1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K/A
AMENDMENT NO. 1 TO CURRENT REPORT
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report : May 16, 2001
Commission File No. 0 -26173
STUDENT ADVANTAGE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-3263743
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
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280 SUMMER STREET
BOSTON, MASSACHUSETTS 02210
(Address of Principal Executive Offices) (Zip Code)
(617) 912-2000
(Registrant's telephone number, including area code)
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2
INTRODUCTORY NOTE
On May 10, 2001, Student Advantage, Inc. (the "Company") completed its
acquisition (the "Acquisition") of substantially all of the assets of edu.com,
Inc. On May 16, 2001, the Company filed a Current Report on Form 8-K (the
"Current Report") to report the Acquisition. The purpose of this Amendment No. 1
to the Current Report on Form 8-K is to file the financial statements of the
business acquired and the pro forma financial statements required by Item 7.
The Company hereby amends Item 7 of the Current Report to read in its
entirety as follows:
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of the Business Acquired.
The required financial statements are attached hereto on pages 3
through 17.
(b) Pro Forma Financial Information.
The required pro forma financial information is attached hereto on
pages 18 through 21.
(c) Consolidated Financial Statements of Student Advantage, Inc. (as
restated).
The required consolidated financial statements are attached hereto on
pages 22 through 44.
(d) Exhibits.
2.1* Asset Purchase Agreement, dated as of May 10, 2001, by and among
Student Advantage, Inc. and edu.com, Inc.
23.1 Consent of Arthur Andersen LLP
- -------------------
* Previously filed.
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ITEM 7. (a)
edu.com, inc.
Contents
Page
Report of Independent Public Accountants 4
Balance Sheets as of December 31, 1999 and 2000, and as of March 31, 2001
(unaudited) 5
Statements of Operations for the Years Ended December 31, 1999 and 2000 and for
the three month periods ended March 31, 2000 and 2001 (unaudited) 6
Statement of Shareholders' Equity (Deficit) for the Years Ended December 31,
1999 and 2000, and for the Three Month Period Ended March 31, 2001 (unaudited) 7
Statements of Cash Flows for the Years Ended December 31, 1999 and 2000 and for
the three month periods ended March 31, 2000 and 2001 (unaudited) 9
Notes to Financial Statements 10
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To edu.com, inc.:
We have audited the accompanying balance sheets of edu.com, inc. (a Delaware
corporation) (the Company) as of December 31, 1999 and 2000 and the related
statements of operations, shareholders' equity (deficit) and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of edu.com, inc. as of December
31, 1999 and 2000 and the results of its operations and its cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered significant recurring losses from
operations and has a net capital deficiency that raises substantial doubt about
its ability to continue as a going concern. In addition, the Company sold a
significant part of its assets in a transaction on May 10, 2001. Management's
plans in regards to these and other matters are also described in Note 1.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
May 17, 2001
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edu.com, Inc.
Balance Sheets
(in thousands, except share data)
MARCH 31,
DECEMBER DECEMBER 2001
31, 1999 31, 2000 (unaudited)
-------- -------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $ 13,865 $ 3,687 $ 1,473
Restricted cash (Note 3) 50 50 50
Accounts receivable 48 114 85
Prepaid expenses 110 199 128
-------- -------- --------
Total current assets 14,073 4,050 1,736
Property and Equipment, net (Note 4) 2,283 -- --
Restricted Cash 200 154 154
Other Assets 5 5 --
-------- -------- --------
$ 16,561 $ 4,209 $ 1,890
======== ======== ========
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current Liabilities:
Accounts payable $ 1,231 $ 316 $ 199
Accrued expenses 902 1,137 867
Loans payable and other amounts due to shareholders -- 5,109 5,403
-------- -------- --------
Total current liabilities 2,133 6,562 6,469
-------- -------- --------
Commitments (Note 7)
Shareholders' Equity (Deficit):
Convertible preferred stock, $0.001 par value --
20,000,000 shares authorized -
Series A -
Authorized -- 4,200,000 shares
Issued and outstanding -- 4,125,000 shares for 1999, 2000,
and March 31, 2001, entitled to $4,125,000 in liquidation 4 4 4
Series B -
Authorized -- 6,941,431 shares
Issued and outstanding -- 5,223,428 shares for 1999 and
6,531,673 shares for 2000 and March 31, 2001, respectively;
entitled in liquidation to $48,160,006 for 1999 and $60,222,025
and for 2001 and March 31, 2001, respectively 5 7 7
Common stock, $0.001 par value -
Authorized -- 30,000,000 shares
Issued and outstanding -- 4,457,814 shares for 1999 and 4,305,235
and 4,307,215 shares for 2000 and March 31, 2001, respectively 4 4 4
Additional paid-in capital 28,593 34,983 34,985
Deferred compensation (22) --
Accumulated deficit (14,156) (37,351) (39,579)
-------- -------- --------
Total shareholders' equity (deficit) 14,428 (2,353) (4,579)
-------- -------- --------
$ 16,561 $ 4,209 $ 1,890
======== ======== ========
The accompanying notes are an integral part of these financial statements.
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edu.com, Inc.
Statements of Operations
(in thousands)
YEAR YEAR THREE MONTHS ENDED
ENDED ENDED ---------------------
DECEMBER DECEMBER MARCH 31, MARCH 31,
31, 1999 31, 2000 2000 2001
-------- -------- -------- --------
(Unaudited)
Net Sales $ 133 $ 1,421 $ 209 $ 727
Cost of Sales 128 1,190 217 549
-------- -------- -------- --------
Gross profit 5 231 (8) 178
-------- -------- -------- --------
Operating Expenses:
Selling and marketing 6,040 8,654 2,287 645
Product development 2,548 5,725 1,225 379
General and administrative 4,998 4,734 1,213 1,077
Impairment charge -- 4,705 -- --
-------- -------- -------- --------
Total operating expenses 13,586 23,818 4,725 2,101
-------- -------- -------- --------
Operating loss (13,581) (23,587) (4,733) (1,923)
Loss on Sale of Assets -- -- -- (47)
Interest Income (Expense), net (289) 392 197 (258)
-------- -------- -------- --------
Net loss $(13,870) $(23,195) $ (4,536) $ (2,228)
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
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edu.com, Inc.
Statement of Shareholders' Equity (Deficit)
(in thousands, except share data)
SERIES A CONVERTIBLE SERIES B CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ---------- ---------- ---------- ---------- ----------
Balance, January 1, 1999 -- $ -- -- $ -- 3,961,905 $ 4
Issuance of common stock -- -- -- -- 38,095 --
Grant of stock options and warrants to
nonemployees -- -- -- -- -- --
Issuance of Series A convertible
preferred stock, net of issuance costs 4,125,000 4 -- -- -- --
Issuance of Series B convertible
preferred stock, net of issuance costs -- -- 5,223,428 5 -- --
Issuance of restricted common stock and
related deferred compensation -- -- -- -- 457,814 --
Amortization of deferred compensation -- -- -- -- -- --
Net loss -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1999 4,125,000 4 5,223,428 5 4,457,814 4
Employee stock option exercise -- -- -- -- 26,041 --
Value ascribed to stock options and
warrants granted to nonemployees -- -- -- -- -- --
Issuance of Series B convertible
preferred stock, net of issuance costs -- -- 1,308,245 2 -- --
Amortization of deferred compensation -- -- -- -- -- --
Forfeitures of restricted stock -- -- -- -- (178,620) --
Net loss -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 2000 4,125,000 $ 4 6,531,673 $ 7 4,305,235 $ 4
========== ========== ========== ========== ========== ==========
TOTAL
ADDITIONAL SHAREHOLDERS'
PAID-IN DEFERRED ACCUMULATED EQUITY
CAPITAL COMPENSATION DEFICIT (DEFICIT)
---------- ------------ ----------- -------------
Balance, January 1, 1999 $ 97 $ -- $ (286) $ (185)
Issuance of common stock 4 -- -- 4
Grant of stock options and warrants to
nonemployees 273 -- -- 273
Issuance of Series A convertible
preferred stock, net of issuance costs 4,118 -- -- 4,122
Issuance of Series B convertible
preferred stock, net of issuance costs 24,034 -- -- 24,039
Issuance of restricted common stock and
related deferred compensation 67 (27) -- 40
Amortization of deferred compensation -- 5 -- 5,237
Net loss -- -- (13,870) (13,870)
---------- ---------- ---------- ----------
Balance, December 31, 1999 28,593 (22) (14,156) 14,428
Employee stock option exercise 3 -- -- 3
Value ascribed to stock options and
warrants granted to nonemployees 373 -- -- 373
Issuance of Series B convertible
preferred stock, net of issuance costs 6,033 -- -- 6,034
Amortization of deferred compensation -- 3 -- 2
Forfeitures of restricted stock (19) 19 -- --
Net loss -- -- (23,195) (23,195)
---------- ---------- ---------- ----------
Balance, December 31, 2000 $ 34,983 $ -- $ (37,351) $ (2,353)
========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
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edu.com, Inc.
Statement of Shareholders' Equity (Deficit)
(in thousands, except share data)
SERIES A CONVERTIBLE SERIES B CONVERTIBLE ADDITIONAL
PREFERRED STOCK PREFERRED STOCK COMMON STOCK PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- --------- --------- --------- --------- --------- ----------
Balance, December 31, 2000 4,125,000 $ 4 6,531,673 $ 7 4,305,235 $ 4 $ 34,983
Employee stock option exercise -- -- -- -- 1,980 -- 1
Compensation expense related to
common stock and warrants -- -- -- -- -- -- 1
Net loss -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Balance, March 31, 2001 (Unaudited) 4,125,000 $ 4 6,531,673 $ 7 4,307,215 $ 4 $ 34,985
========= ========= ========= ========= ========= ========= =========
TOTAL
SHAREHOLDERS'
DEFERRED ACCUMULATED EQUITY
COMPENSATION DEFICIT (DEFICIT)
------------ ----------- -------------
Balance, December 31, 2000 $ -- $ (37,351) $ (2,353)
Employee stock option exercise -- -- 1
Compensation expense related to
common stock and warrants -- -- 1
Net loss -- (2,228) (2,228)
------------ --------- ---------
Balance, March 31, 2001 (Unaudited) $ -- $ (39,579) $ (4,579)
============ ========= =========
The accompanying notes are an integral part of these financial statements.
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edu.com, Inc.
Statements of Cash Flows
(in thousands)
YEAR YEAR THREE MONTHS ENDED
ENDED ENDED
DECEMBER DECEMBER MARCH 31, MARCH 31,
31, 1999 31, 2000 2000 2001
-------- -------- -------- --------
(unaudited) (unaudited)
Cash Flows from Operating Activities:
Net loss $(13,870) $(23,195) $ (4,536) $ (2,228)
Adjustments to reconcile net loss to net cash used in
operating activities -
Depreciation and amortization 796 3,383 158 --
Impairment charge -- 4,705 -- 78
Noncash expense relating to restricted common stock,
common stock options and warrants 278 100 -- 185
Noncash interest relating to bridge loan financing 100 56 -- 112
Noncash expense relating to Student Advantage, Inc. 1,000 -- --
Loss on sale of equipment -- -- -- 47
Changes in operating assets and liabilities -
Restricted cash (250) 46 -- --
Accounts receivable (48) (66) (40) 29
Prepaid expenses (110) (89) (94) 71
Other assets 2 -- -- 5
Accounts payable 1,158 (915) (942) (117)
Accrued expenses 886 235 -- (270)
Note Payable -- -- (250) --
-------- -------- -------- --------
Net cash used in operating activities (10,058) (15,740) (4,594) (2,088)
-------- -------- -------- --------
Cash Flows from Investing Activities:
Property and equipment (3,061) (5,804) (716) (126)
-------- -------- -------- --------
Cash Flows from Financing Activities:
Notes payable -- 1,000 -- --
Payments of shareholder loans (250) -- -- --
Net proceeds from Series A convertible preferred stock
financing 4,123 -- -- --
Net proceeds from Series B convertible preferred stock
financing 18,339 6,034 5,181 --
Proceeds from loans payable 4,600 4,328 -- --
Proceeds from issuance of common stock 44 4 -- --
-------- -------- -------- --------
Net cash provided by financing activities 26,856 11,366 5,181 --
-------- -------- -------- --------
Net Increase (Decrease) in Cash and Cash Equivalents 13,737 (10,178) (129) (2,214)
Cash and Cash Equivalents, beginning of period 128 13,865 13,865 3,687
-------- -------- -------- --------
Cash and Cash Equivalents, end of period $ 13,865 $ 3,687 $ 13,736 $ 1,473
======== ======== ======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 101 $ -- $ -- $ --
======== ======== ======== ========
Cash paid for income taxes $ 1 $ 7 $ -- $ --
======== ======== ======== ========
Supplemental Disclosure of Noncash Financing Activity:
Common stock issued to consultants as part of Series A
convertible preferred stock financing $ 2 $ -- $ -- $ --
======== ======== ======== ========
Conversion of principal and interest into Series B
convertible preferred stock financing $ 4,700 $ -- $ -- $ --
======== ======== ======== ========
Issuance of Series B convertible preferred stock for
marketing services $ 1,000 $ -- $ -- $ --
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
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edu.com, Inc.
Notes to Financial Statements
(Information as of March 31, 2001 and for the three months
ended March 31, 2000 and 2001 is unaudited)
(1) DESCRIPTION OF BUSINESS
edu.com, inc. (edu.com or the Company) is an online distribution channel that
helps large, branded marketers sell their products directly to college students
via the Internet. The Company negotiates with marketers to offer substantial
value on products and services of interest to students, then provides marketers
with a destination to offer their special values without competing with their
traditional marketing channels. The Company was originally incorporated under
the name StudentDirect, Inc. on September 4, 1998 in the State of Delaware. The
name of the Company was changed to edu.com, inc. in March 1999. The Company's
Web site went live and began generating revenue in August 1999.
Through December 31, 2000 and subsequently, the Company has incurred significant
losses which have raised substantial doubt about its ability to continue as a
going concern. The Company has explored various financing options and other
alternatives which have resulted in the following. On May 10, 2001, the Company
entered into an agreement to sell certain assets of the Company in exchange for
90,000 shares of Student Advantage, Inc. common stock, plus 450,000 warrants to
acquire common stock at various exercise prices ranging from market to above
market, as well as the assumption of certain liabilities, including amounts due
to Student Advantage, Inc. (see Note 7). The Company will also be entitled to
additional warrants if certain financial goals are met by the end of 2001.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements and reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates and assumptions.
CASH AND CASH EQUIVALENTS
Cash equivalents are recorded at cost plus accrued interest, which approximates
fair value. The Company considers all highly liquid investments with an original
maturity date of three months or less to be cash equivalents. All of the
Company's cash and cash equivalents are maintained in two accounts: the main
operating account and a mutual fund account, both of which are with highly rated
institutions.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards (SFAS) No. 107, Disclosures about
Fair Value of Financial Instruments, requires that disclosure be made of
estimates of the fair value of financial instruments. The Company's financial
instruments consist primarily of cash and cash equivalents, letters of credit,
accounts receivable, accounts payable and notes payable. The carrying amount of
these instruments approximates fair value due to their short-term nature.
REVENUE RECOGNITION
The Company follows the method of revenue recognition required by Emerging
Issues Task Force Statement 99-19, Reporting Revenue Gross as a Principal Versus
Net as an Agent. In certain eCommerce transactions, the Company is deemed to be
acting as a principal. In such transactions, the Company recognizes gross
revenues from product sales when the products are shipped to customers, net of
coupons redeemed. The Company takes title to these products upon transfer to the
shipper and assumes the risks and rewards of ownership including the risk of
loss for collection.
In other eCommerce transactions, the Company is deemed to be acting as a sales
agent for its suppliers. In such transactions, net commission revenue is
recognized when products are shipped or services are provided to the customer.
The Company does not take title to these products, it does not provide these
services and the supplier retains the risks and rewards of ownership. To date,
such revenues have consisted primarily of product sales.
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The Company has also generated revenues through marketing service agreements. In
accordance with the Securities and Exchange Commission (SEC) Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements, revenues from the
Company's marketing agreements are ratably recognized as the related services
are performed, provided the services are fixed and determinable, no significant
performance obligations remain and the collection of the related receivable is
probable.
COST OF SALES
The Company's cost of sales is comprised of product costs, such as hardware and
software, freight and handling.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses include advertising and promotional expenditures
and payroll and related expenses for personnel engaged in marketing and customer
service activities.
PRODUCT DEVELOPMENT EXPENSES
Product development expenses include payroll and related expenses for
merchandising, Web site development and information technology personnel and Web
content and design expenses. In accordance with Emerging Issues Task Force
Statement 00-02, the Company has capitalized a portion of Web site development
costs incurred in 1999 and 2000 (see Note 4), which are included in property and
equipment in the accompanying financial statements.
STOCK-BASED COMPENSATION
SFAS No. 123, Accounting for Stock-Based Compensation, requires that stock
awards be recognized as compensation expense based on their fair value at the
date of grant. Alternatively, a company may use Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees, to account for
grants to employees and disclose pro forma income amounts that would have
resulted from recognizing such awards at their fair value. The Company has
elected to account for stock issued to employees under APB Opinion No. 25 and
make the required pro forma disclosures for stock-based compensation (see Note
6).
LONG-LIVED ASSETS
In accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of, the carrying value of
intangible assets and other long-lived assets is reviewed on a regular basis for
the existence of facts or circumstances that may suggest impairment. The Company
recognizes an impairment when the sum of the expected undiscounted future cash
flows is less than the carrying amount of the asset. Impairment losses, if any,
are measured as the excess of the carrying amount of the asset over its
estimated fair value. As a result of the deterioration of the financing
marketplace, the Company made a decision under SFAS No. 121 to record an
impairment charge for the entire net book value of the property and equipment at
December 31, 2000. This charge is included in accumulated depreciation in the
accompanying financial statements (see Note 4).
INCOME TAXES
The Company records income taxes in accordance with SFAS No. 109, Accounting for
Income Taxes. Under SFAS No. 109, the liability method is used in accounting for
income taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between the financial reporting and tax bases of
assets and liabilities and are measured using enacted tax rates. A valuation
allowance is established against deferred tax assets unless the Company believes
it is more likely than not that the benefit will be realized (see Note 8).
COMPREHENSIVE INCOME
Comprehensive income is defined as the change in net assets of a business
enterprise during a period from transactions generated from nonowner sources. It
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners. The Company had no other
comprehensive income (loss) in the periods presented.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. As
issued, SFAS No. 133 is effective for all fiscal
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quarters of all fiscal years beginning after June 15, 1999, with earlier
application encouraged. In May 1999, the FASB issued SFAS No. 137, Accounting
for Derivative Instruments and Hedging Activities -- Deferral of the Effective
Date of FASB Statement No. 133, which delayed the effective date of SFAS No. 133
for one year, to fiscal years beginning after June 15, 2000. The Company does
not currently nor does it intend in the future to issue derivative instruments
and, therefore, the adoption of SFAS No. 133 is not expected to have any impact
on its financial position or its results of operations.
In March 2000, the FASB issued Interpretation No. 44 (FIN 44), Accounting for
Certain Transactions Involving Stock Compensation. FIN 44 interprets APB Opinion
No. 25 for certain issues and was effective as of July 1, 2000; however, certain
conclusions cover specific events that occur after either December 15, 1998 or
January 12, 2000. FIN 44 has not had a material effect on the financial position
of the Company.
(3) RESTRICTED CASH
The Company currently has restricted cash in the amount of $204,000 as
collateral for a letter of credit related to its facility lease. The restriction
on the cash expires on September 30, 2001, with automatic one-year extensions
through September 30, 2004, if not amended. The amount of the letter of credit
is scheduled to decrease by $50,000 per year during the term of the lease.
(4) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation.
Expenditures that significantly improve or extend the life of an asset are
capitalized. Maintenance and repairs are charged to expense as incurred.
Depreciation of property and equipment is calculated on the straight-line basis
over an estimated useful life, as follows:
ESTIMATED
PROPERTY AND EQUIPMENT USEFUL LIFE
Web site development costs 6-12 months
Computer equipment and software 3 years
Office equipment and furniture 3 years
Leasehold Improvements 5 years
Property and equipment consist of the following:
DECEMBER 31, MARCH 31,
1999 2000 2001
----------- ----------- -----------
Web site development costs $ 1,328,719 $ 2,554,789 $ --
Computer equipment and software 729,723 3,485,327 --
Office equipment and furniture 230,606 506,287 --
Leasehold Improvements 789,786 1,008,011 --
----------- ----------- -----------
3,078,834 7,554,414 --
Less -- Accumulated depreciation (795,640) (2,849,416) --
Less -- Impairment charge -- (4,704,998) --
----------- ----------- -----------
$ 2,283,194 $ -- $ --
=========== =========== ===========
When equipment and improvements are sold or otherwise disposed of, the asset
cost and accumulated depreciation are removed from the accounts and the
resulting gain or loss, if any, is included in the results of operations.
(5) DEBT
LOAN AND SECURITY AGREEMENT
In October 1999, the Company entered into a loan and security agreement (the
Loan Agreement) with a bank to borrow up to $2,000,000 under a revolving credit
facility (the Credit Facility). The annual interest rate on the Credit Facility
is equal to the prime rate plus 1.5% (9.65% as of December 31, 2000). In October
and November 1999, the Company borrowed an aggregate of $1,750,000 under this
Credit Facility. In connection
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with the Credit Facility, the Company issued a detachable warrant to the bank to
purchase 7,593 shares of Series A convertible preferred stock (Series A
Preferred) at a price of $2.50 per share. These warrants expire in October 2004.
Using the Black-Scholes option pricing model, the warrants issued were valued at
$27,131, which was recorded as additional interest expense in 1999. In November
1999, the outstanding balance on the Credit Facility was paid. No amounts were
outstanding as of December 31, 1999 or 2001, or as of March 31, 2001.
BRIDGE LOAN FINANCING
In August 1999, the Company secured $4,600,000 in bridge loan financing (the
Bridge Loan Financing) from a group of investors. The Company issued convertible
promissory notes to these investors with annual interest rates of either 8% or
16%. The notes were converted into Series B convertible preferred stock (Series
B Preferred) in November and December 1999 (see Note 6). In August 1999, in
connection with the Bridge Loan Financing, the Company issued detachable
warrants to the investors to purchase 109,216 shares of the Company's next class
of preferred stock at a price of $2.93 per share. These warrants expire on
August 31, 2004. Using the Black-Scholes option pricing model, the warrants
issued were valued at $229,823, which was recorded as an additional interest
expense in 1999.
In November 2000, the Company secured an additional $4,327,739 in bridge loan
financing from a group of investors. The Company issued convertible promissory
notes to these investors with annual interest rates of 10%. The notes were
convertible into preferred stock upon the Company's completion of a new round of
financing for an amount equal to or greater than $20,000,000. In November 2000,
the Company also issued detachable warrants to the investors to purchase 93,878
shares of the Company's net class of preferred stock at a price of $4.61 per
share. These warrants expire on November 14, 2007. Using the Black-Scholes
option pricing model, the warrants issued were valued at $367,617. The full
value of the warrants was recorded as a discount to notes payable and as
additional paid-in capital in the accompanying financial statements. The related
interest expense recorded in 2000 was $91,904.
(6) SHAREHOLDERS' EQUITY
AUTHORIZED CAPITAL
On September 4, 1998, the Company was incorporated in the State of Delaware with
authorized capital of 500,000 shares of $0.001 par value common stock. In
January 1999, the Company increased its authorized common stock to 12,000,000
shares and increased its authorized convertible preferred stock to 4,200,000
shares. In November 1999, the Company increased its authorized common stock to
30,000,000 shares and its authorized convertible preferred stock to 20,000,000
shares, including 5,532,209 shares of Series B Preferred. In February 2000, the
Company increased its authorized shares of Series B Preferred to 6,941,431
shares.
PREFERRED STOCK
In January and March 1999, the Company issued 4,125,000 shares of Series A
Preferred at a price of $1.00 per share in conjunction with the Series A
Preferred Financing. The Series A Preferred is convertible to common stock at
the option of the holder, at a rate of one share of common stock for one share
of Series A Preferred. Furthermore, in the event of a public offering of the
Company's equity securities resulting in a per share common stock price of at
least $5.00 and gross proceeds to the Company of at least $15,000,000, or upon a
majority vote of the Series A Preferred shareholders, all outstanding Series A
Preferred will automatically convert into common stock.
In November and December 1999, the Company issued 5,223,428 shares of Series B
Preferred at a price of $4.61 per share to a group of investors in the Company's
Series B Preferred Financing. The Series B Preferred Financing resulted in net
cash proceeds of approximately $18,339,000, the conversion of the outstanding
bridge loans including principal plus accrued interest totaling $4,700,000, and
the first of two $1,000,000 payments in settlement of the amount owed to Student
Advantage, Inc. (see Note 7).
In January, February and July 2000, the Company issued 1,308,245 shares of
Series B Preferred at a price of $4.61 per share for net cash proceeds of
approximately $6,034,299.
The Series B Preferred is convertible to common stock at the option of the
holder, at a rate of one share of common stock for one share of Series B
Preferred. As amended in the Second Restated Certificate of Incorporation in
November 1999, in the event of a public offering of the Company's equity
securities resulting in a per share common stock price of at least $13.83 and
gross proceeds to the Company of at least $20,000,000 or greater, or upon a
majority vote of the Series A and Series B Preferred shareholders, all
outstanding Series A and Series B Preferred will automatically convert into
common stock.
13
14
VOTING
Each share of Series A Preferred and Series B Preferred entitles the holder to
the number of votes per share as equals the number of shares of common stock
into which each share of preferred stock is convertible.
DIVIDENDS
The holders of Series A Preferred are entitled to receive, when and if declared
by the Board of Directors, annual dividends at the rate of $0.08 per share. The
holders of Series B Preferred are entitled to receive, when and if declared by
the Board of Directors, annual dividends at the rate of $0.369 per share. The
preferred dividends are not cumulative. From issuance through December 31, 2000,
the Company has not declared any dividends.
LIQUIDATION
In the event of any liquidation, dissolution or winding-up of the Company, the
holders of Series A Preferred are entitled to receive, in preference to the
holders of common stock, any distribution of assets of the Company in an amount
per share equal to $1.00, plus any declared but unpaid dividends. The holders of
Series A Preferred are entitled to receive total payments, including the
preferential amounts, not to exceed $3.00 per share of the respective class of
preferred stock held.
In the event of any liquidation, dissolution or winding-up of the Company, the
holders of Series B Preferred rank pari passu with the holders of Series A
Preferred and are entitled to receive, in preference to the holders of common
stock, any distribution of assets of the Company in an amount per share equal to
$4.61 plus any declared but unpaid dividends. The holders of Series B Preferred
are entitled to receive total payments, including the preferential amounts, not
to exceed $9.22 per share of the respective class of preferred stock held.
COMMON STOCK
Each share of common stock entitles the holder to one vote per share. In
December 1998, the Company effected a 1.03125-for-1 stock split in the form of
stock dividend. In January 1999, the Company effected a 7.619-for-1 stock split
in the form of a stock dividend. All references in the financial statements to
the number of shares and to per share amounts have been retroactively restated
to reflect these changes.
WARRANTS
In December 1998, the Company issued a warrant to purchase an aggregate of
10,000 shares of common stock at an exercise price of $0.10 per share to the
Company's outside legal counsel. These warrants expire in December 2008. Using
the Black-Scholes option pricing model, the warrants issued were valued at $906,
which was recorded as expense in 1999.
In August 1999, the Company issued warrants to purchase an aggregate of 109,216
shares of preferred stock in connection with the Company's Bridge Loan Financing
(see Note 5).
In October 1999, the Company issued warrants to purchase an aggregate of 7,593
shares of Series A Preferred in connection with the Company's Loan Agreement
(see Note 5).
In November 2000, the Company issued warrants to purchase an aggregate of 93,878
shares of preferred stock in connection with the Company's Bridge Loan Financing
(see Note 5).
STOCK OPTIONS
In January 1999, the Company adopted the 1999 Stock Plan (the Plan), which
authorized the Company to grant options to purchase up to an aggregate of
2,000,000 shares of common stock. In November 1999, the Company amended the Plan
and increased the authorized option grants to 2,600,000 shares of common stock.
Under the Plan, incentive and nonqualified stock options, awards of restricted
stock and opportunities to make direct purchases of stock may be granted to
employees, officers, directors, independent contractors and consultants.
Generally, the Company's Board of Directors grants options. Each outstanding
option granted under the Plan expires at various dates, not to exceed 10 years
from the date of grant, and becomes exercisable in varying installments as
determined by the Board of Directors at the date of grant. Vesting generally
occurs over four years.
14
15
In March 1999, the Company granted nonqualified stock options under the Plan to
purchase a total of 100,000 shares of common stock, 66,667 of which vested
immediately and the remaining 33,333 vested upon the Web site going live in
August 1999, to individuals that were neither employees nor directors. As
prescribed by SFAS No. 123 and Emerging Issues Task Force (EITF) 96-18,
Accounting for Equity Instruments that Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services, the options were
valued using the Black-Scholes option pricing model. Consequently, $13,937 and
$5,725 were recorded as expense in 1999 and 2000, respectively, and classified
as a component of selling and marketing expense in the accompanying financial
statements.
In November 1999, the Company granted nonqualified stock options under the Plan
to purchase a total of 50,000 shares of common stock to individuals who were
neither employees nor directors. The options were for consulting services to be
performed and vest over four years. As prescribed by SFAS No. 123 and EITF
96-18, the options were valued using the Black-Scholes option pricing model.
Consequently, $954 was recorded as expense in 1999 and classified as a component
of general and administrative expense in the accompanying financial statements.
In May 2000, the Company adopted the 2000 Stock Plan (the Plan), which
authorized the Company to grant options to purchase up to an aggregate of
1,500,000 shares of common stock. Under the Plan, incentive and nonqualified
stock options, awards of restricted stock and opportunities to make direct
purchases of stock may be granted to employees, officers, directors, independent
contractors and consultants.
Options are granted at an exercise price of not less than 100% of the fair
market value of the common stock on the date of grant. The following table
summarizes all of the Company's stock option activity, including both employee
and nonemployee activity:
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
---------- --------------
Outstanding, December 31, 1998 -- $ --
Options granted 1,044,450 0.24
Options canceled (41,000) 0.11
---------- ----------
Outstanding, December 31, 1999 1,003,450 0.25
Options granted 1,825,900 0.80
Options canceled (734,879) 0.55
Options exercised (26,041) 0.14
---------- ----------
Outstanding, December 31, 2000 2,068,430 0.63
Options granted 180,500 0.80
Options exercised (1,980) 0.15
---------- ----------
Outstanding, March 31, 2001 2,246,950 $ 0.64
========== ==========
At March 31, 2001, 1,724,355 shares of common stock were available for future
grant under the Plan. Options outstanding at March 31, 2001 were:
WEIGHTED
OPTIONS AVERAGE OPTIONS
OUTSTANDING AS REMAINING EXERCISABLE AT
Range of OF MARCH CONTRACTUAL MARCH 31,
Exercise Price 31, 2001 LIFE 2001
-------------- -------------- --------------- --------------
$ 0.10-0.15 440,500 8.21-8.53 years 179,565
0.50 156,500 8.87-8.94 years 39,417
0.80 1,649,950 9.09-9.80 years --
---------- --------
2,246,950 218,982
========== ========
15
16
If the Company had accounted for the Plan in accordance with SFAS No. 123, the
Company's net loss would have been increased to the following pro forma amount:
Year Ended
December 31,
2000
Net loss -
As reported $ (23,194,806)
Pro forma (23,239,816)
Pro forma net loss for the three months ended March 31, 2001 was not materially
different from actual earnings.
The fair value of each option grant was estimated using the minimum-value
method. For the years ended December 31, 1999 and 2000, and for the three months
ended March 31,, the weighted average value was estimated using an expected life
of four years, a dividend yield of 0%, a risk-free interest rate of between
5.18% and 6.64% and a volatility of 0%. The weighted average fair value of
options granted during the fiscal year ended December 31, 1999 and 2000 and for
the three months ended March 31, 2001 was $0.05 and $0.18 and $0.80,
respectively.
RESTRICTED STOCK
During 1999, the Company issued 457,814 shares of restricted common stock to
various consultants, directors and officers. The restrictions lapse 25% at the
end of the first year, with the remaining vesting in equal monthly installments
over the next three years. In the event of termination of employment with the
Company before all purchased shares are released, the Company has the right to
reacquire the shares at the original purchase price per share. Shares sold or
granted to consultants and directors (51,876 and 150,000, respectively) were
sold or priced at the then current common stock fair value, as determined by the
Board of Directors. Included in these amounts is 15,000 shares granted in
association with the Series A Preferred. Compensation expense was calculated
(weighted average fair value at date of grant of $0.11) and recorded for those
shares issued to officers (255,938 shares). Total compensation expense related
to the 1999 restricted stock grants was determined to be $27,094. That amount
was deferred and is being recognized ratably over the related service period.
Expense recorded in 1999 and 2000 was $5,237 and $2,495, respectively, which is
included in general and administrative expense in the accompanying financial
statements. During 2000, 178,620 shares were forfeited.
(7) COMMITMENTS
The Company currently leases office space and fixed assets under noncancelable
operating leases. Rental expense under operating lease agreements for the years
ended December 31, 1999 and 2000 and for the three months ended March 31, 2001
was approximately $569,000, $93,000 and $150,000, respectively.
Future minimum commitments as of March 31, 2001 are approximately as follows:
OPERATING
LEASES
Year ending December 31,
2001 $ 477,000
2002 614,000
2003 604,000
2004 502,000
2005 351,000
Thereafter --
----------
Total minimum lease payments $2,548,000
==========
AGREEMENTS WITH STUDENT ADVANTAGE, INC.
In November 1999, the Company signed a marketing, distribution and
co-promotional agreement with Student Advantage, Inc. (Student Advantage). The
agreement provides for various marketing initiatives, including the promotion of
customers to visit the other party's Web sites, the display of messaging on each
other's Web sites, the extension of certain edu.com customer privileges to
Student Advantage customers and certain off-line
16
17
marketing. The agreement also specifies the commissions to be paid to the other
party for products and services purchased by customers originating at the other
party's Web site.
The Company guaranteed a nonrefundable minimum payment of $2,000,000 to Student
Advantage over the course of the agreement as the services were performed. In
November 1999, the Company issued 216,920 shares of Series B Preferred at a
price of $4.61 per share in lieu of the first payment of $1,000,000. The second
$1,000,000 was payable on the first anniversary of the agreement, and was
converted into a secured note payable with interest. This note has been
converted into a loan payable and recorded as such in the accompanying financial
statements (see Note 1).
(8) INCOME TAXES
Due to losses incurred since inception of the Company, there is no income tax
accrual in the period presented. As of December 31, 2001, the Company had
approximately $30,556,000 of federal net operating loss carryforwards, which
begin to expire in 2018. A full valuation allowance was established for the
deferred tax assets, as realization of the tax benefit is uncertain. In
addition, the Company's utilization of its net operating loss carryforwards and
tax credits, if any, may be limited pursuant to the Tax Reform Act of 1986, due
to cumulative changes in ownership in excess of 50% that have occurred or may
occur.
The approximate tax effect of each type of temporary difference and carryforward
as of December 31, 2000 is as follows:
Assets -
Net operating loss carryforwards $ 10,389,000
Capitalized software amortization 545,000
Depreciable and amortizable assets 1,600,000
Other 102,000
Liabilities -
Capitalized software (869,000)
Start-up costs (818,000)
Valuation allowance (10,949,000)
------------
$ --
============
The effective income tax provisions for fiscal years 1999 and 2000 are different
from the amounts computed by applying the statutory federal income tax rate of
34% to pretax income principally as a result of the increase to the valuation
allowance for net operating loss carryforwards whose realization is uncertain.
17
18
ITEM 7. (B) UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION OF STUDENT
ADVANTAGE, INC.
On May 10, 2001 Student Advantage, Inc. purchased certain assets of
edu.com, Inc. ("edu"). The unaudited pro forma combined balance sheet assumes
that the transaction took place on March 31, 2001. The unaudited pro forma
combined balance sheet combines the unaudited historical balance sheet of
Student Advantage and edu as of March 31, 2001. The unaudited pro forma combined
condensed statements of operations assume that the transaction had been
consummated at the beginning of the periods presented. The unaudited pro forma
combined statement of operations for the three months ended March 31, 2001
combine the unaudited historical statements of operations of Student Advantage
and edu for the three months ended March 31, 2001. The unaudited combined
condensed statement of operations for the year ended December 31, 2000 combines
the audited historical statement of operations of Student Advantage and edu for
the year ended December 31, 2000.
This transaction is accounted for under the purchase method of
accounting. The purchase price is allocated to the tangible and intangible
assets purchased, based upon their respective fair values. The allocation of the
purchase price included in the pro forma condensed financial information is
preliminary. The final values may differ from those set forth herein. The
Company believes, however, that the final allocation will not be materially
different from the pro forma allocation.
The pro forma information is presented for illustrative purposes only
and does not purport to be indicative of the operating results or financial
position that would have actually occurred if the transaction had been in effect
on the dates indicated, nor is it indicative of the future operating results or
financial position of the Company. The pro forma adjustments are based upon
information and assumptions available at the time of the filing of this Form
8-K/A. The pro forma information should be read in conjunction with the
Company's December 31, 2000 consolidated financial statements and notes thereto
contained herein.
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19
Student Advantage, Inc.
Unaudited Pro Forma Combined Balance Sheet
As of March 31, 2001
STUDENT PRO FORMA PRO FORMA
ADVANTAGE edu.com ADJUSTMENTS COMBINED
--------- -------- ----------- ---------
(as restated)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,004 $ 1,473 $ (26)(d) $ 6,451
Restricted Cash 50 -- 50
Accounts receivable 9,323 85 (1,000)(a) 8,408
Prepaid advertising 3,350 -- -- 3,350
Prepaid expenses and other current assets 2,059 128 -- 2,187
-------- -------- -------- --------
TOTAL CURRENT ASSETS 19,736 1,736 (1,026) 20,446
LONG-TERM ASSETS
Property and equipment, net 12,419 -- 2,021 (d) 14,440
Investment 676 -- (676)(d) --
Restricted Cash -- 154 -- 154
Intangible and other assets, net 12,055 916 (d) 12,971
-------- -------- -------- --------
TOTAL ASSETS $ 44,886 $ 1,890 $ 1,235 $ 48,011
======== ======== ======== ========
LIABILITIES
CURRENT LIABILITIES
Accounts payable $ 4,832 $ 199 -- $ 5,031
Accrued compensation 2,000 -- -- 2,000
Other accrued expenses 7,800 867 $ 773 (b) 9,440
Deferred revenue 5,944 -- -- 5,944
Loans payable and other amounts due to shareholders -- 5,403 (5,403)(a) --
Current obligation under capital leases 1,081 -- -- 1,081
-------- -------- -------- --------
Total current liabilities 21,657 6,469 (4,630) 23,496
LONG-TERM LIABILITIES
Long-term obligation under capital leases 1,543 -- -- 1,543
-------- -------- -------- --------
Total long-term liabilities 1,543 -- -- 1,543
-------- -------- -------- --------
Total liabilities 23,200 6,469 (4,630) 25,039
STOCKHOLDERS' EQUITY
Preferred Stock, $0.01 par value 11 (11)(c) --
Common stock, $0.01 par value 396 4 (3)(c,d) 397
Additional paid-in capital 104,076 34,985 (34,783)(c,d) 104,278
Accumulated deficit (82,111) (39,579) 39,749 (c) (81,941)
Warrants -- -- 913 (d) 913
Notes receivable from stockholders (50) -- -- (50)
Deferred compensation (625) -- -- (625)
-------- -------- -------- --------
Total stockholders' equity 21,686 (4,579) 5,865 22,972
-------- -------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 44,886 $ 1,890 $ 1,235 $ 48,011
======== ======== ======== ========
See accompanying notes to unaudited pro forma combined
condensed financial statements.
19
20
Student Advantage, Inc.
Unaudited Pro Forma Combined Condensed Statement of Operations
For the Three Month Period ended March 31, 2001
STUDENT PRO FORMA PRO FORMA
ADVANTAGE edu.com ADJUSTMENTS COMBINED
--------- ------- ----------- ---------
(as restated)
REVENUE $13,208 $ 727 $(1,000)(e) $ 12,935
COSTS AND EXPENSES
Cost of Sales 4,247 549 (200)(e) 4,596
Product development 5,821 379 -- 6,200
Sales and marketing 6,049 645 -- 6,694
General and administrative 2,830 1,077 -- 3,907
Depreciation and amortization 2,711 -- 325 (d) 3,036
------- ------- ------- --------
TOTAL COSTS AND EXPENSES 21,658 2,650 125 24,433
------- ------- ------- --------
Loss from operations (8,450) (1,923) (1,125) (11,498)
Equity interest in edu.com net loss (495) -- 495 (d) --
Loss on sale of assets -- (47) -- (47)
Interest income (expense), net (70) (258) -- (328)
------- ------- ------- --------
NET LOSS $(9,015) $(2,228) $ (630) $(11,873)
======= ======= ======= ========
See accompanying notes to unaudited pro forma combined
condensed financial statements
20
21
Student Advantage, Inc.
Unaudited Pro Forma Combined Condensed Statement of Operations
For the year ended December 31, 2000
STUDENT PRO FORMA PRO FORMA
ADVANTAGE edu.com ADJUSTMENTS COMBINED
--------- ------- ----------- ---------
(as restated)
REVENUE $ 48,014 $ 1,421 $(1,000)(e) $ 48,435
COSTS AND EXPENSES
Cost of Sales 20,192 1,190 (1,550)(e) 19,832
Product development 18,377 5,726 -- 24,103
Sales and marketing 17,880 8,654 -- 26,534
General and administrative 11,196 4,733 -- 15,929
Depreciation and amortization 6,382 -- 2,011 (d) 8,393
Impairment Charge -- 4,705 -- 4,705
-------- -------- ------- --------
TOTAL COSTS AND EXPENSES 74,027 25,008 461 99,496
-------- -------- ------- --------
Loss from operations (26,013) (23,587) (1,461) (51,061)
Equity interest in edu.com net loss (3,776) -- 3,776 (d) --
Realized loss on write-off of investment (367) -- -- (367)
Interest income (expense), net 1,434 392 -- 1,826
-------- -------- ------- --------
NET LOSS $(28,722) $(23,195) $ 2,315 $(49,602)
======== ======== ======= ========
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
The transaction is accounted for under the purchase method of accounting. The
purchase price is allocated to tangible and intangible assets purchased, based
upon their respective fair market values. The allocation of the purchase price
included in the pro forma condensed financial information is preliminary.
Certain assets may be written down to fair market value and goodwill may be
allocated to specific intangible assets based on the results on an independent
appraisal.
Pro forma adjustments to reflect the acquisition of edu.com give effect to the
following:
(a) Reflects elimination of note payable to Student Advantage from edu.com
which was forgiven as part of the acquisition.
(b) Reflects costs incurred by Student Advantage related to the Company's
acquisition of edu.com.
(c) Reflects the elimination of edu.com equity.
(d) In connection with the transaction, Student Advantage recognized
goodwill of approximately $916,000, which will be amortized over two
years. These adjustments reflect the allocation of the purchase price
to the tangible and intangible assets acquired, and the amortization of
goodwill over the remaining life as if the acquisition had occurred as
of the beginning of the periods presented.
(e) Reflects elimination of intercompany revenue and expense. Under the
sales and marketing agreement between Student Advantage and edu,
Student Advantage recognized $1 million in revenue in the year 2000 as
services were performed, and an additional $1 million in revenue in the
three months ended March 31, 2001 for services performed during 2000
for which collectibility was assured during the first quarter of 2001.
Edu.com has amortized the expenses related to the contract over the
life of the agreement.
21
22
ITEM 7.(c) CONSOLIDATED FINANCIAL STATEMENTS OF STUDENT ADVANTAGE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Accountants......................................... 23
Consolidated Balance Sheets as of December 31, 1999 and 2000 and
March 31, 2001 (unaudited).............................................. 24
Consolidated Statements of Operations for the years ended December 31,
1998, 1999 and 2000 and for the three months ended March 31, 2000 and
2001 (unaudited)........................................................ 25
Consolidated Statement of Changes in Redeemable Convertible Preferred
Stock and Stockholders' Equity (Deficit) for the years ended
December 31, 1998, 1999 and 2000........................................ 26
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1999 and 2000, and for the three months ended March 31, 2000 and
2001 (unaudited)........................................................ 28
Notes to Consolidated Financial Statements................................ 29
22
23
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Student Advantage, Inc.
In our opinion, the consolidated balance sheets and the related consolidated
statements of operations, of changes in redeemable convertible preferred stock
and stockholders' equity (deficit) and of cash flows present fairly, in all
material respects, the financial position of Student Advantage, Inc. and its
subsidiaries at December 31, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2000 in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 1, the accompanying consolidated financial statements
for the years ended December 31, 1999 and 2000 have been restated to reflect the
application of the equity method of accounting for the Company's investment in
edu.com, Inc.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Portland, Maine
February 7, 2001,
except as to the restatement described in
the seventh paragraph of Note 1, as to
which the date is May 10, 2001
23
24
STUDENT ADVANTAGE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(RESTATED - SEE NOTE 1)
DECEMBER DECEMBER MARCH
31, 1999 31, 2000 31, 2001
-------- -------- --------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents.......................... $ 15,370 $ 12,762 $ 5,004
Marketable securities.............................. 20,546 -- --
Accounts receivable, net........................... 4,527 5,982 9,323
Prepaid advertising................................ -- 3,350 3,350
Prepaid expenses and other current assets.......... 2,698 1,329 2,059
-------- -------- --------
TOTAL CURRENT ASSETS.................................. 43,141 23,423 19,736
Property and equipment, net........................... 4,038 13,343 12,419
Investment............................................ 3,946 1,171 676
Intangible and other assets, net...................... 9,355 13,633 12,055
-------- -------- --------
TOTAL ASSETS.......................................... $ 60,480 $ 51,570 $ 44,886
======== ======== ========
LIABILITIES
CURRENT LIABILITIES
Accounts payable...................................... $ 3,329 $ 3,564 $ 4,832
Accrued compensation.................................. 1,523 2,840 2,000
Other accrued expenses................................ 4,574 7,541 7,800
Deferred revenue...................................... 9,576 4,013 5,944
Current obligation under capital leases............... -- 1,208 1,081
-------- -------- --------
Total current liabilities.......................... 19,002 19,166 21,657
LONG-TERM LIABILITIES.................................
Notes payable...................................... 100 -- --
Long-term obligation under capital leases.......... -- 1,861 1,543
-------- -------- --------
Total long-term liabilities........................... 100 1,861 1,543
-------- -------- --------
Total liabilities..................................... 19,102 21,027 23,200
Stockholders' equity
Preferred Stock, $0.01 par value, 5,000,000
shares authorized, 0 shares issued and
outstanding
Common Stock, $0.01 par value; Authorized:
150,000,000 shares; Issued: 35,435,398 and
39,621,244 at December 31, 1999 and 2000,
respectively; Outstanding: 35,435,398 and
39,621,244 at December 31, 1999 and 2000,
respectively..................................... 354 396 396
Additional paid-in capital....................... 87,690 104,058 104,076
Accumulated deficit.............................. (44,374) (73,096) (82,111)
Notes receivable from stockholders............... (79) (50) (50)
Deferred compensation............................ (2,213) (765) (625)
-------- -------- --------
Total stockholders' equity..................... 41,378 30,543 21,686
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............ $ 60,480 $ 51,570 $ 44,886
======== ======== ========
The accompanying notes are an integral part of these
supplemental consolidated financial statements.
24
25
STUDENT ADVANTAGE, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(RESTATED - SEE NOTE 1)
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------------------ ----------------------------
1998 1999 2000 2000 2001
-------- -------- -------- -------- --------
(unaudited) (unaudited)
Revenue
Student services .......................................... $ 15,174 $ 19,722 $ 28,099 $ 6,963 $ 9,038
Corporate and university solutions ........................ 4,186 7,922 19,915 4,179 4,170
-------- -------- -------- -------- --------
Total revenue .......................................... 19,360 27,644 48,014 11,142 13,208
-------- -------- -------- -------- --------
Costs and expenses
Cost of student services revenue .......................... 7,416 11,093 10,263 2,883 1,810
Cost of corporate and university solutions revenue ........ 2,963 4,541 9,929 2,229 2,437
Product development ....................................... 5,169 9,974 18,377 3,823 5,821
Sales and marketing ....................................... 7,759 12,251 17,880 4,786 6,049
General and administrative ................................ 5,555 8,876 11,196 2,341 2,830
Depreciation and amortization ............................. 1,155 1,822 6,382 1,007 2,711
-------- -------- -------- -------- --------
Total costs and expenses ............................... 30,017 $ 48,557 74,027 17,069 21,658
-------- -------- -------- -------- --------
Loss from operations ........................................ (10,657) (20,913) (26,013) (5,927) (8,450)
Equity interest in edu.com net loss ......................... (316) (3,776) (944) (495)
Realized loss on write-off of investment (Note 2) ........... -- -- (367) -- --
Interest income (expense), net .............................. 121 1,358 1,434 473 (70)
-------- -------- -------- -------- --------
Net loss .................................................... $(10,536) $(19,871) $(28,722) $ (6,398) $ (9,015)
======== ======== ======== ======== ========
Basic and diluted net loss per share ........................ $ (0.59) $ (0.72) $ (0.79) $ (0.18) $ (0.23)
======== ======== ======== ======== ========
Shares used in computing basic and diluted net loss per share 17,710 27,410 36,549 35,590 39,663
======== ======== ======== ======== ========
The accompanying notes are an integral part of these
supplemental consolidated financial statements.
25
26
STUDENT ADVANTAGE, INC.
CONSOLIDATED STATEMENT OF CHANGES IN REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
(RESTATED - SEE NOTE 1)
REDEEMABLE CONVERTIBLE
PREFERRED STOCK COMMON STOCK
---------------------- ----------------------
PAID IN ACCUMULATED
SHARES AMOUNT SHARES PAR VALUE CAPITAL DEFICIT
---------- -------- ---------- --------- ------- -----------
Balance, December 31, 1997...................... 1,588,688 $ 111 19,210,646 $ 192 $12,180 $(12,766)
--------- -------- ---------- ------ ------- --------
Issuance of preferred and common stock, net
of issuance costs.............................. 1,250,000 10,000 271,441 3 1,997 (84)
Issuance of preferred and common stock in
connection with the acquisition of The
Main Quad...................................... 65,858 49 709,768 7 169
Issuance of preferred and common stock upon
cancellation of notes payable.................. 48,022 36 517,536 5 124
Issuance of common stock for services........... 36,864 -- 297
Exercise of common stock options................ -- -- 6
Distributions to stockholders................... (2,320)
Deferred compensation relating to grants of
stock options.................................. 4,171
Compensation relating to grants of stock
options........................................
Net loss........................................ (10,536)
--------- -------- ---------- ------ ------- --------
Balance, December 31, 1998...................... 2,952,568 10,196 20,746,255 207 $18,944 (25,706)
Exercise of common stock options and
Warrants....................................... 1,075,046 11 665
Sale of common stock under employee stock
purchase plan.................................. 36,258 -- 246
Issuance of common stock and common stock
warrants in connection with the acquisition
of Mentor Interactive.......................... 18,056 -- 299
Issuance of common stock in connection with
the acquisition of Transaction Service
Providers...................................... 195,000 2 268 (444)
Issuance of common stock in initial public
offering, net of issuance costs................ 6,900,000 69 49,823
Conversion of preferred stock to common
stock in connection with the initial public
Offering....................................... (2,952,568) (10,196) 6,026,043 61 9,505
Issuance of common stock for services........... 8,658 -- 108
Issuance of common stock warrant................ 2,221
Deferred compensation relating to grants of
stock options.................................. 228
Deferred compensation related to
cancellation of stock options for
terminated employees........................... (259)
Compensation relating to grants of stock
options........................................
Issuance of common stock in connection with
the acquisition of Voice FX.................... 430,082 4 5,642
Adjustment to conform fiscal periods for
University Netcasting.......................... 1,647
Net loss........................................ (19,871)
---------- -------- ---------- --------- ------- ----------
Balance December 31, 1999....................... -- -- 35,435,398 354 87,690 (44,374)
========== ======== ========== ========= ======= ==========
NOTE TOTAL
RECEIVABLE STOCKHOLDERS'
FROM TREASURY DEFERRED EQUITY
STOCKHOLDERS STOCK COMPENSATION (DEFICIT)
------------ -------- ------------ -------------
Balance, December 31, 1997...................... $ -- $(630) $ -- $ (1,024)
------ ----- ------- --------
Issuance of preferred and common stock, net
of issuance costs.............................. 1,916
Issuance of preferred and common stock in
connection with the acquisition of The
Main Quad...................................... 176
Issuance of preferred and common stock upon
cancellation of notes payable.................. 129
Issuance of common stock for services........... 297
Exercise of common stock options................ 6
Distributions to stockholders................... (2,320)
Deferred compensation relating to grants of
stock options.................................. (4,171) --
Compensation relating to grants of stock
options........................................ 808 808
Net loss........................................ (10,536)
------ ----- ------- --------
Balance, December 31, 1998...................... -- (630) (3,363) (10,548)
Exercise of common stock options and
Warrants....................................... (79) 597
Sale of common stock under employee stock
purchase plan.................................. 246
Issuance of common stock and common stock
warrants in connection with the acquisition
of Mentor Interactive.......................... 299
Issuance of common stock in connection with
the acquisition of Transaction Service
Providers...................................... (174)
Issuance of common stock in initial public
offering, net of issuance costs................ 49,892
Conversion of preferred stock to common
stock in connection with the initial public
Offering....................................... 630 10,196
Issuance of common stock for services........... 108
Issuance of common stock warrant................ 2,221
Deferred compensation relating to grants of
stock options.................................. (228) --
Deferred compensation related to
cancellation of stock options for
terminated employees........................... 259 --
Compensation relating to grants of stock
options........................................ 1,119 1,119
Issuance of common stock in connection with
the acquisition of Voice FX.................... 5,646
Adjustment to conform fiscal periods for
University Netcasting.......................... 1,647
Net loss........................................ (19,871)
------ ---- ------- --------
Balance December 31, 1999....................... (79) -- (2,213) 41,378
====== ==== ======= ========
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Exercise of common stock options................ 389,968 4 168
Sale of common stock under employee stock
purchase plan.................................. 145,638 2 412
Issuance of common stock in connection with
the acquisitions of ScholarAid and College411.. 325,479 3 1,712
Issuance of common stock and warrants to At
Home and John Hancock Small Cap Value Fund...... 2,000,000 20 9,945
Issuance of common stock in connection with
the acquisition of CollegeClub.................. 1,324,761 13 4,808
Deferred compensation related to
cancellation of stock options for
terminated employees........................... (677)
Compensation relating to grants of stock
Options........................................
Repayment of stock subscription.................
Net loss........................................ (28,722)
---------- -------- ---------- --------- ------- ----------
Balance December 31, 2000....................... -- -- 39,621,244 396 104,058 (73,096)
========== ======== ========== ========= ======= ==========
Exercise of common stock options................ 172
Sale of common stock under employee stock
purchase plan.................................. 414
Issuance of common stock in connection with
the acquisitions of ScholarAid and College411.. 1,715
Issuance of common stock and warrants to At
Home and John Hancock Small Cap Value Fund...... 9,965
Issuance of common stock in connection with
the acquisition of CollegeClub.................. 4,821
Deferred compensation related to
cancellation of stock options for
terminated employees........................... 677 --
Compensation relating to grants of stock
Options........................................ 771 771
Repayment of stock subscription................. 29 29
Net loss........................................ (28,722)
------- ---- ---------- ----------
Balance December 31, 2000....................... $ (50) $ -- $ (765) $ 30,543
======= ==== ========== ==========
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STUDENT ADVANTAGE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(RESTATED - SEE NOTE 1)
Year Ended Three Months Ended
December December December March March
31, 1998 31, 1999 31, 2000 31, 2000 31, 2001
-------- -------- -------- -------- --------
(unaudited) (unaudited)
Cash flows from operating activities:
Net loss ........................................................ $(10,536) $(19,871) $(28,722) $ (6,398) $ (9,015)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Depreciation ................................................. 315 829 2,925 471 1,356
Amortization ................................................. 840 956 3,457 536 1,365
Reserve for bad debts ........................................ -- 180 487 125 130
Compensation expense relating to issuance of equity .......... 808 1,119 771 241 140
Issuance of stock in exchange for services ................... 297 151 -- -- --
Amortization of marketing expense associated with common
stock warrant............................................... -- 444 888 222 222
Gain on disposal of assets ................................... -- (16) -- -- --
Equity interest in edu.com net loss .......................... -- 316 3,776 944 495
Realized loss on write-off of investment ..................... -- -- 367 -- --
Changes in assets and liabilities, net of effects of
acquisitions:
Accounts receivable ........................................ (2,728) (776) (1,904) (2,251) (3,471)
Prepaid expenses, other current assets and other assets .... (169) (2,375) 1,512 (86) (730)
Accounts payable ........................................... 1,271 1,003 128 (606) 1,269
Accrued compensation ....................................... 733 386 1,299 (479) (840)
Accrued expenses ........................................... 854 2,472 2,768 1,034 259
Deferred revenue ........................................... 1,094 2,095 (5,811) (363) 1,931
-------- -------- -------- -------- --------
Net cash used for operating activities ..................... (7,221) (13,087) (18,059) (6,610) (6,899)
======== ======== ======== ======== ========
Cash flows from investing activities:
Purchases of fixed assets ....................................... (1,332) (2,971) (3,098) (730) (432)
Acquisitions of businesses, net of cash acquired ................ (655) (2,485) (10,992) (31) --
Purchases of marketable securities .............................. -- (47,223) (8,813) (5,866) --
Proceeds from sale of marketable securities ..................... -- 26,677 29,359 14,523 --
Purchase of investment .......................................... -- (4,262) (1,368) (1,000) --
Proceeds from sale of fixed assets .............................. -- 20 -- -- --
-------- -------- -------- -------- --------
Net cash (used for) provided by investing activities ............. (1,987) (30,244) 5,088 6,896 (432)
======== ======== ======== ======== ========
Cash flows from financing activities:
Proceeds from sale of preferred and common stock, net of
issuance costs ................................................ 11,916 49,892 9,965
Repayment of note from stockholder .............................. 165 -- 29 29 --
Repayment of capital lease obligation ........................... -- -- (217) -- (445)
Proceeds from exercise of common stock options, warrants
and employee stock purchase plan .............................. 6 922 586 107 18
Note payable .................................................... -- 100 -- -- --
Proceeds from short-term debt -- related party .................. 1,410 -- -- -- --
Repayment of short-term debt -- related party ................... (1,635) -- -- -- --
Distributions to stockholders ................................... (2,320) -- -- -- --
-------- -------- -------- -------- --------
Net cash (used) provided by financing activities ........... 9,542 50,914 10,363 136 (427)
======== ======== ======== ======== ========
Adjustment to conform fiscal period of University Netcasting ...... -- 1,647 --
Net increase (decrease) in cash and cash equivalents .............. 334 9,230 (2,608) 422 (7,758)
Cash and cash equivalents, beginning of period .................... 5,806 6,140 15,370 15,370 12,762
-------- -------- -------- -------- --------
Cash and cash equivalents, end of period .......................... $ 6,140 $ 15,370 $ 12,762 $ 15,792 $ 5,004
======== ======== ======== ======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for interest ............................ $ 87 $ -- $ 5 $ -- $ --
======== ======== ======== ======== ========
Cash paid during the year for taxes................................ $ 1 $ -- $ -- $ -- $ --
======== ======== ======== ======== ========
The accompanying notes are an integral part of these
supplemental consolidated financial statements.
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STUDENT ADVANTAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION, NATURE OF BUSINESS AND BASIS OF PRESENTATION
Student Advantage, Inc. (the "Company") is a media and commerce connection
for college students and the businesses and universities that serve them. The
Company reaches students online through its network of web sites, including
collegeclub.com and studentadvantage.com, and offline through the Student
Advantage Membership and SA Cash Programs. The Company also offers
business-to-business marketing and events and promotion services, and
information services, internet content and data management services to colleges
and universities.
Student Advantage, Inc. is the surviving entity of a reorganization of
Student Advantage LLC, a limited liability company. In October 1998, Student
Advantage LLC effected a recapitalization pursuant to which each of the 10,911
outstanding Members' Interests converted into 137 Preferred Members' Interests
and 1,479 Common Members' Interests, (or an aggregate of 1,497,036 Preferred
Members' Interests and 16,133,892 Common Members' Interests). Each Member
received the proportion of Preferred and Common Members' Interests that
corresponded to such Member's proportion of the 10,911 Members' Interests that
existed immediately prior to the recapitalization. Immediately following such
recapitalization, certain Members sold an aggregate of 1,250,000 Preferred
Members' Interests to two investors for aggregate consideration of $10 million.
Immediately following such transaction, the Company was reorganized from an
"LLC" to a "C" corporation, and as part of such reorganization, each Member
received the number of shares of common stock and of preferred stock of the
Company that was equal to the number of common and preferred Members' Interests
that such Member held immediately prior to the reorganization. The assets and
liabilities of the limited liability company were transferred to Student
Advantage at historical cost. The recapitalization and reorganization have been
accounted for retroactively in the accompanying financial statements.
Student Advantage is subject to the risks and uncertainties common to
growing companies, including reliance on certain customers, growth and
commercial acceptance of the internet, dependence on principal products and
services and third-party technology, activities of competitors, dependence on
key personnel such as Raymond V. Sozzi, Jr., Student Advantage's President and
Chief Executive Officer, and limited operating history. We continue to operate
as a single segment since the financial information reviewed by the chief
decision maker reflects one segment.
Student Advantage has also experienced substantial net losses since its
inception and, as of December 31, 2000, had an accumulated deficit of $73.1
million. Such losses and accumulated deficit resulted primarily from significant
costs incurred in the development of the Company's products and services and the
preliminary establishment of the Company's infrastructure. For the foreseeable
future, the Company expects to continue to experience growth in its operating
expenses in order to execute its current business plan that requires significant
growth in revenues. If revenue projections do not materialize as anticipated,
the Company may be required to obtain additional financing. If additional
financing is not obtained then management will take appropriate action to manage
cash resources, which would include the implementation of cost reduction
measures. Management estimates that these cost reductions would provide the
necessary funding for operations at such reduced revenue levels. Failure to
generate sufficient revenues, obtain additional capital or financing if needed,
or reduce certain discretionary spending if necessary, could have a material
adverse effect on the Company's ability to achieve its intended business
objectives.
In May 1999, the Company increased the number of authorized shares of common
stock to 50,000,000. On April 5, 1999, the Company declared a 3-for-1 stock
split in the form of a stock dividend, which was effective on May 21, 1999. On
June 23, 1999, the Company increased the number of total authorized shares of
common stock to 150,000,000. All periods presented have been restated to reflect
the stock dividend.
In June 1999, the Company acquired University Netcasting, Inc. ("UNI"). This
acquisition was accounted for using the pooling of interests method;
accordingly, the historic consolidated financial statements of Student Advantage
prior to the acquisition have been restated to reflect the financial position,
results of operations and cash flows of UNI.
As discussed in Note 2, the Company held a minority investment in edu.com,
Inc. ("edu.com"). This investment had been accounted for under the cost method
of accounting for investment in common stock. On May 10, 2001 Student Advantage
acquired substantially all assets of edu.com. The resulting treatment of the
additional investment is to be in accordance with Accounting Principles
Bulletin: The Equity Method for Accounting for Investments in Common Stock ("APB
18"), which requires the application of step accounting in accordance with
Accounting Research Bulletin 51: Consolidated Financial Statements Elimination
of Intercompany Investment ("ARB 51"). Accordingly, Student Advantage has
retroactively restated their investment in edu.com on the
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equity method of accounting and recorded its ownership percentage of edu.com's
net loss for the years ended December 31, 1999 and 2000. As a result of
applying the equity method in edu.com, a portion of the cost of the Company's
investment has been allocated to the equity in the net assets of edu.com,
amounting to approximately $1,064,000 and $174,000 for the transactions
occurring in 1999 and 2000, respectively. The difference between the cost of
the investment and underlying equity in net assets (approximately $3,198,000
and $826,000 for the transactions occurring in 1999 and 2000, respectively) has
been allocated to goodwill. The goodwill is being amortized over two years.
The accompanying financial statements reflect the following changes (in
thousands except share data):
For the Year Ended December 31, 1999
------------------------------------
As Restated As Reported
------------------------------------
Net loss ........................... $(19,871) $(19,555)
Investment ......................... $ 3,946 $ 4,262
Loss per Share ..................... $ (0.72) $ (0.71)
For the Year Ended December 31, 2000
------------------------------------
As Restated As Reported
------------------------------------
Net loss ........................... $(28,722) $(24,946)
Investment ......................... $ 1,171 $ 5,263
Loss per Share ..................... $ (0.79) $ (0.68)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Student
Advantage, Inc. and its wholly-owned subsidiaries. All intercompany balances and
transactions have been eliminated in consolidation.
Cash and Cash Equivalents
Student Advantage considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Student
Advantage invests its excess cash in money markets and certificates of deposit,
which are subject to minimal credit and market risk. Student Advantage's cash
equivalents are classified as "available for sale" and are recorded at cost
which approximates fair value. As of December 31, 1999 and 2000, the Company had
cash equivalents of $10.2 and $11.2 million included in cash and cash
equivalents.
Marketable Securities
Marketable securities consist of certificates of deposit, commercial paper
and other equity securities with maturities greater than three months. The
Company classifies its marketable securities as "available for sale" and reports
them at fair value, with unrealized gains and losses excluded from earnings and
reported as an adjustment in stockholders' equity. As of December 31, 1999, the
cost of the marketable securities approximates fair value. All marketable
securities held at December 31, 1999 mature within one year. Gross realized and
unrealized gains and losses which are calculated on a specific identification
basis, for the year ended December 31, 1999 were immaterial.
Investments
On November 12, 1999, Student Advantage made an equity investment in
edu.com, Inc. ("edu.com"), a privately held e-commerce company. Student
Advantage paid approximately $4.3 million in exchange for approximately 922,000
shares of Series B preferred stock of edu.com. In January 2000, Student
Advantage invested an additional $1.0 million in exchange for approximately
217,000 shares of Series B preferred stock.
On July 12, 2000, Student Advantage made an investment in alumnipride.com,
Inc., ("alumnipride.com"), a privately held company providing customized web
sites to national alumni associations. Student Advantage paid approximately
$350,000 in exchange for approximately 97,000 shares of Series B preferred stock
of alumnipride.com. In October 2000, alumnipride.com,
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was acquired by UConnections.com, Inc. ("Uconnections.com"), and the shares of
preferred stock of alumnipride.com were exchanged for 270,569 shares of common
stock of UConnections.com. At December 31, 2000 the Company evaluated the
investment and determined that the fair value had been permanently impaired and
accordingly recorded a realized loss in the amount of $367,000.
Revenue Recognition
The Company derives student services revenue from subscription, commerce and
advertising. Subscription revenue is derived from membership fees related to
enrolling students in the Student Advantage Membership Program. Subscription
revenue is recognized ratably from the date of subscription to the end of the
annual membership period, which ends on August 31 of each year. Commerce revenue
is derived primarily from transaction-based revenue earned for reselling
products and services and acquiring student customers on behalf of other
businesses. This revenue is recognized upon the completion of the related
contractual obligations. The Company derives revenue from advertisements placed
in SAM, Student Advantage Magazine and on its network of web sites. Revenue from
fees related to advertisements placed in SAM is recognized when the magazine is
shipped to members. Web site advertising revenue is recognized as the related
impressions are displayed, provided that no significant obligations remain and
collection of the related receivable is assured. Certain advertising
arrangements include guarantees of a minimum number of impressions. For
arrangements with guarantees, revenue is recognized based upon the lesser of:
(1) ratable recognition over the period the advertising is displayed, provided
that no significant Company obligations remain and collection of the receivable
is assured, or (2) a pro-rata portion of contract revenue based upon impressions
delivered relative to minimum guaranteed impressions to be delivered.
The Company derives corporate and university solutions revenue from commerce
and marketing services. Commerce revenue includes primarily transaction-based
fees earned in connection with acquiring customers on behalf of our corporate
clients. This revenue is recognized upon the completion of the related
contractual obligations. Marketing services revenue is derived primarily from
providing tailored marketing services to businesses seeking to market their
products and services to college students. Fees from marketing services are
recognized as the related services are rendered, provided that no significant
obligations remain and collection of the related receivable is assured. Payments
received in advance of revenue being earned are recorded as deferred revenue.
In accordance with the Emerging Issues Task Force ("EITF") Issue No. 99-17
Accounting for Advertising Barter Transactions, the Company has appropriately
recorded barter revenue and expense based upon the fair value of the advertising
surrendered in the transaction. Fair value is established by reference to
comparable cash transactions during the six month period preceding the barter
transaction. Generally, barter transactions involve exchanges of banner
advertising. For the years ended December 31, 1999 and 2000, the Company
recorded $580,000 and $1.2 million respectively of barter revenue and $523,000
and $1.2 million respectively of barter expense recorded as sales and marketing
expense.
In accordance with Staff Accounting Bulletin No. 101 "Revenue Recognition in
Financial Statements" ("SAB 101") and EITF Issue No. 99-19 "Reporting Revenue
Gross as a Principal versus Net," the Company has evaluated its revenue and
determined that it is being appropriately reported in accordance with the
guidance. Student Advantage has recorded certain of its commerce revenue at
gross as the Company is the considered the primary obligor in the transaction.
In accordance with SAB 101 and EITF Issue No. 00-21 "Accounting for
Multiple-Element Revenue" (currently in discussion) the Company has evaluated
any such arrangements and determined that revenues are being appropriately
reported in accordance with the guidance. Multiple element arrangements have
been recognized as revenue either based on the relative fair value of each
component, or based on straight-line recognition over the term of the agreement.
Fair Value of Financial Instruments
The carrying amounts of Student Advantage's financial instruments, which
include cash equivalents, marketable securities, accounts payable, accrued
expenses and notes payable, approximate their fair values at December 31, 1999
and 2000.
Concentrations of Credit Risk and Significant Customers
Financial instruments which potentially expose the Company to concentration
of credit risk are comprised primarily of cash, cash equivalents, marketable
securities and trade accounts receivable. The Company places its cash, cash
equivalents and marketable securities with financial institutions that have high
credit ratings. Management believes its credit policies are prudent and reflect
normal industry terms and business risk. The Company does not anticipate
non-performance by the counterparties and, accordingly, does not require
collateral. The Company maintains reserves for potential credit losses and such
losses, in the aggregate, have not exceeded management's expectations. For the
years ended December 31, 1998 and 1999 one customer accounted for 61% and 55% of
total revenue, respectively. For the year ended December 31, 2000, two customers
accounted for 50% of total revenue. At December
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31, 1998, one customer accounted for 60% of accounts receivable, and at December
31, 1999 and 2000, two customers accounted for 56% and 36% of accounts
receivable, respectively.
Product Development
Costs incurred in product development by Student Advantage are expensed as
incurred.
Property and Equipment
Fixed assets are recorded at cost. Depreciation is recorded using the
straight-line method over estimated useful lives as follows:
YEARS
-----
Furniture and fixtures............... 3
Computer equipment and software...... 2-3
Equipment............................ 3
Amortization of capitalized leased assets and leasehold improvements is
recorded using the straight-line method over the shorter of the lease term or
the useful life. Repair and maintenance costs are expensed as incurred. When
fixed assets are retired or otherwise disposed of, the asset cost and
accumulated depreciation and amortization are removed from the accounts and any
resulting gain or loss is reflected in income.
CAPITALIZED COMPUTER SOFTWARE COSTS
The Company records expenditures for computer software in accordance with
the provisions of Statement of Position 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use." The Company reports
computer software cost in product development. The Company had capitalized
$736,000 and $454,000 and in 1999 and 2000, respectively. Amortization of
software cost is provided on a straight-line basis over two or three years.
WEB SITE DEVELOPMENT COSTS
The Company records expenditures for web site development in accordance
with the provision of the Emerging Issues Task Force Issue No. 00-02,
"Accounting for Web Site Development Costs." The Company reports web site
development costs in product development. The Company had capitalized $233,000
and $799,000 in 1999 and 2000, respectively. Amortization of web site
development cost is provided on a straight-line basis over two or three years.
Intangible and Other Assets
Intangible assets include the excess of the purchase price over
identifiable net assets acquired in acquisitions. Such assets include goodwill,
completed technology, workforce, customer lists and non-compete agreements, web
sites and other intangible assets, which are being amortized on a straight-line
basis over their estimated economic lives ranging from two to five years.
Accumulated amortization was $1.8 million and $5.3 million at December 31, 1999
and 2000, respectively. The Company periodically evaluates its intangible assets
for potential impairment. In 2000, the Company amortized to expense the
remaining balance of goodwill related to the purchase of substantially all the
assets of Mentor Interactive due to a change in estimated economic life.
Accounting for Stock-Based Compensation
Student Advantage accounts for stock-based awards to employees using the
intrinsic value method as prescribed by Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Accordingly, no compensation expense is recorded for options
issued to employees in fixed amounts and with fixed exercise prices at least
equal to the fair market value of Student Advantage's common stock at the date
of grant. Student Advantage has adopted the provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," through disclosure only (Note 8). All
stock-based awards to non-employees are accounted for at their fair value in
accordance with SFAS No. 123.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation -- an Interpretation of APB No. 25 ("FIN 44"). FIN 44 clarifies the
application of APB 25 and, among other issues clarifies the following: the
definition of an employee for purposes of applying APB 25; the criteria for
determining whether a plan qualifies as a non-compensatory plan; the accounting
consequence of various modifications to the terms of the previously fixed stock
options or awards; and the accounting for an exchange of stock compensation
awards in a business combination.
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FIN 44 was effective July 1, 2000, but certain conclusions in FIN 44 cover
specific events that occurred at earlier dates. The application of FIN 44 has
not had a material impact on the Company's financial position or results of
operations.
Income Taxes
Prior to its reorganization as a C Corporation in 1998 (Note 1), Student
Advantage was treated as a limited liability company for federal and state
income tax purposes. Accordingly, no provision for corporate income taxes was
recorded during this period and all losses were passed through to Student
Advantage LLC's members. At the time of its reorganization, Student Advantage
adopted the liability method of accounting for income taxes as set forth in SFAS
No. 109, "Accounting for Income Taxes."
Advertising Expense
Student Advantage recognizes advertising expense as incurred. Advertising
expense was approximately $824,000, $1.2 million and $1.0 million for the years
ended December 31, 1998, 1999 and 2000, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Flow Information
During 1998, the Company issued 65,858 shares of Preferred Stock and 709,768
shares of Common Stock in connection with a contingent payment relating to a
1997 acquisition of a company.
During 1998, the Company issued 48,022 shares of Preferred Stock and 517,538
shares of Common Stock in exchange for a note receivable of $165,000.
During 1999, the Company issued 643,138 shares of Common Stock and a warrant
to purchase 24,000 shares of Common Stock, in connection with the acquisitions
of companies.
Assets acquired and liabilities assumed in connection with these
acquisitions were as follows (in thousands):
Fair value of tangible and intangible assets and goodwill acquired....... $ 8,626
Common stock, common stock options and warrants issued................... (6,189)
Cash paid................................................................ (1,462)
--------
Liabilities assumed...................................................... $ 975
========
During 1999, the Company issued 8,658 shares of Common Stock in exchange for
services received.
During 1999, the Company issued 237,000 shares of Common Stock in exchange
for notes receivable of $79,000.
During 1999 the Company issued a warrant to purchase 550,000 shares of
Common Stock to Lycos, Inc. in connection with a marketing agreement (Note 7).
During 2000, the Company issued 1,650,240 shares of Common Stock in
connection with the acquisitions of companies.
Assets acquired and liabilities assumed in connection with these
acquisitions were as follows (in thousands):
Fair value of tangible and intangible assets and goodwill acquired...... $ 21,292
Common stock, common stock options and warrants issued.................. (6,536)
Cash paid............................................................... (11,004)
--------
Liabilities assumed..................................................... $ 3,752
========
Net Loss Per Share
Net loss per share is computed under SFAS No. 128, "Earnings Per Share."
Basic net loss per share is computed using the weighted average number of
shares. Diluted loss per share does not differ from basic loss per share since
potential common shares from conversion of preferred stock (in 1997 and 1998)
and exercise of stock options and warrants are anti-dilutive for all periods
presented.
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Reclassification
The financial statements for the years ended December 31, 1998, 1999 and
2000, reflect a change in the classification of revenue categories and the
associated cost of sales. The classifications have been changed from
"Subscription" and "Other" to "Student Services" and "Corporate and University
Solutions." In addition, the financial statements for the years ended December
31, 2000 and 1999 reflect a change in the presentation of stock based
compensation charges. The charges have been included in each of the operating
expense line items rather than as a separate line item. Certain prior year
amounts have been reclassified to conform to current year presentation.
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities" ("SFAS No. 133"). The new
standard establishes accounting and reporting standards for derivative
instruments, including derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. On July 7,
1999, the FASB issued SFAS 137, "Accounting for Derivative Instruments and
Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133
- -- an amendment to FASB Statement No. 133." SFAS 133, as amended by SFAS 137, is
effective for Student Advantage's fiscal year ending December 31, 2001. On June
19, 2000, certain provisions of SFAS 133 were amended by SFAS 138, "Accounting
for Certain Derivative Instruments - an amendment to FASB Statement No. 133."
The adoption of SFAS No. 133 will not have a material effect on our financial
position or results of operations.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements." This
bulletin summarizes certain views of the staff on applying generally accepted
accounting principles to revenue recognition in financial statements. The staff
believes that revenue is realized or realizable and earned when all of the
following criteria are met: persuasive evidence of an arrangement exists;
delivery has occurred or services have been rendered; the seller's price to the
buyer is fixed or determinable; and collectibility is reasonably assured. We
were required to adopt SAB 101 in the fourth quarter of 2000. The application of
this bulletin did not have a material impact on our financial position or
results of operation in fiscal 2000 as our existing revenue recognition policies
were consistent with SAB 101.
In October 2000, the Emerging Issues Task Force (EITF) issued No. 00-14,
"Accounting for Certain Sales Incentives." This Issue addresses the recognition,
measurement, and income statement classification for sales incentives offered
voluntarily by a vendor without charge to customers that can be used in, or that
are exercisable by a customer as a result of, a single exchange transaction. The
EITF also issued No. 99-19, "Reporting Gross as a Principal versus Net as an
Agent." The issue addresses whether a company should report revenue based on (a)
the gross amount billed to a customer because it has earned revenue from the
sale of the goods or services or (b) the net amount retained (that is, the
amount billed to the customer less the amount paid to a supplier) because it has
earned a commission or fee. Both were effective in connection with the
implementation of Staff Accounting Bulletin 101. The application of this
bulletin did not have a material impact on our financial position or results of
operation in 2000.
In October 2000, the EITF issued Issue No. 00-16, "Recognition and
Measurement of Employer Payroll Taxes on Employee Stock-Based Compensation". The
issue addresses when a liability for employee payroll taxes on employee stock
compensation should be recognized, which is on the date of the event triggering
the measurement and payment of the tax to the taxing authority (for a
nonqualified option in the United States, generally the exercise date). The
application of this issue did not have a material impact on our financial
position or results.
In February 2001, the EITF issued Issue No. 00-19, "Determination of Whether
Share Settlement Is Within the Control of the Issuer for Purposes of Applying
Issue No. 96-13". The issue addresses the accounting for contracts that are
indexed to, and potentially settled in, a company's own stock. The issue was
effective for all new contracts and contract modifications entered into after
September 20, 2000. For contracts that exist on September 20, 2000, the issue
should be applied on June 30, 2001, to those contracts that remain outstanding
at that date. We do not expect the application of this issue will have a
material impact on our financial position or results.
3. ACQUISITIONS
For acquisitions accounted for under the purchase method, the purchase price
of each transaction has been allocated to the assets acquired and liabilities
assumed based on the fair value of such assets and liabilities at the respective
acquisition dates.
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Student Advantage entered into an agreement effective January 1, 1998 for
the purchase of Collegiate Advantage, Inc. ("Collegiate Advantage"), a provider
of marketing and promotional services to the college community. The cost of the
acquisition consisted of $601,000 in cash (including transaction costs) and the
assumption of liabilities of $275,000. During 1998, the Company paid additional
contingent consideration of $50,000. During 1999, the Company agreed to make
additional payments totaling $715,000 in three installments ending on January
31, 2001. As of December 31, 2000, $100,000 remained outstanding. These
additional payments have been recorded as an additional cost of the assets
acquired. This acquisition was accounted for under the purchase method of
accounting; accordingly, the operating results of Collegiate Advantage have been
included in Student Advantage's financial statements since January 1, 1998.
Goodwill and other intangible assets in the aggregate of $1.4 million were
recorded with the acquisition and are being amortized over five years.
On April 1, 1999, Student Advantage completed its acquisitions of The Travel
Holding Group, LLC ("The Travel Holding Group"), and The Campus Agency, LLC
("The Campus Agency), in exchange for a promissory note in the amount of
$330,000 that has been paid in full. The Campus Agency provides media planning
and strategy consulting services to the U.S. student travel market. The Travel
Holding Group is a reseller of Eurail passes. The acquisitions have been
accounted for under the purchase method of accounting; accordingly, the results
of operations of each company have been included in Student Advantage's results
beginning on the acquisition date. Goodwill and other intangible assets in the
aggregate amount of $307,000 were recorded in connection with these acquisitions
and are being amortized over three years.
On May 27, 1999, Student Advantage acquired substantially all of the assets
of Mentor Interactive Corp., a provider of internet-based research tools and
related materials, in exchange for 18,056 shares of common stock and a warrant
to purchase 24,000 shares of common stock at a purchase price of $11.08 per
share with an aggregate estimated fair value of approximately $300,000. This
acquisition has been accounted for under the purchase method of accounting;
accordingly, the results of Mentor Interactive Corp. have been included in
Student Advantage's results beginning on the acquisition date. Goodwill and
other intangible assets in the aggregate of $312,000 were recorded with the
acquisition. Due to a change in estimated economic life, the remaining balance
of approximately $226,000 was fully amortized in 2000.
On June 11, 1999, Student Advantage acquired Transaction Service Providers,
Inc. ("Transaction Service Providers"), a provider of debit card services to
college students and local merchants. This acquisition has been accounted for
using the pooling of interests method; because the historical results of
operations and financial position of Transaction Service Providers were
immaterial to Student Advantage, prior period financial statements have not been
restated. Accordingly, Transaction Service Providers' results of operations have
been included in Student Advantage's results as of April 1, 1999. In connection
with the acquisition, Student Advantage issued 195,000 shares of common stock to
the stockholders of Transaction Service Providers.
On June 18, 1999, Student Advantage acquired all of the outstanding stock of
University Netcasting, Inc. ("UNI") in exchange for 2,425,610 shares of Student
Advantage common stock and the conversion of all UNI outstanding common stock
options for options to purchase 66,634 shares of Student Advantage common stock.
UNI is a leading operator of official athletic web sites for colleges,
universities and college sports associations. Through its FANSonly Network, UNI
provides sports fans with comprehensive online information and analysis on
college sports. This acquisition was accounted for using the pooling of
interests method; accordingly, the historic consolidated financial statements of
Student Advantage prior to the acquisition have been restated to reflect the
financial position, results of operations and cash flows of UNI.
Effective June 18, 1999, UNI's fiscal year end changed from March 31 to
December 31 to conform to Student Advantage's year end. UNI's results of
operations for the years ended March 31, 1997, 1998 and 1999 have been included
in Student Advantage's December 31, 1996, 1997 and 1998 results, respectively.
UNI's results for year ended December 31, 1999 have been included in Student
Advantage's year ended December 31, 1999 results. Accordingly, UNI's operations
for the three months ended March 31, 1999 have been included in Student
Advantage's results for both the years ended December 31, 1998 and 1999. Revenue
and net loss for UNI for the three months ended March 31, 1999 were $682,000 and
$1.6 million, respectively. This net loss has been reported as an adjustment to
the consolidated accumulated deficit.
The following is a reconciliation of revenues and net loss previously
reported by Student Advantage for the year ended December 31, 1998, with the
combined amounts currently presented in the consolidated financial statements
for those periods (in thousands):
12/31/98 3/31/99 12/31/98
STUDENT ADVANTAGE UNI COMBINED
----------------- ------- --------
Revenues................. $ 17,443 $ 1,917 $ 19,360
Net loss................. $ (5,115) $(5,421) $(10,536)
On October 7, 1999, Student Advantage acquired Voice FX Corporation ("Voice
FX"), a leading provider of internet and interactive voice response services to
college and university registrars. In connection with the acquisition, Student
Advantage paid
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approximately $1.1 million in cash, issued 430,082 shares of Student Advantage
common stock, valued at approximately $5.0 million, and agreed to assume all
outstanding options to purchase Voice FX common stock through issuing 59,687
options to purchase common stock valued at approximately $700,000. Student
Advantage also incurred approximately $150,000 in professional and other fees
associated with this acquisition. The acquisition has been accounted for under
the purchase method of accounting; accordingly, Voice FX's results of operations
have been included in Student Advantage's results of operations beginning on the
acquisition date. Goodwill and other intangible assets in the aggregate amount
of $6.4 million have been recorded in connection with the acquisition and are
being amortized on a straight-line basis over expected useful lives of between
three and five years.
The acquired assets and assumed liabilities associated with the purchase of
Voice FX have been allocated as follows (in thousands):
Working capital, net............................... $ 21
Fixed assets....................................... 564
Completed technology............................... 1,230
In-place workforce................................. 470
Goodwill........................................... 4,644
-------
Total purchase price............................. $ 6,929
=======
The following unaudited pro forma data summarizes the results of operations
for the years ended December 31, 1998 and 1999 as if the acquisition of Voice FX
had been completed on the first day of each respective period. The pro forma
data gives effect to actual operating results prior to the acquisition and
adjustments to reflect amortization of goodwill and other intangible assets.
These pro forma amounts do not purport to be indicative of the results that
would have actually been obtained if the acquisition had occurred on January 1,
1998 and 1999, respectively or that may be obtained in the future.
YEAR ENDED DECEMBER 31,
------------------------
1998 1999
--------- --------
(UNAUDITED, IN THOUSANDS,
EXCEPT PER SHARE DATA)
Net revenue....................................... $ 21,395 $ 31,571
Net loss.......................................... $ (13,328) (22,097)
$(22,097)
Net loss per common share:
Basic and diluted............................... $ (0.73) $ (0.81)
(0.81)
On May 17, 2000, Student Advantage acquired College411.com, Inc.
("College411"), a provider of web-based college and university student-focused
content. In connection with the acquisition, Student Advantage issued 193,837
shares of common stock, assumed all of College411's outstanding common stock
options, which were converted into options to purchase a total of 36,162 shares
of the Company's common stock, and forgave a loan of approximately $250,000. The
acquisition has been accounted for under the purchase method of accounting and
the results of operations have been included in Student Advantage's results of
operations beginning on the acquisition date. Goodwill and other intangible
assets in the aggregate amount of $1.5 million have been recorded in connection
with the acquisition and are being amortized on a straight-line basis over two
years.
On May 18, 2000, Student Advantage acquired ScholarAid.com, Inc.
("ScholarAid"), a provider of web-based scholarship and educational research
tools. In connection with the acquisition, Student Advantage issued 131,638
shares of common stock, assumed all of ScholarAid's outstanding common stock
options, which were converted into options to purchase a total of 21,302 shares
of the Company's common stock, and forgave a loan of approximately $493,000. The
acquisition has been accounted for under the purchase method of accounting and
the results of operations have been included in Student Advantage's results of
operations beginning on the acquisition date. Goodwill and other intangible
assets in the aggregate amount of $1.4 million have been recorded in connection
with the acquisition and are being amortized on a straight-line basis over three
years.
On July 28, 2000, Student Advantage acquired from CollegeClub.com, Inc.
("CollegeClub"), certain assets of its eStudentLoan, LLC subsidiary relating to
its student loan search engine business, in exchange for approximately $910,000
in cash. The acquisition has been accounted for under the purchase method of
accounting and the results of operations of the acquired business have been
included in Student Advantage's results beginning on the acquisition date. An
intangible asset in the approximate amount of $1.1 million has been recorded in
connection with this acquisition and is being amortized on a straight-line basis
over three years.
On October 31, 2000, Student Advantage acquired substantially all of the
assets of CollegeClub, an integrated communications and media internet company
for college students, and certain of its subsidiaries that had filed for
protection under Chapter 11 of the federal Bankruptcy Code, in exchange for
approximately $8.3 million in cash, 1,324,761 shares of Student Advantage common
stock and the assumption of certain liabilities. Up to an additional $5 million
in cash will be paid to CollegeClub if certain web site revenue performance
goals described in the acquisition agreement are met during 2001. If the
CollegeClub.com web site generates revenues equal to or in excess of $20
million, additional amounts will become due ranging from a minimum payment of
$1.5 million to a
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maximum payment of $5 million dollars for revenues equal to or in excess of $25
million. If the performance goals are met, any additional payments due
thereunder will be recorded as an additional cost of the assets acquired and
will be amortized over the original amortization period. The sale was approved
by the federal Bankruptcy Court in Southern California. The acquisition has been
accounted for under the purchase method of accounting and the results of the
acquired business have been included in Student Advantage's results beginning on
the acquisition date. An intangible asset, related to a contract with a customer
that was acquired through the acquisition, in the approximate amount of $4.6
million has been recorded in connection with this acquisition and is being
amortized on a straight-line basis over thirty months.
The acquired assets and assumed liabilities associated with the purchase of
CollegeClub have been allocated as follows (in thousands):
Working capital, net................................... $ 2,359
Long-term obligation under capital leases.............. (2,045)
Fixed assets........................................... 8,769
Contracts.............................................. 4,649
-------
Total purchase price................................. $13,732
=======
The following unaudited pro forma data summarizes the results of operations
for the years ended December 31, 1999 and 2000 as if the acquisition of
CollegeClub had been completed on the first day of each respective period. The
pro forma data gives effect to actual operating results prior to the acquisition
and adjustments to reflect amortization of goodwill and other intangible assets.
These pro forma amounts do not purport to be indicative of the results that
would have actually been obtained if the acquisition had occurred on January 1,
1999 and 2000, respectively, or that may be obtained in the future.
YEAR ENDED DECEMBER 31,
-------------------------
1999 2000
--------- ---------
(UNAUDITED, IN THOUSANDS,
EXCEPT PER SHARE DATA)
Net revenue......................................... $ 30,557 $ 54,239
Net loss............................................ $ (46,378) $ (74,840)
Net loss per common share:
Basic and diluted................................. $ (1.69) $ (2.05)
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
DECEMBER 31,
--------------------
1999 2000
------- -------
Furniture and fixtures ............................... $ 246 $ 396
Computer equipment and software ...................... 5,607 17,366
Equipment ............................................ 298 465
Leasehold improvements ............................... 699 853
------- -------
6,850 19,080
Less: Accumulated depreciation and amortization ...... 2,812 5,737
------- -------
$ 4,038 $13,343
======= =======
Depreciation and amortization expense with respect to property and equipment
and capital leases for the years ended December 31, 1998, 1999 and 2000 was
$351,000, $866,000 and $2.9 million, respectively.
5. BORROWINGS
During 1998, the Company entered into a $1.25 million line of credit
agreement with a bank expiring in April of 1999. The agreement was subject to
certain financial covenants as defined in the agreement, and the assets of the
Company collateralized the related obligation. Borrowings under the agreement
bore interest at the bank's rate, which at December 31, 1998 was 9.25%. During
1998, the Company borrowed $1.25 million under the agreement. There were no
borrowings outstanding at December 31, 1998.
In April 1999, this line of credit agreement was replaced with and superseded by
a new line of credit agreement that provided for borrowings of up to $2.75
million, including a $250,000 equipment line of credit. The terms of this line
of credit agreement required the maintenance of certain minimum financial ratios
and conditions and included other covenants similar to those in the initial
agreement. A termination of the Company's agreements with AT&T gave the bank the
right to terminate the credit agreement. All borrowings under this line of
credit agreement bore interest at a rate of LIBOR plus 2% or at the bank's rate
(8.0%)
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at December 31, 1999). There were no borrowings outstanding at December 31,
1999. Student Advantage's $2.75 million bank line of credit and equipment lease
credit facility expired according to its term on August 31, 2000.
6. PREFERRED STOCK
Undesignated Preferred Stock
On April 5, 1999, Student Advantage's Board of Directors approved, which the
stockholders approved in May 1999, 5,000,000 shares of undesignated preferred
stock. Issuances of the undesignated preferred stock may be made at the
discretion of the Board of Directors (without stockholder approval), in one or
more series and with such designations, rights and preferences as determined by
the Board. As a result, the undesignated preferred stock may have dividend,
liquidation, conversion, redemption, voting or other rights which may be more
expansive than the rights of holders of common stock. At December 31, 1999 and
2000 there were no shares of undesignated preferred stock issued and
outstanding.
7. STOCKHOLDERS' EQUITY
Initial Public Offering ("IPO")
On June 23, 1999, the Company completed an IPO of 6,000,000 shares of common
stock resulting in proceeds of approximately $44.6 million. Upon closing of the
IPO, each outstanding share of redeemable convertible preferred stock converted
into shares of common stock at a three to one ratio. On July 21, 1999, an
additional 900,000 shares of common stock were issued by the Company as a result
of the full exercise of the underwriters' over-allotment option. The Company
received additional proceeds of $6.7 million as a result of the exercise.
Private Placement
On October 27, 2000, the Company issued 800,000 shares of common stock to At
Home Corporation ("Excite@Home"), a provider of broadband services, and
1,200,000 shares of common stock to John Hancock Small Cap Value Fund, for an
aggregate purchase price of $10 million. The Company also issued to these
investors warrants to purchase a total of 1,000,000 shares of common stock, half
of which were issued with an exercise price of $5 per share and half of which
were issued with an exercise price of $6 per share. In connection with the
transaction, the Company entered into an alliance agreement with Excite@Home to
jointly market Excite@Home's broadband service and Student Advantage Network
content to student and university customers.
Warrants
In July 1999, Student Advantage entered into a marketing agreement with
Lycos, Inc. In connection with the transaction, Lycos was granted a warrant (the
"Lycos warrant") to purchase 550,000 shares of Student Advantage common stock at
a purchase price of $10.875 per share. The Lycos warrant terminates on July 21,
2002 and is exercisable on or after July 21, 2000. The Company valued the Lycos
warrant, using the Black-Scholes method, at $2.2 million, which is included in
other assets and is being recognized as a sales and marketing expense on a
straight-line basis over the thirty-month term of the marketing agreement.
During 1999 and 2000 respectively, $444,000 and $888,000 of the warrant's value
was recognized as sales and marketing expense.
In May 1999, Student Advantage issued a warrant for the purchase of 24,000
shares of common stock at a purchase price of $11.08 per share in connection
with its acquisition of Mentor Interactive Corp. (see Note 3). This warrant was
exercisable upon issue and expired unexercised on May 27, 2000.
In October 2000, Student Advantage issued a warrant for the purchase of
200,000 shares of common stock with an exercise price of $5.00 and an additional
warrant for the purchase of 200,000 shares of common stock with an exercise
price of $6.00 to Excite@Home in connection with the private placement.
These warrants are exercisable upon issuance and expire on October 26, 2002 and
October 26, 2003, respectively. The Company valued the warrants, using the
Black-Scholes method, at $846,000.
In October 2000, Student Advantage issued a warrant for the purchase of
300,000 shares of common stock with an exercise price of $5.00 and an additional
warrant for the purchase of 300,000 shares of common stock with an exercise
price of $6.00 to John Hancock Small Cap Value Fund in connection with the
private placement. These warrants are exercisable upon issuance and expire on
October 26, 2002 and October 26, 2003, respectively. The Company valued the
warrants, using the Black-Scholes method, at $1.3 million.
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As of December 31, 2000, the Company has reserved 1,550,000 shares of its
common stock for the exercise of these warrants.
8. STOCK AWARD PLANS
1995 Stock Option Plan
In 1995, the Board of Directors of UNI adopted the 1995 Stock Option Plan (the
"1995 Plan") authorizing the issuance of incentive and non-qualified options and
UNI common stock to select employees and non-employees. Options granted under
the 1995 Plan expire in ten years or less. The vesting terms were set by the
1995 Plan's administrator, and were generally established with monthly vesting
over periods of four years, including cliff vesting at the end of the first year
of 25%. Stock option activity under this plan is reflected in the table below.
1996 Stock Option Plan
In 1996, the Board of Directors of UNI adopted the 1996 Stock Option Plan
(the "1996 Plan") authorizing the issuance of incentive and non-qualified stock
to eligible employees. Options granted under the 1996 Plan expire in ten years
or less. The vesting terms were set by the 1996 Plan's administrator, and were
generally established with monthly vesting over a four-year period and cliff
vesting at the end of the first year of 25%. Stock option activity under this
plan is reflected in the table below.
1998 Stock Incentive Plan
Under the 1998 Incentive Stock Plan, the Board of Directors may award
options and restricted stock or other stock-based awards. Incentive stock
options may not be granted at less than the fair market value of Student
Advantage's common stock at the date of grant, for a term not to exceed ten
years and generally vesting over a four-year period. The exercise price under
each non-qualified stock option shall be specified by the Board of Directors.
Awards made under the 1998 Stock Plan may be made at the discretion of the Board
of Directors with terms to be defined therein.
On April 5, 1999, the Board approved an amendment to the 1998 Stock Plan,
which the stockholders approved in May 1999, providing for the issuance of up to
an aggregate 7,500,000 shares of Student Advantage common stock to eligible
employees, officers, the Board of Directors with terms to be defined therein.
On May 19, 2000, the Board approved an amendment to the 1998 Stock Plan,
which the stockholders approved in May 2000, providing for an increase in the
number of shares of common stock issuable under the plan from 7,500,000 to
9,500,000 shares.
During 1998, Student Advantage granted stock options to purchase 2,313,000
shares of its common stock with an exercise price of $0.33 per share. During
1999, Student Advantage granted stock options to purchase 47,550 shares of its
common stock with an exercise price of $1.87 per share. During 1998 and 1999,
Student Advantage recorded deferred compensation of $4.2 million and $228,000,
respectively, representing the differences between the estimated fair market
value of the common stock on the date of grant and the exercise price. During
1998, 1999 and 2000 Student Advantage recorded compensation expense relating to
these options totaling $808,000, $1.1 million and $771,000, respectively.
Compensation relating to options which vested immediately upon grant was
expensed in full at the date of grant, while compensation related to options
which vest over time was recorded as a component of stockholders' equity
(deficit) and is being amortized over the vesting periods of the related
options. In 1999 and 2000, as a result of employee terminations deferred
compensation related to certain of these options was reduced by approximately
$259,000 and $677,000, respectively. Had compensation cost for the Company's
option grants been determined based on the fair value at the date of grant
consistent with the method prescribed by SFAS No. 123, Student Advantage's net
loss and net loss per share would have increased to the pro forma amounts
indicated below:
YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1999 2000
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net loss:
As reported ....................... $ (10,536) $ (19,871) $ (28,722)
Pro forma ......................... (10,574) (22,082) (33,739)
Basic and diluted net loss per share:
As reported ....................... (0.59) (0.72) (0.79)
Pro forma ......................... (0.60) (0.81) (0.92)
Because additional option grants are expected to be made subsequent to
December 31, 2000, and because most options vest over several years, the pro
forma effects of applying the fair value method may be material to the results
of operations in future years. The weighted average grant date fair values of
options granted during 1998, 1999 and 2000 were $3.35, $6.43 and $1.96,
respectively.
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Under SFAS No. 123, the fair value of each employee option grant is
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted- average assumptions used for grants made during the
years ended December 31, 1998, 1999 and 2000: no dividend yield; risk free
interest rates of 4.54%, 5.25% and 5.35%, respectively; no volatility in 1998,
97% in 1999 and 100% in 2000; and an expected option term of 4, 6 and 6 years,
respectively. Stock option activity under the Company's option plans since
January 1, 1998 is as follows:
OUTSTANDING OPTIONS
------------------------------------------------------------------------
1998 1999 2000
---------------------- ---------------------- ----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE
--------- -------- --------- -------- ---------- --------
Outstanding -- beginning of year 39,842 $ 2.50 2,375,073 $ 0.41 3,883,445 $ 7.07
Granted, at fair value ....... 37,206 4.27 2,842,299 $10.05 4,974,703 $ 4.75
Granted, at below fair value . 2,313,000 0.33 47,550 $ 1.87 -- $ --
Exercised .................... (1,124) 5.70 (1,053,005) $ 0.44 (457,281) $ 0.44
Canceled ..................... (13,851) 3.94 (328,472) $ 4.99 (1,910,037) $ 7.27
--------- --------- ----------
Outstanding at December 31, .... 2,375,073 $ 0.41 3,883,445 $ 7.09 6,490,830 $ 5.75
========= ========= ==========
Exercisable at December 31, .... 485,951 $ 0.49 495,443 $ 4.11 678,294 $ 7.48
========= ========= ==========
As of December 31, 2000, 1,659,262 shares were available for grant under the
1998 Stock Plan.
The following table summarizes information about stock options outstanding at
December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------- ------------------------------------------------ ---------------------------------------
NUMBER NUMBER OF
OUTSTANDING WEIGHTED SHARES
RANGE AS OF AVERAGE EXERCISABLE AS OF
OF EXERCISE DECEMBER 31, REMAINING WEIGHTED AVERAGE DECEMBER 31, WEIGHTED AVERAGE
PRICES 2000 LIFE (YEARS) EXERCISE PRICE 2000 EXERCISE PRICE
- ------------- ------------ ------------ ---------------- ----------------- ----------------
$ 0.33-$ 0.33 465,824 7.94 $ 0.33 87,470 $ 0.33
$ 0.54-$ 3.06 809,687 9.73 $ 2.96 37,856 $ 1.10
$ 3.12-$ 3.56 136,547 9.43 $ 3.50 714 $ 3.38
$ 3.69-$ 3.75 1,308,000 3.41 $ 3.75 20,000 $ 3.75
$ 3.81-$ 5.00 392,469 9.01 $ 4.56 92,032 $ 4.86
$ 5.25-$ 5.63 1,215,368 3.79 $ 5.62 0 $ 0.00
$ 5.70-$ 8.01 962,558 8.72 $ 7.50 143,134 $ 7.64
$ 8.06-$12.25 954,619 8.33 $ 10.59 232,583 $ 10.70
$12.38-$22.25 245,758 8.81 $ 13.96 64,505 $ 13.89
---------- --------
6,490,830 6.79 $ 5.75 678,294 $ 7.48
========== ========
1999 Employee Stock Purchase Plan
On April 5, 1999, the Board of Directors authorized, which the stockholders
approved in May 1999, the 1999 Employee Stock Purchase Plan (the "Purchase
Plan"). The Purchase Plan provides for the issuance of up to 450,000 shares of
Student Advantage's common stock to eligible employees. Under the Purchase Plan,
Student Advantage is authorized to make one or more offerings during which
employees may purchase shares of common stock through payroll deductions made
over the term of the offering. The per-share purchase price at the end of each
offering is equal to 85% of the closing price of the common stock at the
beginning or end of the offering period (as defined by the Purchase Plan),
whichever is lower. During 1999, 36,258 shares of the Company's common stock
were purchased under the Purchase Plan at $6.80 per share. During 2000, 63,964
shares of the Company's common stock were purchased under the Purchase Plan at
$2.60 per share and 81,674 shares of the Company's common stock were purchased
under the Purchase Plan at $3.03 per share.
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9. INCOME TAXES
Deferred tax assets are comprised of the following (in thousands):
DECEMBER 31,
----------------------
1999 2000
-------- --------
Deferred tax assets:
Deferred revenue .............................. $ 3,366 $ 1,060
Net operating loss carryforwards .............. 8,041 20,936
Non current assets ............................ 732 497
Accruals ...................................... 683 2,666
Other ......................................... 100 148
-------- --------
Total deferred tax assets ................ 12,922 25,307
Deferred tax liability -- intangible assets ........ (628) --
-------- --------
Net deferred tax asset ................... 12,294 25,307
Deferred tax asset valuation allowance ............. (12,294) (25,307)
-------- --------
$ -- $ --
======== ========
The Company has provided a full valuation allowance for the deferred tax
assets since it is uncertain that these future benefits will be realized. If the
Company achieves future profitability, a significant portion of these deferred
tax assets could be available to offset future income taxes.
As of December 31, 1999 and 2000, the Company has a net operating loss
carryforward for federal and state purposes of approximately $19.9 million which
expire at various dates through 2019, and $54.9 million which expire at various
dates through 2020, respectively.
Under the Internal Revenue Code, certain substantial changes in the
Company's ownership could result in an annual limitation on the amount of net
operating loss and tax credit carryforwards which can be utilized in future
years.
10. EMPLOYEE SAVINGS PLAN
During 1998, Student Advantage adopted an employee retirement savings plan
under Section 401(k) of the Internal Revenue Code which covers substantially all
employees. Under the terms of the 401(k) Plan, employees may contribute a
percentage of their salary, up to a maximum of 20%. Student Advantage
contributed $61,000, $133,000 and $191,000 to the 401(k) Plan on behalf of its
employees during 1998, 1999 and 2000, respectively.
11. RELATED PARTY TRANSACTIONS
On November 12, 1999, Student Advantage made an equity investment in
edu.com, Inc. ("edu.com"), a privately held e-commerce company. Student
Advantage paid approximately $4.3 million in cash for approximately 922,000
shares of Series B preferred stock of edu.com. On January 14, 2000, the Company
made an additional investment of approximately $1.0 million in cash for
approximately 217,000 shares of Series B preferred stock of edu.com. Effective
with the initial investment, Student Advantage entered into a two-year marketing
and distribution agreement with edu.com, expiring on November 11, 2001. The
agreement provides, among other things, that edu.com will become Student
Advantage's exclusive technology e-commerce partner and rewards program
provider, that the parties will pursue certain promotional initiatives on each
other's behalf and that edu.com will make certain payments to Student Advantage,
including $2.0 million payable over the term of the agreement The company
recorded revenue of $111,000 and $900,000 related to this agreement during the
years ended December 31, 1999 and 2000, respectively. At December 31, 2000, $1.0
million remained payable under the agreement. Student Advantage accepted a
secured promissory note, which is payable on December 31, 2001, from edu.com in
satisfaction of this obligation. Subsequent to year end, Student Advantage
restructured its agreement with edu.com. The restructured agreement, which
expires December 31, 2001, provides that Student Advantage and edu.com will
pursue certain promotional initiatives on each other's behalf. (See note 1).
Effective May 15, 2000, Student Advantage entered into an Affiliate and
E-Commerce Agreement with Princeton Review Publishing, LLC, and The Princeton
Review Management, LLC ("TPR"). Princeton Review Publishing, LLC is a
stockholder of Student Advantage and one of its officers and equity holders is a
member of the Company's Board of Directors. Under the agreement, TPR will pay
the Company a fee to participate in the Student Advantage network by placing the
Student Advantage logo and content on The Princeton Review's review.com web
site. In addition, under the agreement, TPR will provide discounts as part of
the Student Advantage Membership Program and market the discount to high school,
college and university students. Additionally, under the agreement the Company
will pay TPR a fee in exchange for exclusive advertising sales responsibilities
for the review.com web site. The agreement expires on June 15, 2002. The Company
recorded revenue of $571,000 and expense of $653,000 related to this agreement
during the year ended December 31, 2000. The accounts receivable balance from
TPR was $92,000 at December 31, 2000 and the accrued expense balance to TPR was
$522,000 at December 31, 2000.
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12. COMPUTATION OF NET LOSS PER SHARE
All outstanding options and warrants to purchase common stock (totaling
8,040,830) were excluded from the calculation of diluted earnings per share for
all periods presented because their inclusion would have been anti-dilutive.
13. COMMITMENTS AND CONTINGENCIES
Lease Commitments
Student Advantage leases its operating facility and certain office equipment
under noncancelable operating lease agreements. Rent expense under these leases
for the years ended December 31, 1998, 1999 and 2000 totaled approximately
$914,000, $1.5 million and $1.9 million, respectively.
As a result of the Company's acquisitions of ScholarAid and CollegeClub
during 2000, the Company assumed certain capital leases of computer equipment.
Initial lease terms range from 3 to 5 years.
The Company's investment in computer equipment under capital leases was as
follows:
DECEMBER 31,
2000
------------
Computer equipment ........................... $ 3,242
Less: Accumulated depreciation ............... (199)
-------
$ 3,043
=======
Depreciation of property under capital leases was $199,000 for the year ended
December 31, 2000.
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Future minimum lease payments under noncancelable operating and capital
leases at December 31, 2000 are as follows (in thousands):
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
- ------------------------ ------- ---------
2001 ............................................... $ 1,538 $ 2,509
2002 ............................................... 1,394 2,472
2003 ............................................... 649 1,896
2004 ............................................... -- 1,594
2005 ............................................... -- 1,350
Thereafter ......................................... -- 1,510
------- -------
Total minimum lease payments ....................... $ 3,581 $11,331
------- =======
Less: Imputed interest (at rates from
2.03% to 42.83%).......................... (512)
-------
Present Value of net minimum lease
payments ................................. 3,069
-------
Less: Current Portion ...................... (1,208)
-------
Long-term portion of Obligations ........... $ 1,861
=======
Legal Proceedings
Student Advantage is from time to time subject to legal proceedings and
claims which arise in the normal course of its business. In the opinion of
management, the amount of ultimate liability with respect to these actions will
not have a material adverse effect on Student Advantage's financial position or
results of operations.
14. QUARTERLY FINANCIAL DATA
The following table sets forth unaudited quarterly statement of operations
data (restated - see note 1) for each of the four quarters in the years ended
December 31, 1999 and 2000. In the opinion of management, the unaudited
financial statements have been prepared on a basis consistent with the audited
financial statements and include all adjustments, which are only normal
recurring adjustments, necessary for a fair presentation of the financial
position and results of operations for the unaudited periods. The results of
operations for any quarter are not necessarily indicative of the results of
operations for any future period.
QUARTER ENDED
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1999 1999 1999 1999 2000 2000 2000 2000
--------- -------- --------- -------- --------- -------- --------- --------
(UNAUDITED, IN THOUSANDS)
Revenue
Student services ..................... $ 4,076 $ 4,202 $ 5,459 $ 5,985 $ 6,963 $ 7,391 $ 7,070 $ 6,675
Corporate and university solutions ... 831 590 3,164 3,337 4,179 4,172 5,573 5,991
-------- -------- -------- -------- -------- -------- -------- --------
Total revenue ................ 4,907 4,792 8,623 9,322 11,142 11,563 12,643 12,666
-------- -------- -------- -------- -------- -------- -------- --------
Costs and expenses
Cost of student services revenue ..... 2,460 1,961 3,562 3,110 2,883 2,724 2,128 2,528
Cost of corporate and university
solutions revenue ................. 559 693 1,711 1,578 2,229 2,177 3,225 2,298
Product development .................. 1,332 1,633 3,439 3,570 3,823 4,011 4,625 5,918
Sales and marketing .................. 2,256 2,976 3,248 3,771 4,786 4,524 4,324 4,246
General and administrative ........... 1,927 2,656 1,897 2,396 2,341 2,646 2,438 3,771
Depreciation and amortization ........ 305 300 349 (116) 1,007 1,436 1,504 2,435
-------- -------- -------- -------- -------- -------- -------- --------
Total costs and expenses ..... 8,839 10,219 14,206 14,309 17,069 17,518 18,244 21,196
-------- -------- -------- -------- -------- -------- -------- --------
Loss from operations ................... (3,932) (5,427) (5,583) (4,987) (5,927) (5,955) (5,601) (8,530)
-------- -------- -------- -------- -------- -------- -------- --------
Equity interest in edu.com net loss .... (316) (944) (944) (944) (944)
Realized loss on write-off of investment -- -- -- -- -- -- -- (367)
Interest income (expense), net ......... 73 50 637 598 473 396 374 191
-------- -------- -------- -------- -------- -------- -------- --------
Net loss ............................... $ (3,859) $ (5,377) $ (4,946) $ (4,705) $ (6,398) $ (6,503) $ (6,171) $ (9,650)
======== ======== ======== ======== ======== ======== ======== ========
Basic and diluted net loss per share
as restated........................... $ (0.21) $ (0.26) $ (0.14) $ (0.13) $ (0.18) $ (0.18) $ (0.17) $ (0.25)
======== ======== ======== ======== ======== ======== ======== ========
Basic and diluted net loss per share as
originally reported................ $ (0.21) $ (0.26) $ (0.14) $ (0.15) $ (0.15) $ (0.15) $ (0.14) $ (0.23)
======== ======== ======== ======== ======== ======== ======== ========
Shares used in computing basic and
diluted net loss per share ........ 18,556 21,027 34,610 35,235 35,590 35,980 36,170 38,446
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Student Advantage, Inc.
(Registrant)
Dated: June 28, 2001 By: /s/ Kenneth S. Goldman
----------------------------------------------
Kenneth S. Goldman, Executive Vice
President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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EXHIBIT INDEX
2.1* Asset Purchase Agreement, dated as of May 10, 2001, by and among
Student Advantage, Inc. and edu.com, Inc.
23.1 Consent of Arthur Andersen LLP
- --------------------------
* Previously filed.
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