building infrastructure and merging operations. Cash flows
from operations also reflect a net positive result of $43,000. Accordingly,
the balance of the operating loss is due principally to the accounting anomaly
described in Note 4 to the Condensed Consolidated Financial Statement, the
adverse effect of which will gradually be eliminated over the remaining three
quarters of fiscal 2001.
It is also important to understand the Company recognizes approximately
70% of its costs relating to contracts sold within the first 60 days of a
customer contract signing while only recognizing 17% of the related revenue.
This distortion of matching revenues and related expenses may be significantly
reduced for contracts signed beginning in calendar 2001 as the Company is
considering product enhancements and modification of its contracts which would
result in earlier revenue recognition.
FINANCIAL CONDITION AS OF OCTOBER 31, 2000 AS COMPARED TO JULY 31, 2000
Total assets have decreased from $5,429,843 at July 31, 2000 to
$4,459,289 for a change of $970,554 at October 31, 2000. The reduction was
primarily due to a decrease of $1,079,959 from collections of amounts due
from customer contracts acquired that was used as working capital. The
remaining decrease in total assets is primarily due to the amortization and
depreciation of assets.
10
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Total liabilities increased from $4,814,652 at July 31, 2000 to
$5,490,488 at October 31, 2000. Current liabilities increased from
$2,604,640 at July 31, 2000 to $3,359,361 at October 31, 2000. The increase
in current liabilities is primarily a result of a $639,000 increase in
deferred revenue due to receipts of cash for customer contracts prior to
delivery of the services over similar amounts collected and deferred as of
July 31, 2000. Current notes payable and due to related parties increased
reflecting an increase in deferred salaries, deferred royalties and items
reclassified from accounts payable to due to related party when the contractor
became a related party.
Other increases occurred primarily in accounts payable and accrued
liabilities. The increase in accounts payable is primarily the result of
higher sales volume and professional fees relating to SEC filings. The
balance sheet also reflects a decrease in long-term debt from $2,143,376 at
July 31, 2000 to $2,072,845 at October 31, 2000 which is primarily due to
payments on the notes given in connection with the College Bound
Student-Athletes, CRM and CFPI acquisitions, amounts due to related parties
whose terms were extended and amounts reclassified to current;
reclassification of related party debt, deferred salaries, etc.
Stockholders' equity decreased from $615,191 at July 31, 2000 to a
deficit of $1,031,199 at October 31, 2000 primarily because of the net loss
during the quarter. We issued 100,000 shares of stock during the period in
connection with the exercise of options.
As of October 31, 2000, we have a working capital deficit of $2,126,758.
We plan to manage the deficit through deferring certain management
salaries, financing amounts due from open customer contracts, using cash
produced from operations and accessing the Swartz equity line of credit
(discussed in our annual filing.) We also expect to collect open customer
contract amounts (net balance $1,974,00 at October 31, 2000) in the normal
course of business.
A large portion, $455,000, of our current long-term debt matures in March
2001 to pay off the debt associated with the acquisition of CBS-Athletes.
We plan to meet this obligation through exercising puts under the Swartz
equity line of credit. If we cannot or choose not to access the Swartz equity
line of credit, we will attempt to negotiate terms to extend the maturities or
seek alternative financing.
RESULTS OF OPERATIONS: THREE MONTHS ENDING OCTOBER 31, 2000 VERSUS
OCTOBER 31, 1999
GENERAL. The acquisition of College Resource Management, Inc. has
dramatically affected our revenues and expenses recognition methods. We
recognize contract fee revenue from students on a straight-line basis over the
term of the contract. Customers have the option to pay the full contract
price when the contract is signed, in four equal installments payable the
first four months of the contract, in twelve equal monthly installments or in
weekly installments over one year. Customers have the right to cancel the
contract for a full refund within three days. Amounts due under contracts are
not recorded until cash is received. If a customer paying in four equal
installments cancels their contract, all deferred revenue at that time is
recognized as revenue. If a customer is paying in equal monthly or weekly
installments, the revenue is recognized as the payments are received.
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Revenue is recognized on a straight-line basis over the life of the
contract. Deferred revenue is recorded for cash received in advance for
services we are obligated to perform. Over 90% of our direct costs are
incurred and 67% expensed within 60 days of the contract signing, although 83%
of the revenue is recognized after 60 days. We expense direct workshop
marketing costs, which are included in selling, general and administrative
expenses in the statement of operations, prior to delivering action plans to
customers.
The College Action Plan(TM) contract is an arrangement with two
service elements; 1) a tailored profile (the College Action Plan(TM)) to
assist the client in selecting a college and 2) continuing support,
generally for a one year period, in assisting clients in understanding the
output as presented in the College Action Plan(TM), guidance in the college
application process and assistance in identifying sources of educational
financial assistance. These services are not separately priced nor can
customers select only one service. The College Action Plan(TM) is generally
delivered approximately 60 days after initiation of the client contract.
Student services revenue represents revenue from contracts recognized
over the period of the contract. Corporate sponsor contributions, which are
not restricted as to use by the sponsor, are recognized as revenue when
received. Management believes that our business is somewhat seasonal,
with average customer contracts signed declining in the period beginning at
Thanksgiving and ending at the New Year's holiday, and declining in the
spring.
CUSTOMER CONTRACTS. For the period ended October 31, 2000, we signed
2,646 customer contracts, net of 3 day cancellations, as compared to the prior
three month period ended July 31, 2000 which 2,494 customer contracts were
signed, net of 3 day cancellations. Our cash collections are directly related
to the number of customer contracts signed not the amount of revenue
recognized in the period.
REVENUE. For the three-month period ending October 31, 2000, total
revenue increased $427,272 or 119% to $786,397 as compared to $359,125 for
the comparable period in 1999. The increase is primarily due to the
incorporation of revenue from the operations of CRM and CFPI, which
contributed $400,677 and $127,606, respectively. Revenue is expected to
continue increasing substantially in fiscal 2001, primarily due to the
purchase of CRM and the integration and expansion of our products and our
sales representatives. The revenue sources are planned to diversify as
more products are developed.
Student services revenue increased $440,871 or 129% for the three month
period ending October 31, 2000 to $782,496 from $341,625 for the
comparable period in 1999, primarily as a result of the acquisition of
College Resource Management, Inc. (CRM) on July 31, 2000. Revenue from
student services is expected to increase in fiscal 2001 as the marketing
and selling of other products is included in the CRM workshop marketing
channel, increased use of leads, the number of representatives grows and
the sales per representative increases.
We have recently experienced substantial growth; however, there
can be no assurance that we will continue to grow at historical rates or
at all. Our ability to generate increased revenue and achieve
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profitability will depend upon our ability to increase sales through
development and/or acquisition of new products, expanding and upgrading
the number of sales representatives, further developing the workshop
program and designing an effective Internet commerce site. Our ability to
expand and develop these channels depends on a number of factors beyond
our control, including general business and economic conditions.
Expansion and development of existing and additional marketing and
distribution channels will also depend, in part, upon our ability to
secure additional technology, expertise and staff.
Corporate sponsor contributions were $3,800.
Other revenue decreased $17,399 or 99% for the three month period ended
October 31, 2000 to $101 from $17,500 for the comparable period in 1999.
The decrease consists primarily of changes in policy in charging for
training the sales force.
COST OF SERVICES. The cost of services for the three-month period ended
October 31, 2000 increased $366,704 or 175% to $575,994 from $209,290 for
the comparable period in 1999. The increase in cost of services is
primarily attributable to the operations of CRM and CFPI and the related
increase in student services revenue. As a percentage of student services
revenue, cost of services was 73% for the current quarter, as compared to
61% for the comparable period in the prior year. Cost of services
increased as a percentage of revenue because of cost of fulfillment
associated with customer contracts acquired at July 31, 2000.
OPERATING EXPENSE. Selling, general and administrative expenses
increased $1,279,664 or 324% to $1,675,174 for the three-month period ended
October 31, 2000, as compared to $395,510 for the comparable period in 1999.
The increase results from the selling and operating expenses of CRM and CFPI,
legal expenses, accounting and auditing expenses, SEC filing related expenses
and additional compensation for new staff. Because of increased management,
staff and cost of new technology, we anticipate general and administrative
expenses to increase in the future. Operating expenses are expected to
increase in absolute dollars and continue at their current or a somewhat lower
percentage of revenue due to our integration of CRM and CFPI, development of
new products, and efforts to develop processing and production methodologies
to increase the gross margin of each product.
Our 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 we
will be able to successfully integrate the businesses we have acquired or
integrate them in a timely manner in accordance with our strategic
objectives. Failure to integrate acquired businesses effectively and
efficiently could have a material adverse effect on our business,
financial condition, results of operations and liquidity.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased $76,561 or 132% to $134,519 for the three-month period ended
October 31, 2000, as compared to $57,958 for the comparable period in
1999. The additional depreciation and amortization was primarily due to
the acquisitions of CFPI and CRM, since their acquisitions resulted in
intangible assets totaling $1,616,600. These assets are generally being
amortized over a 10-year period.
13
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OPERATING LOSS. Our operating loss for the three-month period ended
October 31, 2000 was $1,599,290 compared to an operating loss of $303,633 for
the comparable period in 1999. The increase in operating loss is primarily
attributable to the selling, general and administrative costs and product
costs expensed as compared to revenue deferred in accordance with SAB 101.
The increase in selling, general and administrative costs is primarily
due to $665,929 in selling expenses associated with customer contracts,
Further, we experienced increases in professional fees, amortization due to
the acquisitions of CRM and CFPI, general expenses of merging operations and
building infrastructure.
Our deferred revenue increased $489,867 from the prior period, which is
recognized over the associated contract life. We estimate 90% of the direct
costs associated with these contracts are incurred and approximately 70%
expensed within 60 days of the contract signing while 83% of the revenue is
deferred. Given the significant variance in the accounting principles applied
in purchase accounting and those applied in on-going operations, we are
experiencing accounting losses than is represented by the approximately break-
even cash provided by operating activities of $43,606.
NON OPERATING INCOME (EXPENSE). Interest expense for the three-month
period ended October 31, 2000 increased $59,357 or 247% to $83,381 as
compared to $24,024 for the comparable period in 1999. The increase in
interest expense relates to the financing of acquisitions. Our interest
expense is directly related to our 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, the
acquisition of CRM that was completed in July 2000, and the possibility
that we may obtain third-party debt financing to fund operations and
development.
NET LOSS AND NET LOSS PER SHARE. The net loss for the three-month period
ended October 31, 2000 was $1,682,671, as compared to $327,657 for the
comparable period in 1999. The basic and diluted net loss per share for the
three month period ended October 31, 2000 was $0.07, as compared to net loss
per share of $0.02 for the comparable period in 1999. The Company has issued
options to purchase 3,838,734 shares of its common stock to employees and
warrants to Swartz as of October 31, 2000, which could potentially dilute
earnings per share in the future.
LIQUIDITY. Management believes that our business is somewhat seasonal,
with average number of customer contracts signed declining in the period
beginning at Thanksgiving and ending in the first week of January. The period
of January, February and March are high productivity months which generate
strong cash flow and profitable operations. We anticipate that sales and
profitability will increase significantly during calendar 2001 as we complete
the upgrade and integration of our products and operations and expand our
sales representatives and marketing activities. These activities and the
seasonality impact in December and early January will stretch cash
resources, which management plans to alleviate by using the $1.9 million open
customer contract receivables as collateral for a short-term line of credit.
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Except for the historical information contained herein, the preceding
discussion contains forward-looking statements that involve risks and
uncertainties. Our 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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On May 26, 2000, the Federal Trade Commission ("FTC") commenced an
investigation against CRM with respect to its past consumer trade
practices involving advertising, promotions and sales. To date, no
legal action has been filed by the FTC. Our legal counsel is involved
in ongoing settlement discussions with the FTC and we currently
anticipate that, in order to avoid future costly litigation, we will
settle the matter during the fiscal year ending July 31, 2001 by signing
a cease and desist order with no admission of liability and paying a
relatively small settlement amount. FTC staff and our counsel have
agreed to a settlement order which will be signed by CRM (and CBSA)
anticipating FTC approval prior to the fiscal year end of July 31, 2001.
In the very unlikely event that our settlement discussions are
ultimately not successful, we could be required to pay a significant
fine, but only if an action is ultimately brought by the FTC and the FTC
prevails on the merits.
On August 1, 2000, the Attorney General of Kansas commenced an
investigation against CRM based on a small number of consumer complaints
regarding CRM's past consumer trade practices in that state. To date,
no legal action has been filed and no allegation of wrongdoing has been
made. Our legal counsel has initiated settlement discussions with the
Kansas Attorney General and we currently anticipate that, in order to
avoid future costly litigation, we will settle the matter during the
fiscal year ending July 31, 2001 by signing a cease and desist order
with no admission of liability. If our settlement discussions are not
successful, we might be fined or other administrative action could be
taken, but only if an action is ultimately brought and the Kansas
Attorney General prevails on the merits, which we think is unlikely.
On September 19, 2000, the Attorney General of Minnesota and Mike Hatch
filed suit in District Court, Second Judicial District, County of
Ramsey, against CRM alleging deceptive trade practices, consumer fraud
and false advertising. The plaintiffs in the case are seeking
injunctive and other relief. Our legal counsel is involved in ongoing
settlement discussions with the plaintiffs in the case. Based on these
discussions we currently anticipate that we will settle the matter by
signing a cease and desist order with no admission of liability and by
possibly paying a small settlement amount. If our settlement
discussions are not successful we might be fined or other administrative
action could be taken in the event that the case proceeds and the
plaintiffs ultimately prevail on the merits, which we think is not
likely.
The Company is also involved in claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position or results of operations.
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Item 2. Changes in Securities
On October 24, 2000, Jerome M. Lapin, our Chief Executive Officer,
exercised options to purchase 100,000 shares of our common stock. The
exercise price was $0.275 per share, which yielded $27,500.
In connection with this issuance we relied on Section 4(2) of the
Securities Act of 1933 for exemption from registration. The purchaser is an
accredited investor. We affixed an appropriate legend on the stock
certificate issued.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
27 Financial Data Schedule - filed herewith electronically
Reports on Form 8-K:
We filed a Report on Form 8-K dated July 31, 2000, reporting
information under Items 2 and 7 concerning the acquisition of
College Resource Management, Inc.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
College Bound Student Alliance, Inc.
Date: December 20, 2000 By: /s/ Jerome M. Lapin
Jerome M. Lapin
Chief Executive Officer
Date: December 20, 2000 By: /s/ John J. Grace
John J. Grace
Chief Financial Officer
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