flunks dot-com market

A Web site with almost 3 million registered users and millions of dollars in financial backing yesterday released details of its fall into bankruptcy and the planned acquisitions of most of the site's assets. Inc. said it will be acquired by Student Advantage Inc., an Internet educational content and commerce specialist. Initial figures call for Boston-based Student Advantage to pay about $7 million in cash and 1.5 million shares of its stock. Another $5 million may also come CollegeClub's way from Student Advantage if the vendor meets specific Web site revenue goals next year.

The completion of the deal hinges on several factors, however, including approval by the U.S. Bankruptcy Court in San Diego. That's where CollegeClub, its owner and various subsidiaries filed Monday for a voluntary petition for reorganization under Chapter 11 of the U.S. Federal Bankruptcy Code.

Almost five years ago, began operations and looked to the Internet as a way to attract both students and educators to an online locale with roommate finders, credit-card applications, loan services and textbook stores -- basically, anything a Digital Age collegian might need.

Due in part to an aggressive marketing campaign and user satisfaction, the site began attracting customers at a swift clip. At last count, College Club boasted 2.9 million registered online members, according to the company's numbers.

Investments flowed in from venture capitalists, car manufacturers and media giants alike. By the first quarter of last year, CollegeClub had secured a partnership with WorldCom Inc. that provided users with free access to e-mail via the phone and free voice mail, in addition to the e-mail and paging services the site already provided. Shortly thereafter, CC -- as it's known to users -- raised around $15 million in financing from a group of investors that included Convergence Partners and France-based Viventures.

In early January this year, the company continued to receive attention from both existing and new investors. It secured $40 million from Seligman Technology Group via the group's investment fund and additional money from previous investors Convergence and Sony Corp. Later deals included partnerships with Ericsson Inc. and General Motors Corp., along with a planned initial public offering (IPO).

Then, CollegeClub hit the organizational and financial difficulties that have apparently made it ripe for takeover. In June, CEO Michael Pousti and chief operating officer James DeBello resigned. In the wake of these announcements, the company withdrew its IPO.

While one source close to the company traces the financial difficulties to some unorthodox spending practices by the management, the planned owner of CollegeClub said it believes that problems stemmed from the nature of the site's business model.

Ray Sozzi, CEO of Student Advantage, said he hopes to use his company's off-line resources to support what CollegeClub has traditionally done. "Generally speaking, we don't plan on tinkering too much with what the folks in San Diego have built," Sozzi said.

He did, however, point to a few key areas of improvement required for CollegeClub to start heading toward a profitable future. First on the list was the need to reduce excess costs -- a feat he said he hopes to accomplish initially by benefiting from points of redundancy between the two vendors. In particular, Sozzi noted that much of CollegeClub's hosting, software and database development overlaps with the assets Student Advantage already holds.

In the recent past, Student Advantage has shown less than stellar financial performance itself. Since the beginning of the year, the company's stock price has plummeted from a high just over $20 to its current price, which is hovering just above $7. In addition, Student Advantage has continually met analysts' predictions of red ink, and the company has suggested that losses will continue throughout next year.

However, Sozzi said that investors continue to knock on his company's door. "We have proven that we are good at turning relationships into revenue," he said.

In addition, Student Advantage yesterday announced that FleetBoston Bank NA has made a $10 million financing commitment.

With Student Advantage planning to let CollegeClub maintain control of the site's operation, the question continues to loom as to how and why CollegeClub failed in the past and what measures should be taken to ensure profitable operations in future.

Monte Brem, senior vice president of corporate development at CollegeClub, said that after negotiating with a number of parties during the last two and half months, his company saw a deal with Student Advantage as the most logical step toward profitability -- a goal he claims the company can achieve by the fourth quarter of this year or at least the first quarter of next year.

Based on his company's model of e-commerce, CollegeClub required heavy amounts of financing in order to keep up with the technological needs and rapid growth of the San Diego-based vendor, according to Brem.

"The business model does work," Brem said. However, he noted that with nearly 3 million users, the back-end costs for the site ran high and needed multiple rounds of financing for success. "It requires a tremendous amount of scaling to be profitable," Brem added.

He said that CollegeClub will look to downsize a number of growth initiatives, including some educational offerings and international targeting. Brem said he believes that his company has achieved a level of prominence that will allow a reduction in marketing costs, as CollegeClub can rely on word of mouth to attract future users.

Brem also noted that Tuesday's acquisition announcement underlines a trend in off-line and online companies joining forces. "CollegeClub will be the focus of Student Advantage's online efforts," he said.

One source close to the company pointed to exorbitant amounts of spending by CollegeClub that was a financial drain on its resources.

Even with a troubled fiscal past, CollegeClub plans to retain its partnerships and is currently negotiating how to proceed with these deals.

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Copyright © 2000 IDG Communications, Inc.

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