10-Q 1 b47195sae10vq.txt STUDENT ADVANATAGE, INC. ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to ___________ Commission File No. 0 - 26173 STUDENT ADVANTAGE, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 8699 04-3263743 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER) --------------- 280 SUMMER STREET BOSTON, MASSACHUSETTS 02210 (Address of Principal Executive Offices) (Zip Code) (617) 912-2000 (Registrant's telephone number, including area code) -------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]. Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 537,309 shares of common stock as of August 12, 2003. --------------- STUDENT ADVANTAGE, INC. FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2003 INDEX

2 PART 1. FINANCIAL INFORMATION. ITEM 1. FINANCIAL STATEMENTS. STUDENT ADVANTAGE, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED)

-------------------------- * All share and per share items have been adjusted to reflect the one-for-ten reverse split of the common stock effected on June 30, 2003 The accompanying notes are an integral part of these consolidated financial statements. 3 STUDENT ADVANTAGE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)

-------------------------- * All share and per share items have been adjusted to reflect the one-for-ten reverse split of the common stock effected on June 30, 2003. The accompanying notes are an integral part of these consolidated financial statements. 4 STUDENT ADVANTAGE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)

The accompanying notes are an integral part of these consolidated financial statements. 5 STUDENT ADVANTAGE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - THE COMPANY Student Advantage, Inc. is an integrated media and commerce company focused on the higher education market. The Company works with hundreds of colleges, universities and campus organizations, and more than 15,000 participating national and local business locations to develop products and services that enable students to make purchases less expensively and more conveniently on and around campus. Student Advantage, Inc. was incorporated in the State of Delaware on October 20, 1998. The Company began operations in 1992 as a sole proprietorship, converted to a general partnership in 1995, converted to a limited liability company in 1996 and became a C corporation in 1998. From inception through December 1997, the Company's revenue was derived primarily from annual membership fees. Since that time, the Company has expanded its product and service offerings through internal growth as well as acquisitions. However, despite the expansion of products and service offerings, the Company operates as one reporting segment. The Company has experienced substantial net losses since its inception and, as of June 30, 2003, had an accumulated deficit of $127.0 million. Such losses and accumulated deficit resulted primarily from significant costs incurred in the development of the Company's products and services and the establishment of the Company's infrastructure. As of the filing of the Company's annual report on Form 10-K, as amended, for the year ended December 31, 2002, certain factors raised concerns about the Company's ability to continue as a going concern. The Company has taken significant steps through the sale of its SA Cash product line in February 2003 for proceeds of $4.5 million, the sale of the assets of its OCM Direct subsidiary in early May 2003 for cash proceeds of $15.6 million and $1.8 million in settlement of intercompany obligations, and the amendment of the terms of its outstanding indebtedness in May 2003, enabling the Company to significantly reduce its outstanding debt obligations and to restructure the remainder of its debt obligations. The Company's operating and financing plan for the remainder of 2003, assumes that it will be able to achieve significant reduction in net cash loss for the remainder of 2003 and into 2004. However, if the Company's revenue and expense projections do not materialize as anticipated, the Company will be required to obtain additional financing. Failure to generate sufficient revenues, reduce certain discretionary spending and obtain additional capital or financing, if needed, would have a material adverse effect on the Company's ability to achieve its intended business objectives. With the proceeds of the sales of its SA Cash product line and the assets of its OCM Direct subsidiary, the related reduction of its debt obligations and restructuring of its remaining debt, the Company believes that it has sufficient cash resources for at least the next 12 months. All share and per share items in these Notes to the Consolidated Financial Statements have been adjusted to reflect the one-for-ten reverse split of the Company's Common Stock effected on June 30, 2003. These financial statements should be read in conjunction with the consolidated financial statements and related footnotes included in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2002. UNAUDITED INTERIM FINANCIAL INFORMATION The unaudited interim consolidated financial statements of Student Advantage for the three and six months ended June 30, 2003 and 2002, respectively, included herein have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions from Form 10-Q under the Securities Exchange Act of 1934, as amended, and Article 10 of Regulation S-X under the Securities Act of 1933, as amended. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations relating to interim financial statements. In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of Student Advantage at June 30, 2003, and the results of its operations for the three and six months ended June 30, 2003 and 2002, respectively, and its cash flows for the six months ended June 30, 2003 and 2002, respectively. The results for the three and six months ended June 30, 2003 are not necessarily indicative of the expected results for the full fiscal year or any future period due to the seasonal nature of the Company's Student Advantage Membership Program revenue cycle. NOTE 2 - COMPUTATION OF UNAUDITED NET INCOME (LOSS) PER SHARE (1, 2, 3, 4) 6 (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)

(1) Net income (loss) per share is computed under SFAS No. 128, "Earnings Per Share." Basic net income (loss) per share is computed using the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by using the weighted average number of common shares and dilutive potential common shares and warrants outstanding during the period. (2) For all periods, except for the three month period ended June 30, 2002 and six month period ended June 30, 2003, diluted net income (loss) per share does not differ from basic net income (loss) per share since potential common shares from exercise of stock options and warrants are anti-dilutive. For the three month period ended June 30, 2002 and six month period ended June 30, 2003, fully diluted net income (loss) per share assumes the exercise of all outstanding dilutive stock options and warrants. (3) All share and per share amounts reflect the one-for-ten reverse stock split of the Company's common stock effected on June 30, 2003. (4) As of June 30, 2003, Student Advantage had reserved 23,552 shares of its common stock for the exercise of various options with exercise prices ranging from $0.40 to $1,587.50 per share. As of June 30, 2003, Student Advantage had reserved 32,675 shares of its common stock for the exercise of various warrants with exercise prices ranging from $100.00 to $1,108.00 per share. NOTE 3 - STOCK COMPENSATION In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation- Transition and Disclosure - amendment of SFAS 123," "SFAS 148." SFAS 148 amends Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," "SFAS 123," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation. In addition, this statement amends the disclosure requirements for SFAS 123, to require prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has elected to continue to account for stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," "APB 25," and related interpretations. Accordingly, compensation cost for stock options and restricted stock awards is measured as the excess, if any, of the quoted market price of our stock at the date of the grant over the exercise price an employee must pay to acquire the stock. The Company has adopted the annual disclosure provisions of SFAS 148 in our financial statements for the year ended December 31, 2002 and has adopted the interim disclosure provisions in our financial statements for the quarter ended March 31, 2003. 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, the Company's net income (loss) and net income (loss) per share would have increased to the pro forma amounts indicated below: 7

NOTE 4 - RELATED PARTY TRANSACTIONS Effective May 15, 2000, the Company entered into an Affiliate and E-Commerce Agreement with Princeton Review Publishing, LLC, and The Princeton Review Management, LLC ("TPR"). One of the officers and equity holders of Princeton Review Publishing was a member of the Company's Board of Directors until December 30, 2002 and is currently a guarantor of the Company's debt obligation to Reservoir Capital. Under the agreement, TPR paid 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 website. In addition, TPR provided discounts as part of the Student Advantage Membership Program and marketed the discount to high school, college and university students. Additionally, under the agreement the Company paid TPR a fee in exchange for exclusive advertising sales responsibilities for the review.com website. The agreement expired on March 31, 2002. The Company recorded revenues of $0.2 million and expenses of $0.2 million related to this agreement during the six months ended June 30, 2002. Additionally, the Company recorded revenue of $0.2 million and expenses of $0.3 million related to additional work performed by both parties for the six months ended June 30, 2002. No revenue or expenses were recorded related to this agreement for the six months ended June 30, 2003. On September 30, 2002, the Company entered into a $3.5 million loan agreement with Scholar, Inc., an entity formed by Raymond V. Sozzi, Jr., the Company's President and Chief Executive Officer, Atlas II, L.P. and certain other stockholders. The loan is referred to as the Scholar loan, has an interest rate of 10% per annum and a maturity date of January 31, 2005, and otherwise has the same terms as the Reservoir Capital credit facility. On May 6, 2003, pursuant to an amendment to the Scholar Loan, the Company repaid $1.3 million of the Scholar Loan (See Note 5). During the six month period ended June 30, 2002, Raymond V. Sozzi, Jr., the Company's President and CEO, advanced an aggregate of $0.5 million to the Company, all of which was repaid during the six month period ended June 30, 2002. There were no advances during the six month period ended June 30, 2003. NOTE 5 - BORROWINGS On June 25, 2001, the Company entered into a loan agreement (the "Loan Agreement") by and among the Company, the subsidiaries of the Company and Reservoir Capital Partners, L.P., Reservoir Capital Associates, L.P. and Reservoir Capital Master Fund, L.P. (collectively the "Reservoir Lenders") providing for the establishment of credit facility in the aggregate principal amount of up to $15.0 million, consisting of a $10.0 million term loan and a $5.0 million revolving loan. The Company borrowed $10.0 million in the form of a term loan and $5.0 million in the form of a revolving loan, and used substantially all of these proceeds to pay the cash portion of the purchase price for the acquisition and existing debt of OCM Direct, Inc. The remainder of the proceeds from the credit facility were used for working capital and general corporate purposes of the Company. The credit facility is secured by a lien against substantially all of the assets of the Company, and is guaranteed by all the Company's subsidiaries, which guarantees are also secured. From time to time the terms of the credit facility have been amended as described below. In February 2002, the Company's subsidiary, OCM Direct and its two subsidiaries, CarePackages, Inc. and Collegiate Carpets, Inc., entered into a revolving loan agreement with Bank of America providing for a $5.0 million loan facility, which is referred to as 8 the OCM loan. On May 5, 2003, in connection with the Company's sale of substantially all of the assets of OCM Direct to Alloy, Inc., Alloy assumed substantially all of the liabilities of OCM Direct and its subsidiaries, including its obligations under the OCM loan with Bank of America as they existed on May 1, 2003. Until May 1, 2003, the Company provided an unsecured guaranty of the obligations of its three subsidiaries to Bank of America and the interest rate under the OCM loan was LIBOR plus 2.5. As noted above, on September 30, 2002, the Company agreed to borrow $3.5 million from Scholar, Inc., an entity formed by the Company's President and Chief Executive Officer, an affiliate of Atlas II, L.P. and certain other of the Company's stockholders. The loan is referred to as the Scholar loan, had an annual interest rate of 8% through April 30, 2003 and otherwise has the same terms as the Reservoir credit facility. On May 6, 2003, pursuant to an amendment to the Scholar Loan, the Company made a payment of $1.3 million of the principal outstanding under the Scholar loan with a portion of the proceeds from the sale of the assets of the Company's OCM Direct subsidiary to Alloy, Inc. Scholar agreed to extend the maturity date of the loan from July 1, 2003 to January 31, 2005, to set the interest rate at 10% per annum beginning May 1, 2003 and to require quarterly payments of interest beginning September 30, 2003. In addition, the Company agreed to pay a fee of $0.1 million on December 31, 2003 and June 30, 2004 if any amount of the loan is outstanding as of such date. As of June 30, 2003, the outstanding principal amount under the Scholar loan was $2.3 million. On December 30, 2002, the Reservoir Lenders agreed to reduce the total indebtedness to them from approximately $15.7 million to $9.5 million in exchange for a guarantee by Mr. John Katzman, a member of the Company's Board of Directors who resigned at the time the amendment was consummated. In addition, the Reservoir Lenders agreed to lend the Company an additional $2.0 million. In exchange for his guarantee, the Company agreed to pay Mr. Katzman a $1.0 million fee payable at the time of certain loan repayments. As of December 31, 2002, the debt obligations to the Reservoir Lenders and Mr. Katzman carried an annual interest rate of 12% and required payments of $3.5 million on January 31, 2003, $4.0 million on March 31, 2003 and the remaining balance on the July 1, 2003 loan maturity date. In accordance with SFAS 15 "Accounting by Debtors and Creditors Regarding Troubled Debt Restructuring," the Company recorded the $3.0 million gain on forgiveness of debt net of expenses, including $0.5 million of anticipated interest expense based on the payment schedule, remaining deferred financing costs of $1.8 million, and the $1.0 million guarantee fee paid to Mr. Katzman. On each of January 31, 2003, March 14, 2003, April 14, 2003 and April 28, 2003, the terms of the Reservoir Capital credit facility were further amended. On January 31, 2003, the Reservoir Lenders agreed to reduce the $3.5 million payment due on January 31, 2003 to $1.5 million, which payment was made on that date. On March 14, 2003, the Reservoir Lenders agreed to lend the Company an additional $0.5 million. On March 31, 2003, Reservoir Capital agreed to lend the Company an additional $1.5 million and agreed to change the date on which the Company is required to repay $4.0 million of borrowings under the loan agreement from March 31, 2003 to April 14, 2003. On April 14, 2003, the repayment date for the $4.0 million was amended to become April 28, 2003. On April 28, 2003, the repayment date for the $4.0 million was amended to become May 2, 2003. Effective May 1, 2003, the Company amended its loan agreement with the Reservoir Lenders and John Katzman, to provide for a payment of $7.8 million of the principal amount outstanding under the Reservoir credit facility upon the consummation of the sale of the assets of the Company's OCM Direct subsidiary to Alloy, Inc. The payment was made on May 6, 2003. In addition, the Reservoir Lenders and Mr. Katzman agreed to extend the maturity date of their loans from July 1, 2003 to January 31, 2005, to set the interest rate at 10% per annum beginning May 1, 2003 and require quarterly payments of interest beginning September 30, 2003. The Reservoir Lenders and Mr. Katzman also agreed to waive all accrued and unpaid interest under the loan through April 30, 2003. In addition, the Company agreed to pay a fee of $0.1 million on December 31, 2003 and June 30, 2004 if any of the loans are outstanding as of such date. As of June 30, 2003, the outstanding principal amount under the Reservoir credit facility was $5.3 million. As of June 30, 2003 and December 31, 2002, the Company had total borrowings outstanding of $7.8 million and $18.2 million, respectively. NOTE 6 - OTHER EVENTS Effective April 1, 2002, the Company entered into a two year Sales Agency Agreement with Alloy, Inc., appointing Alloy as the primary, non-exclusive agent for the purpose of selling its CollegeClub.com media inventory. The Company received an agent fee of $4.9 million under the agreement and must make quarterly payments to Alloy for agent performance and base commissions and may make additional variable commission payments to Alloy based on CollegeClub.com media revenues over the two-year term of the agreement. The Company deferred the $4.9 million fee it received and is reducing it over the two year term of the agreement as appropriate. For the first fifteen months of the agreement, the payments for agent performance, base commissions and variable commissions have equaled $2.2 million. On April 1, 2003, the parties amended the agreement to provide for a minimum quarterly base commission rate of $0.5 million for the period from April 1, 2003 to March 31, 2004. On May 6, 2003, the Company prepaid $2.2 million to Alloy for anticipated commissions through March 31, 2004. As of June 30, 2003, the remaining $1.7 million prepaid balance has been offset against the remaining $1.9 million of deferred agent fee on the Company's balance sheet. 9 Effective May 8, 2002, the Company sold the assets relating to its SA Marketing Group product line to Triple Dot, Inc., a subsidiary of Alloy, Inc. At the time of the sale the Company had the opportunity to receive an additional $1.5 million based on the performance of certain pending proposals, of which $1.0 million was prepaid to the company and deferred until earned. On May 5, 2003, the parties amended the purchase agreement to note that all obligations had been met by both parties and on May 5, 2003, the remaining $0.5 million was paid to the Company. The Company recorded the $1.5 million as additional gain on sale during the three month period ended June 30, 2003. On May 5, 2003, the Company completed the sale of substantially all the assets of its OCM Direct subsidiary to Alloy Inc., for cash consideration of $15.6 million and $1.8 million as settlement of the intercompany balance between OCM Direct and the Company and the amendment of the terms of OCM Direct's outstanding indebtedness to Bank of America. $1.0 million of the consideration paid was placed into an escrow account, which expires on May 1, 2005, and may be drawn down by the Company upon payment of tax liabilities related to OCM Direct prior to that date. The assets sold consisted of primarily cash, accounts receivable, property and equipment, goodwill and intangible assets, inventory and prepaid expenses. The buyer also assumed certain accounts payable, accrued liabilities and the outstanding balance on the Bank of America line of credit. OCM Direct's sales, reported in discontinued operations, for the six month periods ended June 30, 2003 and 2002 were $4.2 million and $9.2 million, respectively. OCM Direct's loss, reported in discontinued operations, for the six month periods ended June 30, 2003 and 2002 were $3.2 million and $2.6 million respectively. In connection with the sale, the Company agreed not to compete with Alloy in the business of selling diploma frames, carpets, residence halls linens and related dorm accessories as well as care packages and related sampling programs except as currently done through the Company's websites and membership program until May 2007. In relation to the sale, the Company deferred $1.0 million of the purchase price for anticipated tax liabilities and recorded a net loss of $0.7 million, inclusive of transaction costs of $1.0 million, during the three month period ended June 30, 2003. On June 30, 2003, the Company's shareholders approved a one-for-ten-reverse split of the common stock. In addition, the shareholders approved a reduction in the number of authorized shares of common stock from 150,000,000 to 1,000,000 and a reduction in the number of authorized shares of preferred stock from 5,000,000 to 100,000. Effective July 1, 2003, the Company's common stock began trading under the new ticker symbol "STUA" on the OTC Bulletin Board. NOTE 7 - COMMITMENTS AND CONTINGENCIES Legal Proceedings The Company is from time to time subject to legal proceedings and claims that arise in the normal course of its business. In the opinion of management, the amount of ultimate liability with respect to these actions will not have a material adverse effect on the Company's financial position or results of operations. In November 2002, the Company was named as a defendant in a lawsuit filed against it and General Motors by Richard M. Kipperman, Liquidating Trustee of the bankruptcy estate of CollegeClub.com, Inc., Campus24, Inc. and CollegeStudent.com, Inc., in the U.S. Bankruptcy Court for the Southern District of California. The suit seeks damages of $2.25 million and interest and costs relating to payments received by the Company under an agreement with General Motors that the Company acquired from 10 CollegeClub.com. The trustee alleges that the payments were earned by CollegeClub.com prior to the Company's acquisition of the agreement and were not sold to the Company as part of the agreement. The Company believes that the trustee's allegations are factually incorrect and are inconsistent with the terms of the acquisition agreement with CollegeClub.com and intends to defend the matter vigorously. If, however, the Company is found to have significant liability to the liquidating trustee or incurs significant costs in connection with the litigation, its financial condition and liquidity would suffer significant harm. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Student Advantage has included in this filing certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 concerning Student Advantage's business, operations and financial condition. The words or phrases "can be," "expects," "may affect," "may depend," "believes," "estimate," "project" and similar words and phrases are intended to identify such forward-looking statements. Such forward-looking statements are subject to various known and unknown risks and uncertainties and Student Advantage cautions you that any forward-looking information provided by or on behalf of Student Advantage is not a guarantee of future performance. Actual results could differ materially from those anticipated in such forward-looking statements due to a number of factors, some of which are beyond Student Advantage's control, in addition to those discussed in Student Advantage's other public filings, press releases and statements by Student Advantage's management, including those set forth below under "Factors That May Affect Future Results". All such forward-looking statements are current only as of the date on which such statements were made. Student Advantage does not undertake any obligation to publicly update any forward-looking statement to reflect events or circumstances after the date on which any such statement is made or to reflect the occurrence of unanticipated events. OVERVIEW Student Advantage, Inc. is an integrated media and commerce company focused on the higher education market. We work in partnership with colleges and universities and in cooperation with businesses to develop products and services that enable students to make less expensive and more convenient purchases on and around campus. We report our revenue in two categories: student services revenue and corporate and university solutions revenue. We reach consumers offline through our Student Advantage Membership Program, and online through our highly trafficked websites studentadvantage.com, CollegeClub.com and our Official College Sports Network ("OCSN"). The Student Advantage Membership Program is a national fee-based membership program that provides its student members with exclusive benefits including ongoing discounts on products and services currently offered by more than 15,000 participating national and local business locations. Discounts are made available to students both through our studentadvantage.com website and at sponsors' retail and online locations. OCSN is the largest, most trafficked network on the web devoted exclusively to college sports, providing online brand management and content delivery to more than 135 schools and athletic conferences. Until January 2003, we also reached our consumers through our SA Cash programs. The SA Cash programs enabled students to use their college ID cards as a method of payment (stored-value card) for off-campus dining, shopping and other purchase needs. In January 2003, we sold the portion of our assets relating to our SA Cash brand to Blackboard, Inc. In connection with the sale, we entered into a limited licensing agreement with Blackboard under which we will continue to offer the SA Cash product line to a set of designated colleges and universities, but otherwise will not compete with Blackboard in the SA Cash business other than in connection with schools operating on the Diebold payments platform until January 2010. We do not anticipate that the SA Cash product will be a significant source of revenue in the future. Effective May 1, 2003, we sold substantially all the assets of our OCM Direct subsidiary to Alloy, Inc. OCM Direct was our direct mail marketing business and provided college and university-endorsed products to students and their parents. In connection with the sale, we agreed not to compete with Alloy in the business of selling diploma frames, carpets, residence halls linens and related dorm accessories as well as care packages and related sampling programs except as currently done through the Company's websites and membership program until May 2007. We began operations in 1992 as a sole proprietorship, converted to a general partnership in 1995, converted to a limited liability company in 1996 and became a C Corporation in 1998. From inception through December 1997, our revenue was derived primarily from annual membership fees. CRITICAL ACCOUNTING POLICIES The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses. On an on-going basis management evaluates its estimates and judgments, including those related to revenue recognition, bad debts, intangible assets, contingencies and litigation. Management bases its estimates on historical experience and on various other 11 factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. However, results may differ from these estimates under different assumptions or conditions. Critical accounting policies are those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. Our most critical accounting polices are described below. Accounts Receivable We evaluate the collectibility of our accounts receivable based on a combination of factors. In circumstances where we become aware of a specific customer's inability to meet its financial obligations to us, such as a bankruptcy filing or a substantial down-grading of a customer's credit rating, we record a specific reserve to reduce our net receivable to the amount we reasonably expect to collect. We also record reserves for bad debts based on the length of time our receivables are past due, the payment history of our individual customers and the current financial condition of our customers based on obtainable data and historical payment and loss trends. Our allowance for doubtful accounts was $0.2 million and $0.2 million at June 30, 2003 and December 31, 2002, respectively. Uncertainties affecting our estimates include future industry and economic trends and the related impact on the financial condition of our customers, as well as the ability of our customers to generate cash flows sufficient to pay the amounts due. If circumstances change, such as higher than expected defaults or an unexpected material adverse change in a customer's ability to meet its financial obligations to us, our estimates of the recoverability of the receivables due us could be reduced by a material amount. Revenue Recognition We report revenues in two categories: student services revenue and corporate and university solutions revenue. Student services revenue is attributable to the parts of our business focused primarily on providing goods and services to students, their parents and alumni. We derive student services revenue from commerce, subscription and advertising. Commerce revenue from continuing operations is derived primarily from transaction-based revenue earned for reselling products and services and processing stored value transactions. To date, commerce revenue has primarily included revenue that we receive from the sale of residence hall linens and related accessories, care packages and diploma frames through direct mail marketing, fees from SA Cash transactions and e-commerce revenue from our network of websites. As a result of the February 2003 sale of our SA Cash product line, fees from SA Cash transactions were not a significant part of our revenue stream beginning with the three month period ended June 30, 2003. As a result of the May 2003 sale of the assets of our OCM Direct subsidiary, revenue from the sale of residence hall linens and related accessories, care packages and diploma frames will be presented in the results of discontinued operations on our Consolidated Statements of Operations. Commerce revenue is recognized upon the completion of the related contractual obligations. 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. Advertising revenue consists primarily of fees for banner advertisements and sponsorships on our network of websites. Website 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. Corporate and university solutions revenue is attributable to the parts of our business focused primarily on providing goods and services to universities and consists of licensing, management and consulting fees from universities. This revenue is recognized upon the completion of the related contractual obligations. Payments received in advance of revenue being earned are recorded as deferred revenue. In accordance with the EITF Issue No. 99-17, "Accounting for Advertising Barter Transactions," we have 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 six months ended June 30, 2003 and 2002, we recorded $19,000 and $2.1 million of barter revenue and $19,000 and $2.1 million of barter expense as sales and marketing expense, respectively. In accordance with Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" and EITF Issue No. 99-19 "Reporting Revenue Gross as a Principal versus Net," we have evaluated our revenue and determined that it is being reported in accordance with the guidance. We have recorded certain of our commerce revenue at gross, as we are considered the primary obligor in the transaction. In November 2001, the Emerging Issues Task Force concluded its discussions on EITF Issue 01-9, "Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products)". This guidance requires that an entity account for consideration given to a customer as a reduction of revenue unless it can demonstrate an identifiable benefit that can 12 be sufficiently separable from the sale of the products or services to the customer, and can reasonably estimate the fair value of the benefit identified. We adopted EITF Issue 01-9 effective January 1, 2002. In accordance with EITF 01-9, we have offset amortization of consideration given to certain vendors against revenue (for the six months ended June 30, 2003, this approximated $0.9 million). While consideration given and received by us are carried at the gross value of the amounts on the balance sheet, any revenue recognized is reflected on a net basis in the accompanying statement of operations. Goodwill and other intangible assets Intangible assets include the excess of the purchase price over identifiable tangible net assets acquired in acquisitions. Such assets include goodwill, completed technology, workforce, customer lists, non-compete agreements, websites and other intangible assets, which are being amortized on a straight-line basis over their estimated economic lives ranging from two to fifteen years. As a result of the application of SFAS 142 in 2002, we stopped amortizing the remaining goodwill related to the acquisition of OCM Direct in the first quarter of 2002. We continued to amortize the remaining value of our intangible assets related to completed technology, workforce, customer lists, non-compete agreements and contracts related to our acquisitions of OCM Direct and Collegeclub. As of May 1, 2003, in relation to our sale of the assets of OCM Direct, we removed $17.8 million of net goodwill and intangible assets as part of the overall loss on sale calculation. As of June 30, 2003, the remaining intangible asset related to our acquisition of Collegeclub has been fully amortized. Amortization expense from continuing operations for the six month period ended June 30, 2003 and 2002 was $0.8 million and $0.6 million, respectively. The Company completed an analysis to assess the carrying value of the remaining goodwill amounts, as of December 31, 2002, and determined there was no impairment. RESULTS OF CONTINUING OPERATIONS Comparison of Quarter Ended June 30, 2003 with Quarter Ended June 30, 2002 Revenue. Total revenues decreased to $4.0 million for the second quarter of 2003 from $6.6 million for the second quarter of 2002, due to decreases in student services revenue of $1.8 million and corporate and university solutions revenue of $0.7 million. Student Services Revenue. Student services revenue decreased to $3.4 million in the second quarter of 2003 from $5.2 million in the second quarter of 2002. The decrease was primarily due to a reduction in barter revenue of $1.0 million, a reduction in the amount of revenue related to our contract with General Motors which expired in May 2003, and the sale of substantially all the assets of our SA Cash brand in February 2003. Additionally, advertising revenue from our network of web sites decreased primarily as a result of a decrease in online advertising on CollegeClub.com. Corporate and University Solutions Revenue. Corporate and university solutions revenue decreased to $0.6 million in the second quarter of 2003 from $1.4 million in the second quarter of 2002. The decrease in revenue was primarily due to the sale of our SA Marketing Group brand on May 8, 2002, and partially offset by increases in our licensing fees from universities. For the three month period ended June 30, 2003 and 2002, there were no individual customers that accounted for more than 10% of revenue. Cost of Student Services Revenue. Cost of student services revenue consists of the costs associated with subscription, commerce and advertising revenue. Subscription costs consists of the costs associated with the fulfillment of membership subscriptions and customer service. Commerce costs include costs of goods paid to partners in connection with selling products and personnel-related costs associated with acquiring customers for the Company. Advertising costs consist primarily of royalties paid to colleges and universities and fees paid to partners' in exchange for the right to place media inventory on such parties' web sites. Cost of student services revenue decreased to $1.3 million in the second quarter of 2003 from $1.9 million in the second quarter of 2002. The decrease was due the sale of our SA Cash brand on February 1, 2003, consistent with the decrease in the related revenue. Cost of Corporate and University Solutions Revenue. Cost of corporate and university solutions revenue consists primarily of the costs of marketing services and the costs of acquiring customers on behalf of our corporate clients. Marketing services costs primarily include the direct and indirect costs associated with planning and implementing events and promotions provided through our SA Marketing Group brand. Cost of corporate and university solutions revenue decreased to zero in the second quarter of 2003 from $0.8 million in the second quarter of 2002, consistent with the sale of our SA Marketing Group assets on May 8, 2002, which constituted our only cost of sales against our corporate and university solutions revenue. Product Development. Product development expenses consist primarily of personnel-related and consulting costs associated with the development and enhancement of our suite of products, which include the Student Advantage Membership Program and our 13 network of web sites. Product development expenses remained level at $1.5 million in the second quarter of 2003 as compared to the second quarter of 2002. Sales and Marketing. Sales and marketing expenses consist primarily of personnel and other costs related to our sales and marketing programs. Sales and marketing expenses decreased to $1.1 million in the second quarter of 2003 from $3.8 million in the second quarter of 2002. The decrease was primarily related to a reduction in barter expense of $1.0 million, the sale of the assets of our SA Marketing Group brand in May 2002, and the sale of the assets of our SA Cash brand in February 2003. General and Administrative. General and administrative expenses consist primarily of costs related to general corporate functions, including executive management, finance, human resources, facilities, accounting and legal. General and administrative expenses decreased to $0.8 million in the second quarter of 2003 from $1.2 million in the second quarter of 2002. The decrease was primarily due to a significant reduction in the number of employees engaged in the general and administrative functions. Depreciation and Amortization. Depreciation expense decreased to $1.0 million in the second quarter of 2003 from $1.6 million in the second quarter of 2002, primarily due to decreased capital expenditures throughout 2002 and the first two quarters of 2003. Amortization expense decreased to $0.2 million in the second quarter of 2003 from $0.6 million in the second quarter of 2002. In accordance with SFAS 142, we amortized the value of acquired contract related to CollegeClub, which was fully amortized as of April 2003. Realized Gain on Sale of Assets. On May 5, 2003, we amended the SA Marketing Group purchase agreement dated May 8, 2002 with Triple Dot, Inc., to provide that all obligations had been met by both parties in relation to the $1.5 million earn-out in the original agreement. The Company recorded the $1.5 million as additional gain on sale during the three-month period ended June 30, 2003. Interest and Other Income (Expense), Net. Interest net, includes interest income from cash balances and notes receivable and interest expense related to the Company's financing obligations. Interest income was $0.4 million in the second quarter of 2003 compared to $0.6 million of interest expense in the second quarter of 2002. The decrease in interest expense resulted mainly from the May 1, 2003 amendment to our Reservoir credit facility. The Reservoir Lenders agreed to waive $0.5 million of accrued and unpaid interest under the loan through April 30, 2003. In addition, we recorded $0.1 million of interest income related to cash balances and notes receivable offset by $0.2 million of interest expense on our Reservoir credit facility. Comparison of Six Months Ended June 30, 2003 with Six Months Ended June 30, 2002 Revenue. Total revenues decreased to $8.7 million for the first six months of 2003 from $15.3 million for the first six months of 2002 due to a decrease in student services revenue of $5.1 million and corporate and university solutions revenue of $1.5 million. Student Services Revenue. Student services revenue decreased to $7.4 million in the first months of 2003 from $12.4 million in the first six months of 2002. The decrease in student services revenue was primarily due to a reduction in barter revenue of $2.1 million, a $1.6 million reduction in the amount of revenue related to our contract with General Motors, which expired in May 2003, and the sale of substantially all assets of our SA Cash brand in February 2003. Corporate and University Solutions Revenue. Corporate and university solutions revenue decreased to $1.3 million in the first six months of 2003 from $2.8 million in the first six months of 2002. The decrease in revenue was due to the sale of certain assets of our SA Marketing Group brand on May 8, 2002, and partially offset by increases in our licensing fees from universities. For the six month period ended June 30, 2003 and 2002 there were no individual customers that accounted for more than 10% of revenue. Cost of Student Services Revenue. Cost of student services revenue decreased to $2.8 million in the first six months of 2003 from $3.8 million in the first six months of 2002. The decrease was primarily due to the sale of substantially all the assets of our SA Cash brand in February 2003, consistent with the decrease in the related revenue. Cost of Corporate and University Solutions Revenue. Cost of corporate and university solutions revenue decreased to zero in the first six months of 2003 from $1.9 million in the first six months of 2002, consistent with the sale of our SA Marketing Group assets on May 8, 2002, which constituted our only cost of sales against our corporate and university solutions revenue. Product Development. Product development expenses decreased to $3.1 million in the first six months of 2003 from $3.6 million in the first six months of 2002. The decrease was primarily due to the sale of the assets of our SA Cash brand in February 2003, the reduction in number of employees engaged in product development in the first six months of 2003 and a general reduction in technology spending. 14 Sales and Marketing. Sales and marketing expenses decreased to $2.7 million in the first six months of 2003 from $7.2 million in the first six months of 2002. The decrease was primarily related to a reduction in barter expense of $2.1 million, the sale of our SA Marketing Group assets in May 2002, and the sale of the assets of our SA Cash brand in February 2003. General and Administrative. General and administrative expenses decreased to $1.8 million in the first six months of 2003 from $4.2 million in the first six months of 2002. The decrease was primarily due to a significant reduction in the number of employees engaged in the general and administrative functions. Depreciation and Amortization. Depreciation expense decreased to $2.2 million in the first six months of 2003 from $3.2 million in the first six months of 2002, primarily due to decreased capital expenditures in 2002 and 2003. Amortization expense decreased to $0.8 million in the first six months of 2003 from $0.6 million in the first six months of 2002 resulting from the full amortization of our intangible assets relating to our acquisition of Collegeclub in April 2003. Realized Gain (Loss) on Sale of Assets. In May 2002, we sold the assets of our SA Marketing Group brand to Triple Dot, Inc., for a cash payment of $6.5 million and an opportunity to earn up to an additional $1.5 million based on the performance of certain pending proposals. For the six month period ended June 30, 2002, we recorded a gain of $7.0 million. Effective May 5, 2003, we amended the SA Marketing Group purchase agreement dated May 8, 2002 with Triple Dot, Inc., to provide that all obligations had been met by both parties in relation to the $1.5 million earn-out in the original agreement. The Company recorded the $1.5 million as additional gain on sale during the six month period ended June 30, 2003. On February 3, 2003, we completed the sale of certain assets of our SA Cash brand to Blackboard Inc. for a cash payment of $4.5 million and recorded a net gain of $4.3 million. Interest and Other Income (Expense), Net. Interest net, includes interest income, net, of $0.4 million in the first six months of 2003 compared to $1.2 million of interest expense, net, in the first six months of 2002. The decrease in interest expense was mainly a result of December 31, 2002 debt restructuring with our lenders. In accordance with SFAS 15 "Accounting by Debtors and Creditors Regarding Troubled Debt Restructuring", we recorded the anticipated total interest expense over the remaining term of the debt as of December 31, 2002. Accordingly, no interest expense was recorded for the three month period ended March 31, 2003. The decrease in interest expense was also a result of the May 1, 2003 amendment to our Reservoir credit facility. The Reservoir Lenders agreed to waive $0.5 million of accrued and unpaid interest under the loan through April 30, 2003. In addition, we recorded $0.1 million of interest income related to cash balances and notes receivable offset by $0.3 million of interest expense on our Reservoir credit facility. RESULTS OF DISCONTINUED OPERATIONS On May 5, 2003, we sold substantially all of the assets of our OCM Direct subsidiary to Alloy, Inc., for a cash payment of $15.6 million and $1.8 million in settlement of the intercompany balance between OCM Direct and us. OCM Direct is accounted for as a discontinued operation in the accompanying financial statements in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." OCM Direct's results of operations and cash flows have been removed from our results of continuing operations for all periods presented. All related disclosures have also been adjusted to reflect the discontinued operation. Summarized selected financial information from discontinued operations for the periods indicated is as follows:

The assets and liabilities of the discontinued operation are stated separately in the consolidated balance sheet. The following is a summary of the primary asset and liability categories as of December 31, 2002:

LIQUIDITY AND CAPITAL RESOURCES 15 Since our inception, we have financed our operations primarily through the private placement and public offering of securities, cash from operations, borrowings under our term loan, credit facilities, loans from equity holders, sales of accounts receivable and dispositions of businesses. Our liquidity needs arise primarily from our operating losses, our working capital requirements, debt service on the indebtedness to the Reservoir Lenders, which we refer to as the Reservoir credit facility, and debt service on the Scholar loan. In addition, we expect to have additional liquidity needs as a result of required repayments of the Reservoir credit facility, the Scholar loan and the guarantee fee to Mr. Katzman. As of June 30, 2003 and December 31, 2002, we had $7.8 million and $18.2 million of total indebtedness, consisting of $5.3 and $13.0 million in principal borrowings and interest under the Reservoir credit facility, $2.5 and $3.5 million in principal borrowings and interest under the Scholar loan and $0 and $1.7 million in borrowings under the OCM loan, respectively. The OCM loan was assumed by Alloy, Inc. as of May 1, 2003 as part of their purchase of OCM Direct. As of June 30, 2003, we had cash and cash equivalents of $2.6 million. We had current restricted cash of $0.5 million, which represents amounts held by our third party credit card processor, and long-term restricted cash of $1.0 million held in escrow pursuant to the terms of acquisition agreements we entered into relating to the sale of OCM Direct. Net cash used in operating activities from continuing operations was $10.3 million for the six months ended June 30, 2003, an increase of $3.8 million compared to net cash used for operating activities of $6.5 million for the six months ended June 30, 2002. Net cash used in operating activities from continued operations in the six months ended June 30, 2003 was primarily a result of a net gain on sale of assets of $5.8 million, a decrease in accounts payable of $2.8 million, and a decrease in deferred revenue of $5.7 million, partially offset by depreciation and amortization of $3.4 million and income from continuing operations of $1.7 million. Net cash provided by investing activities from continuing operations was $21.7 million for the six months ended June 30, 2003. Net cash provided by investing activities was $5.7 million for the six months ended June 30, 2002. Net cash provided by investing activities in the six months ended June 30, 2003 was primarily a result of the proceeds received for the sale of the assets of OCM Direct in May 2003 and SA Cash in February 2003, which was partially offset by purchases of fixed assets. Net cash provided by investing activities the first six months of 2002 was a result of the proceeds received for the sale of the assets of our SA Marketing Group brand in May 2002, offset by purchases of fixed assets. Net cash used in financing activities from continuing operations was $9.5 million and $3.0 million for the six months ended June 30, 2003 and 2002, respectively. The net cash used in financing activities in the six months ended June 30, 2003 was primarily the result of repayment of $10.5 million under the Reservoir Capital credit facility and an increase in restricted cash of $1.0 million, which were partially offset by borrowings of $2.0 million under the Reservoir credit facility. The net cash provided by financing activities in the six months ended June 30, 2002 was primarily the result of the net proceeds of $2.7 million from the sale of 36,000 shares of common stock in a private placement in May 2002, partially offset by the repayment of $5.2 million of our obligations to Reservoir Capital. On September 30, 2002, we agreed to borrow $3.5 million from Scholar, Inc., an entity formed by Raymond V. Sozzi, Jr., our President and Chief Executive Officer, an affiliate of Atlas II, L.P. and certain other of our stockholders. The loan is referred to as the Scholar loan, has an interest rate of 10% per annum and a maturity date of January 31, 2005 and otherwise has the same terms as the Reservoir Capital credit facility. On December 30, 2002, Reservoir Capital agreed to reduce our total indebtedness to them from approximately $15.7 million to $9.5 million in exchange for a guarantee from Mr. John Katzman, a member of our Board of Directors who resigned at the time the amendment was consummated. In exchange for his guarantee, we agreed to pay Mr. Katzman a $1.0 million fee payable at the time of certain loan repayments. In addition, Reservoir Capital agreed to lend us an additional $2.0 million, which was not secured by Mr. Katzman's guarantee. On January 31, 2003, Reservoir Capital agreed to reduce the $3.5 million payment due on January 31, 2003 to $1.5 million. Effective April 30, 2003, we amended our loan agreements with the Reservoir Lenders, Scholar, Inc. and John Katzman, (together with Scholar, Inc. and the Reservoir Lenders, the "Lenders") to provide for payments of $7.8 million of the principal amount outstanding under the Reservoir credit facility and $1.2 million of the principal outstanding under the Scholar loan upon the consummation of the sale of substantially all the assets of the our OCM Direct subsidiary to Alloy, Inc. In addition, the Reservoir Lenders agreed to extend the maturity date of the loan from July 1, 2003 to January 31, 2005, to set the interest rate at 10% per annum beginning May 1, 2003 and require quarterly payments of interest beginning on September 30, 2003. The Reservoir Lenders and Mr. Katzman also agreed to waive all accrued and unpaid interest under the loan through April 30, 2003. In addition, we agreed to pay a fee of $0.1 million on December 31, 2003 and June 30, 2004 if any of the loans are outstanding as of such date. After payment of an aggregate of $9.0 million on May 6, 2003 in accordance with the terms of the amendments, the outstanding principal amounts under the Reservoir credit facility and the Scholar loan were $5.3 million and $2.3 million, respectively. In connection with the Company's 16 sale of substantially all of the assets of OCM Direct to Alloy, Inc., Alloy assumed substantially all of the liabilities of OCM Direct and its subsidiaries, including its obligations under the OCM loan with Bank of America. Our guarantee of the loan was terminated as of May 1, 2003. The following table summarizes our future minimum lease payments under noncancelable operating and capital leases as of December 31, 2002. Other than the reduction in operating and capital lease commitments as a result of the OCM Direct divestiture described in footnote (1) below, since December 31, 2002, there has been no material change in our future obligations for these commitments (in thousands): YEAR ENDING DECEMBER 31, CAPITAL LEASES OPERATING LEASES ------------------------- -------------- ---------------- 2003 117 1,780 2004 46 1,471 2005 35 1,355 2006 23 749 2007 16 481 Thereafter 3 -- -------------- ---------------- Total minimum lease payments $ 240 $ 5,836 ============== ================ (1) The capital and operating lease commitments shown above include the following amounts related to the OCM Direct business, which was divested on May 5, 2003 (in thousands, unaudited): YEAR ENDING DECEMBER 31, CAPITAL LEASES OPERATING LEASES ------------------------- -------------- ---------------- 2003 103 1,011 2004 46 1,035 2005 35 1,066 2006 23 749 2007 10 481 Thereafter 3 -- -------------- ---------------- Total minimum lease payments $ 226 $ 4,342 ============== ================ We have experienced substantial net losses since our inception and, as of June 30, 2003, had an accumulated deficit of $127.0 million. Such losses and accumulated deficit resulted primarily from significant costs incurred in the development of our products and services and the establishment of our infrastructure. We have also experienced a reduction in revenue and an increase in net losses as a result of the economic downturn, in particular, the downturn in the media and advertising sector, and as a result of the sale of various assets, including the OCM Direct business. During 2003, we have continued to reduce our operating costs and plan to further reduce operating costs over the remainder of 2003. However, our cash requirements for debt service, primarily the repayment of debt, and continued operations are substantial and our available resources may not be sufficient to fund such obligations, requiring us to obtain additional financing. We believe that our available cash resources are sufficient to meet our current obligations under the Reservoir Capital and Scholar loans, which consist of quarterly interest payments beginning on September 30, 2003. However, if we are unable to realize an anticipated increase in revenue for the remainder of 2003 and cost savings through significant reductions in our net cash loss, we may be required to obtain additional financing. In addition, based on our current expectations, we will be required to raise additional financing in order to repay our outstanding indebtedness when it becomes due beginning on January 31, 2005. There can be no assurance that new or additional sources of financing will be available or will be available upon terms acceptable to us. To the extent that we finance our requirements through the issuance of additional equity securities, any such issuance would result in dilution to the interests of our stockholders. Furthermore, to the extent that we incur indebtedness in connection with financing activities, we will be subject to all of the risks associated with incurring substantial indebtedness, including the risk that interest rates may fluctuate and cash flow may be insufficient to pay principal and interest on any such indebtedness. Our loan agreement with Reservoir Capital imposes significant restrictions on our ability to raise funds through the sale of equity, make investments and acquisitions, restructure our operations, obtain other financing and realize proceeds from sales of assets or equity financings. As of the filing of our annual report on Form 10-K, as amended, for the year ended December 31, 2002, these and other factors raised concerns about our ability to continue as a going concern. With the proceeds of the sales of our SA Cash product line and substantially all of the assets of our OCM Direct subsidiary, the related reduction of our debt obligations and restructuring of our remaining debt, we believe that we have sufficient cash resources for at least the next 12 months. CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS WE HAVE EXPERIENCED LOSSES IN THE PAST AND EXPECT FUTURE LOSSES. We have not achieved profitability and have incurred significant operating losses to date. As of June 30, 2003, our accumulated deficit was $127.0 million. We expect to continue to incur significant operating and capital expenditures and, as a result, we will need to generate significant revenue to achieve and maintain profitability. We may need to further reduce our expenses in order to achieve and maintain profitability. We may not be able to reduce our expenses without affecting our ability to generate revenues, consummate transactions or achieve and sustain profitability. We cannot assure you that we will achieve sufficient revenue for profitability. We have experienced a reduction in revenue and an increase in net losses in connection with the economic downturn and, in particular, the downturn in the media and advertising sector and due to the sales of various assets. Even if we do achieve profitability, we cannot assure you that we can sustain or increase profitability on a quarterly or annual basis in the future. If revenue grows more slowly than we anticipate, or if operating expenses exceed our expectations or cannot be adjusted accordingly, our business, results of operations and financial condition will be materially and adversely affected. WE HAVE INCURRED A SUBSTANTIAL AMOUNT OF DEBT AND NEED ADDITIONAL CAPITAL, AND THE FUTURE FUNDING OF OUR CAPITAL NEEDS IS UNCERTAIN. We require substantial working capital to fund our business and service our outstanding debt obligation. As of June 30, 2003, we had $7.8 million of total indebtedness, consisting of $5.3 million in principal borrowings and interest under the Reservoir Capital credit facility, and $2.5 million in principal borrowings and interest under the Scholar loan. In connection with our sale of substantially all of the assets of OCM Direct to Alloy, Inc., Alloy assumed substantially all of the liabilities of OCM Direct, including its obligations under the OCM loan with Bank of America as of May 1, 2003. The Company's guarantee of the loan was terminated as of May 1, 2003. Also effective May 1, 2003, we amended our loan agreement with our Reservoir Lenders to provide for payments of $7.8 million of the principal amount outstanding under the credit facility and $1.2 million of the principal outstanding under the Scholar loan upon the consummation of the sale of substantially all the assets of the our OCM Direct subsidiary to Alloy, Inc. The Reservoir Lenders also agreed to extend the maturity date of the loan from July 1, 2003 to January 31, 2005, to set the interest rate at 10% per annum beginning May 1, 2003 and will require quarterly payments of interest beginning September 30, 2003. The required payments were made to the Lenders on May 6, 2003. 17 Our ability to continue as a going concern is dependent on our ability to make required payments on our loans in a timely manner and to fund our operations until we can generate sufficient revenue to sustain our operations. If we are not able to do so, our business will be materially adversely affected and we may not be able to continue as a going concern. Due in part to the spending patterns of students and universities we experience seasonal variations in our receipts and expenditures of cash. Failure to generate sufficient revenues, obtain additional capital or financing, and reduce certain discretionary spending would have a material adverse effect on our assets, properties, operations and our ability to achieve our intended business objectives. Based on our current expectations, we will be required to raise additional financing and sell additional assets in order to repay our outstanding indebtedness as it comes due beginning on January 31, 2005 and we cannot assure you that we will be able to do so. Our loan agreement with Reservoir Capital imposes significant restrictions on our ability to raise funds through the sale of equity, make investments and acquisitions, restructure our operations, obtain other financing and realize proceeds from sales of assets or equity financings. In addition, funds raised through the issuance of equity securities or securities convertible into stock may have negative effects on our stockholders, such as a dilution in percentage of ownership in Student Advantage, and the rights, preferences or privileges of the new security holders may be senior to those of the common stockholders. Our total debt may have important consequences to us, including but not limited to the following: - our ability to obtain additional financing for any working capital, repayment of debt, capital expenditures, future acquisitions or other purposes may be impaired or any such financing may not be on terms favorable to us; - we will remain subject to covenants imposed by our lenders which restrict our ability to make investments and acquisitions, obtain other financing, and realize proceeds from sales of assets; - a substantial decrease in net operating cash flows or increase in expenses could make it difficult for us to meet our debt service requirements or force us to modify our operations or sell assets; and - our debt structure may place us at a competitive disadvantage and affect our ability to adjust rapidly to market conditions or may make us vulnerable to a downturn in our business or the economy generally or changing market conditions and regulations. Our ability to repay or to refinance our obligations with respect to our indebtedness will depend on our future financial and operating performance, which, in turn, may be subject to prevailing economic and competitive conditions and other factors, many of which are beyond our control. We have experienced a reduction in revenue and increase in net losses as a result of the economic downturn and, in particular, the downturn in the media and advertising sector. Our ability to meet our debt service and other obligations may depend in significant part on the extent to which we can successfully implement our business and growth strategy. There can be no assurance that we will be able to successfully implement our strategy or that the anticipated results of our strategy will be realized. OUR INDEPENDENT AUDITORS HAVE EXPRESSED A GOING CONCERN MODIFICATION IN THEIR AUDIT REPORT. The report of Ernst & Young LLP, our current independent auditors, with respect to our financial statements and the related notes for the year ended December 31, 2002, indicates that, at the date of their report, we had suffered recurring losses from operations and that our current cash position raised substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from this uncertainty. OUR COMMON STOCK HAS BEEN DELISTED FROM THE NASDAQ NATIONAL MARKET. On February 12, 2003, we received notification from the Nasdaq Listing Qualifications Panel stating that the Panel determined to delist our common stock from The Nasdaq National Market. The Panel based its decision on our inability to meet the requirements for continued listing on the Nasdaq National Market or the Nasdaq SmallCap Market. Our common stock commenced trading on the OTC Bulletin Board on February 13, 2003. The delisting could result in a number of negative implications, including reduced liquidity in our common stock as a result of the loss of market efficiencies associated with the Nasdaq National Market as well as the potential loss of confidence by suppliers, customers and employees, the loss of institutional investor interest, fewer business development opportunities and greater difficulty in obtaining financing. 18 In addition, the delisting may make it more difficult for an investor to dispose of, or obtain accurate quotations as to the market value of our stock. This delisting may negatively impact the value of our stock as stocks trading on the over-the-counter market are typically less liquid and trade with larger variations between the bid and ask price. In addition, there are additional sales practice requirements on broker-dealers who sell such securities, such as determining the suitability of the purchaser and receiving the purchaser's written consent to the transaction prior to sale. While the trading price of our stock is below $5.00 per share, trading in the common stock is also subject to certain other securities laws requirements, which require additional disclosure by broker-dealers in connection with any trades involving a stock defined as a "penny stock," such as delivery of a disclosure schedule explaining the penny stock market and the risks associated with it. The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from effecting transactions in our stock, which could severely limit the market price and liquidity of our stock. GENERAL MARKET CONDITIONS COULD ADVERSELY AFFECT OUR BUSINESS. We believe that general economic conditions and the financial difficulties that many companies have experienced have caused a slowdown in consumer and business spending and in companies' budgets for marketing services and have reduced the perceived urgency by companies to begin or to continue marketing initiatives. In addition, recent acts of terrorism and subsequent geopolitical uncertainties have materially and adversely affected travel and tourism spending, and as a result our revenues for student-related travel services have been adversely affected. As a result, our current customers may cancel or delay spending on marketing and other initiatives and there may be a decrease in demand for our services from potential customers. If companies continue to delay or reduce their marketing initiatives because of the current economic climate, or for other reasons, our business, financial condition and results of operations could be materially adversely affected. Moreover, the current market conditions have decreased the demand for online advertising, and have put downward pressure on the cost per thousand impressions which we can charge for such advertising and have increased the likelihood that, despite our best efforts and written agreements supporting such efforts, certain of our customers may be unable to pay for such advertising services we have provided to them. WE MAY BE SUBJECT TO LITIGATION WHICH COULD HAVE A MATERIAL ADVERSE EFFECT UPON OUR BUSINESS. Our industry has been the subject of litigation regarding intellectual property and contractual rights. Consequently, there can be no assurance that third parties will not allege claims against us with respect to current or future trademarks, advertising or marketing strategies, our syndication of content to third parties offering archived database service, business processes or other proprietary rights, or that we will counterclaim against any such parties in such actions. Any such claims or counterclaims could be time consuming, result in costly litigation, diversion of management's attention, require us to redesign our products or marketing strategies or require us to enter into royalty or licensing agreements, any of which could have a material adverse effect upon our business, results of operations and financial condition. Such royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all. In November 2002, we were named as a defendant in a lawsuit filed against us and General Motors by Richard M. Kipperman, Liquidating Trustee of the bankruptcy estate of CollegeClub.com, Inc., Campus24, Inc. and CollegeStudent.com, Inc., in the U.S. Bankruptcy Court for the Southern District of California. The suit seeks damages of $2.25 million and interest and costs relating to payments received by us under an agreement with General Motors that we acquired from CollegeClub.com. The trustee alleges that the payments were earned by CollegeClub.com prior to our acquisition of the agreement and were not sold to us as part of the agreement. We believe that the trustee's allegations are factually incorrect and are inconsistent with the terms of the acquisition agreement with CollegeClub.com and intend to defend the matter vigorously. If, however, we are found to have significant liability to the liquidating trustee or incur significant costs in connection with the litigation, our financial condition and liquidity would suffer significant harm. WE HAVE A LIMITED OPERATING HISTORY AND MAY FACE DIFFICULTIES ENCOUNTERED BY EARLY STAGE COMPANIES IMPLEMENTING AN ONLINE AND OFFLINE STRATEGY. We have a limited operating history on which an investor can evaluate our business. An investor in our common stock must consider the risks and difficulties frequently encountered by early stage companies implementing an online and offline strategy. These risks include, without limitation, our possible inability to: - sustain historical revenue growth rates, - generate sufficient revenue to achieve and maintain profitability, - generate or raise sufficient capital to operate and expand our business, 19 - implement our business model, - maintain the satisfaction of our members and users, and our university and corporate partners, - introduce new and enhanced web and offline products, content, and services and avail ourselves of current opportunities, and - respond to current opportunities, competitive developments and market conditions. If we do not successfully manage these risks, our business, results of operations and financial condition will be materially adversely affected. We cannot assure you that we will successfully address these risks or that our business strategy will be successful. WE MAY NOT SUCCESSFULLY IMPLEMENT OUR BUSINESS STRATEGY. In order to successfully implement our business strategy, we must: - maintain our network of university-endorsed relationships as our primary access point to students, their parents and alumni for delivery of our Membership program and our online Official College Sports Network website, - maintain our network of corporate sponsors, - continue to aggressively build the Student Advantage brand, - continue to increase our student reach and grow the number of paid participants in our Membership Program through online membership sales, corporate sponsored distributions, and university and college sales, and - continue to establish our network of websites as part of our integrated approach for delivering our products and services, including licensed college sports products, member registration and renewal, information regarding national and local sponsors, and customer service. We are dependent on maintaining college and university relationships to market and sell our products and services. Our ability to maintain these alliances and relationships and to develop new alliances and relationships is critical to our ability to maintain our members, our direct mail customers, our remaining SA Cash university partners and our Official College Sports Network university partners. A failure to acquire or maintain alliances and relationships with colleges and universities could have a material adverse effect on our business. We are also dependent upon our sponsors, both national and local, to provide our members and SA Cash participants with discounts on their products and services. However, our agreements with a number of our sponsors preclude us from entering into similar arrangements with their competitors. This restriction may prevent us in some cases from offering attractive additional discounts to our members. We may encounter difficulties in establishing or maintaining our network of web sites. Several companies that provide content to our web sites have discontinued operations or filed for bankruptcy protection. We may be forced to procure services from other suppliers, and cannot assure you that we will be able to do so in a timely and cost-effective manner, and may be required to alter certain of our offerings to reflect such events. In addition, our members and customers may perceive our web sites to be lacking certain content or attributes due to the failure of certain business partners. Finally, we cannot guarantee that Internet users will maintain interest in our network of websites. A decline in membership or usage of our network of websites would decrease revenue. OUR ABILITY TO GENERATE SIGNIFICANT REVENUES AND PROFITS FROM CERTAIN ESTABLISHED AND NEW PRODUCTS AND SERVICES IS UNCERTAIN. Our business model depends, in part, on increasing the amount of revenues and profits derived from certain established and new products and services. Our ability to generate significant revenues and profits from these products and services will depend, in part, on the implementation of our strategy to generate significant transaction commerce and user traffic. Our strategy includes using our membership card program to achieve a significant presence in university and college communities, and to develop and expand on sponsor relationships to include revenue sharing agreements based on transaction volume. There is intense competition among offerors of alternative payment methods, including stored-value cards, debit card and credit cards, and among websites that sell online advertising. During the second quarter of 2001, AT&T completed its obligation to purchase Student Advantage memberships in bulk. In prior periods, the majority of student memberships were obtained through AT&T or other corporate partners' promotional offers of Student Advantage memberships. These promotional offers typically included a free one-year membership in the Student Advantage Membership Program. Our corporate partners purchased Student Advantage memberships in bulk to fulfill these promotional offers. We have focused our efforts to change the marketing model for the sale of memberships from a primarily bulk sale model to a more balanced model which includes the sale of memberships to both corporate partners in bulk and direct sales to individuals. We expect to sell memberships under this model through our corporate partners, the Student Advantage network of websites, and other related 20 marketing channels. We have experienced and anticipate continuing to experience a decline in the overall number of memberships sold through bulk sale arrangements, although we expect that this decline will be partially offset by an increase in the number of individual memberships sold at a higher per unit price. The inability to successfully develop this marketing model or the related sales channels could have a materially adverse effect on the business and our ability to attract and retain corporate partners. It is difficult for us to project future levels of subscription, transaction-related and advertising revenues and profits. COLLEGES AND UNIVERSITIES ARE INCREASINGLY RELUCTANT TO PERMIT BUSINESSES TO MARKET PRODUCTS AND SERVICES ON CAMPUS. Colleges and universities are becoming increasingly wary of businesses that market products and services to their students. Recent proposed and enacted laws may restrict how companies can market products and services to students. Many colleges and universities are seeking to decrease or eliminate such marketing. In particular, colleges and universities are concerned that many students have incurred substantial levels of credit card debt. As a result, colleges and universities often attempt to prevent credit card companies and other companies that offer credit from marketing to their students. In the past, we have been mistaken for a credit card company because we give students a plastic card and a unique identification number to represent their membership. This sometimes makes it difficult for us to gain access to college and university students, as we have been denied access to certain college and university campuses in the past. OUR STATUS UNDER STATE AND FEDERAL FINANCIAL SERVICES REGULATION IS UNCLEAR. VIOLATION OF ANY PRESENT OR FUTURE REGULATION COULD EXPOSE US TO LIABILITY, FORCE US TO CHANGE OUR BUSINESS PRACTICE OR FORCE US TO CEASE OR ALTER OUR OFFERINGS. Our remaining SA Cash offerings involve an industry potentially subject to government regulation. In the future, we might be subjected to federal or state banking laws or regulations. If we are deemed to be in violation of any current or future regulations, we could be exposed to financial liability or forced to change our business practices or offerings. As a result, we could face significant legal fees, delays in extending our product offerings, a curtailing of current or contemplated offerings and damage to our reputation that could adversely affect our financial results. One or more governmental agencies that regulate or monitor banks or other types of providers of electronic commerce services, including the Office of the Comptroller of the Currency and the Federal Reserve Board, may conclude that, under its statutes and licensing requirements, we are engaged in an unauthorized banking business. In that event, we might be subject to monetary penalties and adverse publicity and might be required to cease doing business with residents of those states. A number of states have enacted legislation regulating check sellers, money transmitters or service providers as banks. This uncertainty regarding the scope and application of these regulations has slowed our ability to market our offerings. Such liability or changes could have a material adverse effect on our business, results of operations and financial condition. Even if we are not forced to change our business practices, we could be required to obtain licenses or regulatory approvals that could cause us to incur substantial costs. OUR BUSINESS IS SUBJECT TO SEASONAL FLUCTUATIONS, WHICH MAY AFFECT OUR REVENUES AND OPERATING RESULTS. We tend to sell most of our memberships in the beginning of each academic term. Starting in May 2003, all memberships expire on the thirteenth month after issuance. Because the aggregate number of memberships within a school year increases as new members are added and because we recognize revenue from memberships ratably over the period from the time of subscription until the end of our membership year, our subscription revenue will typically be higher in the first and second quarters than in the fourth quarter of each fiscal year. It is difficult to determine how the third quarter will typically compare, since it includes two calendar months from the end of a membership year and the first month of the subsequent membership year. These seasonal factors could have a material adverse effect on our business, financial condition and results of operations. OUR QUARTERLY REVENUES AND OPERATING RESULTS ARE NOT INDICATIVE OF FUTURE PERFORMANCE AND ARE DIFFICULT TO FORECAST. In addition to the seasonal fluctuations described above, our revenues and operating results may vary from quarter to quarter for a variety of other reasons, such as the timing of revenues from corporate sponsors or non-recurring revenues or charges. You should not rely on quarter-to-quarter comparisons of our operating results or our operating results for any particular quarter as indicative of our future performance. It is possible that in some future periods our operating results may be below the expectations of public market analysts and investors. In this event, the price of our common stock might fall. A significant portion of our revenue is derived from our membership business. A significant percentage of our members graduate each year and, therefore, do not renew their memberships. Furthermore, substantially all of our memberships expire annually and require our members to renew the membership subscription. Our revenue growth is highly dependent upon our ability to market the value of our Membership Program to college students and to retain members on a yearly basis. To date, we have not maintained sufficient data to determine the specific number of members who renew on a yearly basis. A failure to acquire new members, renew current members or to predict customer demand in our direct mail business could have a material adverse effect on our business. 21 WE FACE SIGNIFICANT COMPETITION, WHICH COULD ADVERSELY AFFECT OUR BUSINESS. We compete with other companies targeting the student population, such as: - publishers and distributors of traditional offline media, particularly those targeting college students, such as campus newspapers, other print media, television and radio; - vendors of college student information, merchandise, products and services distributed through online and offline means, including retail stores, direct mail and schools. We compete for client marketing budget dollars with other marketing activities and, in particular, other forms of direct marketing activities, such as direct mail. In recent years, there have been significant advances in new forms of direct marketing, such as the development of interactive shopping and data collection through television, the Internet and other media. Many industry experts predict that electronic interactive commerce, such as shopping and information exchange through the Internet will proliferate in the foreseeable future. To the extent such proliferation occurs, it could have a material adverse effect on the demand for membership programs. Competition for online users and advertisers is intense and is expected to increase over time as barriers to entry are relatively low. We compete for visitors, traffic, sponsors and online merchants with web directories, search engines, content sites, online service providers and traditional media companies. We also face competition from other companies maintaining websites dedicated to college students as well as high-traffic websites sponsored by companies such as AOL Time Warner, CBS, Disney, Terra Lycos, Microsoft, MTV and Yahoo! Many of our competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical and marketing resources than we do. In addition, substantially all of our current advertising customers have established collaborative relationships with other high-traffic websites. As a result, our advertising customers might conclude that other Internet businesses, such as search engines, commercial online services and sites that offer professional editorial content are more effective sites for advertising than we are. Moreover, we may be unable to maintain either the level of traffic on our web sites or a stable membership base, which would make our sites less attractive than those of our competitors. Increased competition from these and other sources could require us to respond to competitive pressures by establishing pricing, marketing and other programs or seeking out additional strategic alliances or acquisitions that may be less favorable to us than we could otherwise establish or obtain. WE MAY UNDERTAKE ADDITIONAL ACQUISITIONS OR DIVESTITURES THAT MAY LIMIT OUR ABILITY TO MANAGE AND MAINTAIN OUR BUSINESS AND MAY BE DIFFICULT TO INTEGRATE INTO OUR BUSINESS. Since 1999, we have acquired and disposed of a number of businesses. In the future, we may undertake additional acquisitions and sales of certain businesses or operations. These transactions involve a number of risks, including: 1. diversion of management attention and transaction costs associated in negotiating and closing the transaction; 2. under-performance of an acquired business relative to our expectations; 3. inability to retain the customers, management, key personnel and other employees of the acquired business; 4. inability to establish uniform standards, controls, procedures and policies; 5. inability to fully utilize all intellectual property of the acquired company; 6. exposure to legal claims for activities and obligations of the acquired business arising from events occurring prior to the acquisition; and 7. inability to realize the benefits of divestitures and collect monies owed to us. Integrating the operations of an acquired business can be a complex process that requires integration of service personnel, sales and marketing groups, technological infrastructure and service offerings, and coordination of our development efforts. Customer satisfaction or performance problems with an acquired business could affect our reputation as a whole. If we are unable to effectively fully manage these risks in connection with our acquisitions or dispositions, our business, operating results and financial condition could be adversely affected. WE MUST MANAGE OUR GROWTH AND CONSOLIDATION SUCCESSFULLY, INCLUDING THE INTEGRATION OF ACQUIRED COMPANIES, IN ORDER TO ACHIEVE OUR DESIRED RESULTS. 22 In previous years we experienced dramatic growth in personnel and expect to continue to hire additional personnel in selected areas. We reduced our workforce in 2001, 2002 and 2003 to decrease our costs and create greater operational efficiency. Ongoing growth and consolidation requires significant time and resource commitments. Further, as a result in part of our acquisitions, approximately 65% of our employees are based outside of our Boston headquarters. If we are unable to effectively manage a large and geographically dispersed group of employees, anticipate our future growth or manage our consolidations effectively, our business will be adversely affected. OUR MANAGEMENT TEAM HAS LIMITED EXPERIENCE IN RUNNING A PUBLIC COMPANY. Our management team has had limited significant experience in a leadership role in a public company. We have recently experienced losses in or changes in our management team, including in information technology, human resources, legal, marketing and finance and our chief operating officer. We cannot assure you that the management team as currently configured will be able to continue to successfully lead a public company. The failure of the management team to continue to adequately handle this challenge could have a material adverse effect on our business. WE MUST ATTRACT AND RETAIN KEY MANAGEMENT AND OTHER HIGHLY QUALIFIED PERSONNEL IN A COMPETITIVE LABOR MARKET. Our success depends largely upon the continued service of our executive officers, including Raymond V. Sozzi, Jr., our President and Chief Executive Officer, and other key management and technical personnel, and our ability to continue to attract, retain and motivate other qualified personnel. Competition for such personnel is high. We have experienced, and we expect to continue to experience in the future, difficulty in hiring highly skilled employees with the appropriate qualifications. Furthermore, our business is labor intensive. If our ability to assemble a qualified work force were impaired, or if we do not succeed in attracting new personnel and retaining and motivating our current personnel, our business could be adversely affected. OUR SYSTEMS MAY FAIL OR EXPERIENCE A SLOWDOWN. Substantially all of our communications hardware and certain of our other computer hardware operations are located at third-party locations such as Navisite, Inc. in Andover, Massachusetts and Cable & Wireless in Irvine, California. Fire, floods, earthquakes, power loss (whether through brown-outs or the like) or distribution issues, telecommunications failures, break-ins, acts of terrorism, and similar events could damage these systems. Computer viruses, electronic break-ins or other similar disruptive problems could also adversely affect our websites. Our business could be adversely affected if our systems were affected by any of these occurrences. Our insurance policies may not adequately compensate us for any losses that may occur due to any failures or interruptions in our systems. We do not presently have any secondary "off-site" systems or a formal disaster recovery plan. Our network of websites must accommodate a high volume of traffic and deliver frequently updated information. Our websites have in the past and may in the future experience slower response times or decreased traffic for a variety of reasons. These types of occurrences could cause users to perceive our websites as not functioning properly and therefore cause them to use another website or other methods to obtain information. In addition, our users depend on Internet service providers, online service providers and other website operators for access to our network of websites. Many of them have experienced significant outages in the past, and could experience outages, delays and other difficulties due to system failures unrelated to our systems. OUR NETWORKS MAY BE VULNERABLE TO UNAUTHORIZED ACCESS, COMPUTER VIRUSES AND OTHER DISRUPTIVE PROBLEMS. A party who is able to circumvent our security measures could misappropriate proprietary information or cause interruptions in our operations. Internet and online service providers have in the past experienced, and may in the future experience, interruptions in service as a result of the accidental or intentional actions of Internet users, current and former employees or others. Moreover, any well-publicized compromise of security could deter people from using the Internet or from using it to conduct transactions that involve transmitting confidential information. We may be required to expend significant capital or other resources to protect against the threat of security breaches or to alleviate problems caused by such breaches. Although we intend to continue to implement industry-standard security measures, there can be no assurance that the measures we implement will not be circumvented in the future. Our recent reductions in our technology staff may make it more difficult for us to react to these threats in the future. Eliminating computer viruses and alleviating other security problems may require interruptions, delays or cessation of service to users accessing web pages that deliver our content and services, any of which could harm our business, our financial condition and the results of our operations. WE MAY BE SUED FOR INFORMATION RETRIEVED FROM THE INTERNET. We may be subjected to claims for defamation, invasion of privacy, negligence, copyright or trademark infringement, personal injury or other legal theories relating to the information we publish on our network of websites or in our publications or in the form of web crawling or framing. These types of claims have been brought, sometimes successfully, against online services as well as other print publications in the past, particularly in connection with archive services. Our syndication of content, including U-WIRE content, to such archive services could expose us to indemnification claims in the event copyright holders assert their rights, and a request for 23 indemnification for legal fees incurred is pending. We could also be subjected to claims based upon the content that is accessible from our network of websites through links to other websites or through content and materials that may be posted by members in chat rooms or bulletin boards including those located on the CollegeClub.com website. Our insurance may not adequately protect us against these types of claims. WE MAY LOSE MEMBERS AND OUR REPUTATION MAY SUFFER BECAUSE OF UNSOLICITED BULK EMAIL OR SPAM. Unsolicited bulk e-mail, or Spam (including the dissemination of pornographic links), and our attempts and others' attempts to control such Spam could harm our business and our reputation, particularly with respect to CollegeClub.com. To the extent our efforts to block Spam are not effective, our systems may become unavailable or may suffer from reduced performance. Spam-blocking efforts by others may also result in others blocking our members' legitimate messages. Additionally, our reputation may be harmed if e-mail addresses with our domain names are used in this manner. Any of these events may cause members to become dissatisfied and discontinue their use of our network of websites, including CollegeClub.com. CONSUMER PROTECTION, PRIVACY CONCERNS AND REGULATIONS COULD IMPAIR OUR ABILITY TO OBTAIN AND USE INFORMATION ABOUT OUR MEMBERS AND USERS AND MAY SUBJECT US TO LITIGATION. We collect and our network of websites captures information regarding our members and users in order to provide information to them, enable them to access the services offered on our websites, tailor content to them or assist advertisers in targeting their advertising campaigns to particular demographic groups. However, privacy concerns may cause users to resist providing the personal data necessary to support this tailoring capability. Even the perception of security and privacy concerns, whether or not valid, may indirectly inhibit market acceptance of our network of websites. Our network of websites currently uses "cookies" to track demographic information and user preferences. A cookie is information keyed to a specific server, file pathway or directory location that is stored on a user's hard drive, possibly without the user's knowledge, but is generally removable by the user. Germany has imposed laws limiting the use of cookies, and a number of internet commentators, advocates and governmental bodies in the United States and other countries have urged the passage of laws limiting or abolishing the use of cookies. If these laws are passed, our business, financial condition and results of operations could be materially harmed. Legislative or regulatory requirements may heighten privacy concerns if businesses must notify Internet users that the data may be used by marketing entities to direct product promotion and advertising to the user. The Federal Trade Commission and state agencies have been investigating various Internet companies regarding their use of personal information. In 1998, the United States Congress enacted the Children's On-line Privacy Protection Act of 1998. In addition, the Gramm-Leach-Bliley Act ("GLB"), which governs privacy issues related to financial institutions, went into effect on July 1, 2001. If our programs are determined to be of a nature covered by the GLB, we may be required to undertake certain notices to our members and users and/or modify the membership program and other services. We depend upon collecting personal information from our customers, and the regulations promulgated under this act have made it more difficult for us to collect personal information from some of our customers. If third parties are able to penetrate our network security or otherwise misappropriate our users' personal information, we could be subject to liability. We could also be liable for claims based on unauthorized purchases with credit card information, impersonation or other similar fraud claims. We could also be held responsible for disclosing personal information or images, such as our disclosing such information for unauthorized marketing purposes or for including it in our photo gallery and web cam section on CollegeClub.com. These claims could result in litigation. In addition, we could incur additional expenses if new regulations regarding the use of personal information are introduced or if our privacy practices are investigated. Other countries and political entities, such as the European Economic Community, have adopted such legislation or regulatory requirements. If consumer privacy concerns are not adequately addressed, our business, financial condition and results of operations could be materially harmed. Although we carry general liability insurance, this insurance may not be available to cover a particular claim or may be insufficient. Additionally, our user community on CollegeClub.com exists in part because of our members' willingness to provide information about themselves. If claims, litigation, regulation or the acts of third parties reduce our members' willingness to share this information or our ability to use it, the attractiveness of the website will decline, which would reduce our ability to generate revenue through the affected website. WE MAY BE UNABLE TO RESPOND TO THE RAPID TECHNOLOGICAL CHANGE IN OUR INDUSTRIES. Rapidly changing technologies, frequent new product and service introductions and evolving industry standards characterize our market. To achieve our goals, we need to integrate effectively the various software programs and tools required to enhance and improve our product offerings and manage our business. Our future success will depend on our ability to adapt to rapidly changing technologies by continually improving the performance features and reliability of our products and services. We may experience difficulties that could delay or prevent the successful development, introduction or marketing of new products and services. In addition, our new enhancements must meet the requirements of our current and prospective members and must achieve significant market acceptance. We could also incur substantial costs if we need to modify our service or infrastructures to adapt to these changes or comply with new regulations and our recent reductions in our technology staff may make it more difficult to respond to these challenges. 24 OUR INTELLECTUAL PROPERTY RIGHTS MAY BE VIOLATED OR SUBJECT TO LITIGATION AND WE MAY INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS. We believe that protection of our patents, copyrights, service marks, trademarks, trade secrets, proprietary technology and similar intellectual property is important to the success of some of our services. We rely on the following mechanisms to protect such intellectual property: - patent, trademark and copyright law, - trade secret protection, and - confidentiality agreements with employees, customers, independent contractors, sponsors and others. Despite our best efforts, we cannot assure you that our intellectual property rights will not be infringed, violated or legally imitated. Failure to protect our intellectual property could have a material adverse effect on our business. We have been, and may be, sued or named as a defendant in the future for infringement of the trademark and other intellectual property rights of third parties. Any such claims or counterclaims could be time-consuming, result in costly litigation, diversion of management's attention, require us to redesign our products or marketing strategies or require us to enter into royalty or licensing agreements, any of which could have a material adverse effect on upon our business, results of operations and financial condition. Such royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all. CERTAIN CURRENT STOCKHOLDERS OWN A LARGE PERCENTAGE OF OUR VOTING STOCK. As of August 12, 2003, our executive officers, directors and affiliated entities, together own approximately 49% of our outstanding common stock. Therefore, these stockholders are able to significantly influence all matters requiring stockholder approval and, thereby, our management and affairs. Matters that typically require stockholder approval include: election of directors, merger or consolidation, and sale of substantially all of our assets. This concentration of ownership may delay, deter or prevent acts that would result in a change of control, which in turn could reduce the market price of our common stock. OUR STOCK PRICE COULD BE EXTREMELY VOLATILE AND MAY RESULT IN LITIGATION AGAINST US. The stock market has experienced significant price and volume fluctuations, and our market price has been in the past and could continue to be volatile. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted. Litigation could result in substantial costs and a diversion of management's attention and resources. OUR CHARTER DOCUMENTS MAY INHIBIT A TAKEOVER. Provisions in our charter and bylaws may have the effect of delaying or preventing a change of control or changes in our management that a stockholder might consider favorable. These provisions include, among others: - the division of the Board of Directors into three separate classes, - the right of the Board to elect a director to fill a vacancy created by the expansion of the Board, and - the requirement that a special meeting of stockholders be called by the Chairman of the Board, President or Board of Directors. This concentration of ownership may delay, deter or prevent acts that would result in a change of control, which in turn could reduce the market price of our common stock. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company does not believe that it has any material market risk exposure with respect to derivative or other financial instruments. ITEM 4. CONTROLS AND PROCEDURES 25 The Company's management, with the participation of the Company's chief executive officer and chief financial officer, evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2003. Based on this evaluation, the Company's chief executive officer and chief financial officer concluded that, as of June 30, 2003, the Company's disclosure controls and procedures were (i) designed to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the Company's chief executive officer and chief financial officer by others within those entities, particularly during the period in which this report was being prepared and (ii) effective, in that they provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. No change in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended June 30, 2003 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. PART II. OTHER INFORMATION. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On June 30, 2003, the following proposals were voted on at the Annual Meeting of Stockholders:

In addition to Charles E. Young, who was elected at the meeting, the terms of the following directors continued after the meeting: John M. Connolly, Raymond V. Sozzi, Jr., William S. Kaiser and Marc J. Turtletaub. All share amounts and vote counts in this Item 4 are prior to giving effect to the one-for-ten reverse split of the Common Stock effected on June 30, 2003. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits 3.1 Amended and Restated Certificate of Incorporation of the Company, as amended. 31.1 Rule 13a-14(a)/15d-14(a) Certification of President and Chief Executive Officer. 31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. 26 32.1 Section 1350 Certification of President and Chief Executive Officer. 32.2 Section 1350 Certification of Chief Financial Officer. b) Reports on Form 8-K The Company filed a Current Report on Form 8-K dated March 31, 2003 with the Securities and Exchange Commission on April 4, 2003 reporting an amendment to its loan agreement with Reservoir Capital Partners and a notice that the Company was not able to file its Annual Report on Form 10-K for the fiscal year ended December 31, 2002 by March 31, 2003. The Company filed a Current Report on Form 8-K dated May 5, 2003 with the Securities and Exchange Commission on May 20, 2003 reporting the sale of the assets related to its OCM Direct business to Alloy, Inc. and an amendment to its loan agreement with Bank of America. 27 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. Dated: August 14, 2003 By: /s/ Sevim M. Perry ----------------------------------------------- Sevim M. Perry Chief Financial Officer and Assistant Treasurer (Principal Financial and Accounting Officer) 28 EXHIBIT INDEX

STUDENT ADVANTAGE INC 10-Q