ALLOY INC - 10-Q Quarterly Report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


(Mark One)
þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended April 30, 2004

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from to

Commission file number: 0-26023

Alloy, Inc.

(Exact name of registrant as specified in its charter)






Delaware		04-3310676
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)





151 West 26th Street, 11th floor, New York, NY		10001
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code:

(212) 244-4307

Former name, former address and fiscal year, if changed since last report:

None.

Indicate by check mark whether the registrant (x) 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 þ No o

Indicated by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yes þ No o

APPLICABLE ONLY TO CORPORATE ISSUERS:

As of June 7, 2004, the registrant had 42,965,836 shares of common stock, $.01 par value per share, outstanding.

ALLOY, INC.

CONTENTS


		Page No.





PART I — FINANCIAL INFORMATION




Item 1.	Financial Statements		2




	Consolidated Balance Sheets, April 30, 2004 (unaudited) and January 31, 2004		2




	Consolidated Statements of Operations, Three Months Ended April 30, 2004 (unaudited) and April 30, 2003 (unaudited)		3




	Consolidated Statements of Comprehensive Loss, Three Months Ended April 30, 2004 (unaudited) and April 30, 2003 (unaudited)		4




	Consolidated Statements of Cash Flows, Three Months Ended April 30, 2004 (unaudited) and April 30, 2003 (unaudited)		5




	Consolidated Statement of Changes in Stockholders’ Equity, Three Months Ended April 30, 2004 (unaudited) and April 30, 2003 (unaudited)		6




Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		19




Item 3.	Quantitative and Qualitative Disclosures About Market Risk		25




Item 4.	Controls and Procedures		25




PART II — OTHER INFORMATION




Item 1.	Legal Proceedings		26




Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities		27




Item 3.	Defaults Upon Senior Securities		27




Item 4.	Submission of Matters to a Vote of Security Holders		27




Item 5.	Other Information		27




Item 6.	Exhibits and Reports on Form 8-K		28




Signatures			29




Exhibit Index			30
MORTGAGE NOTE MODIFICATION AGREEMENT
AMENDMENT TO CONSTRUCTION LOAN AGREEMENT
CONTINUING GUARANTY: DELIA*S CORP.
CONTINUING GUARANTY: ALLOY, INC.
CERTIFICATION
CERTIFICATION
CERTIFICATION
CERTIFICATION

PART I. FINANCIAL INFORMATION


Item 1.	*Financial Statements.*

ALLOY, INC.

CONSOLIDATED BALANCE SHEETS


	January 31,			April 30,
	2004			2004

				(Unaudited)

	(Amounts in thousands,
	except share and per share
	data)




ASSETS




CURRENT ASSETS:




Cash and cash equivalents	$	27,273		$	19,597




Restricted cash		3,270			3,270




Marketable securities available-for-sale		19,014			15,684




Accounts receivable, net		31,492			34,907




Inventories		29,021			25,980




Prepaid catalog costs		2,028			1,420




Other current assets		3,813			6,158

TOTAL CURRENT ASSETS		115,911			107,016




Marketable securities available-for-sale		5,585			4,160




Property and equipment, net		27,234			27,176




Goodwill, net		274,796			280,721




Intangible and other assets, net		25,865			25,985

TOTAL ASSETS	$	449,391		$	445,058






LIABILITIES AND STOCKHOLDERS’ EQUITY





CURRENT LIABILITIES:




Accounts payable	$	28,740		$	27,216




Deferred revenues		15,124			17,630




Mortgage note payable		2,914			2,891




Accrued expenses and other current liabilities		36,841			34,678

TOTAL CURRENT LIABILITIES		83,619			82,415




Long-term liabilities		743			3,119




Senior Convertible Debentures Due 2023		69,300			69,300




Series B Redeemable Convertible Preferred Stock, $10,000 per share liquidation preference; $.01 par value; 3,000 shares designated; mandatorily redeemable on June 19, 2005; 1,340 and 1,340 shares issued and outstanding, respectively		14,434			14,828




STOCKHOLDERS’ EQUITY:




Preferred Stock; $.01 par value; 10,000,000 shares authorized of which 1,850,000 shares designated as Series A Redeemable Convertible Preferred Stock and 3,000 shares designated as Series B Redeemable Convertible Preferred Stock authorized; 1,340 and 1,340 shares issued and outstanding as Series B Redeemable Convertible Preferred Stock (above), respectively		—			—




Common Stock; $.01 par value; 200,000,000 shares authorized; 42,701,767 and 43,574,111 shares issued, respectively		427			436




Additional paid-in capital		412,594			415,621




Accumulated deficit		(127,170	)		(136,413	)




Deferred compensation		(1,411	)		(1,093	)




Accumulated other comprehensive loss		(30	)		(40	)




Less common stock held in treasury, at cost; 608,275 and 608,275 shares, respectively		(3,115	)		(3,115	)

TOTAL STOCKHOLDERS’ EQUITY		281,295			275,396

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	449,391		$	445,058

The accompanying Notes are an integral part of these financial statements.

ALLOY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS



			For the Three Months Ended
			April 30,

			2003			2004


			(Amounts in thousands, except
			share and per share data)

			(Unaudited)




Net revenues:




	Direct marketing revenues		$	29,971		$	30,640




	Retail stores revenues			—			13,641




	Sponsorship and other revenues			39,473			43,566

		Total net revenues		69,444			87,847




Cost of revenues:




	Cost of goods sold			14,830			23,028




	Cost of sponsorship and other revenues			23,145			23,599

		Total cost of revenues		37,975			46,627




Gross profit				31,469			41,220

Operating expenses:




	Selling and marketing			25,379			36,003




	General and administrative			4,958			12,116




	Amortization of intangible assets			1,785			1,522




	Restructuring charge			380			126

		Total operating expenses		32,502			49,767

Loss from operations				(1,033	)		(8,547	)




Interest income				291			120




Interest expense				(4	)		(1,194	)




Other income				—			388

Loss before income taxes				(746	)		(9,233	)




Provision for income tax (benefit) expense				(358	)		10

Net loss			$	(388	)	$	(9,243	)

Preferred stock dividends and accretion				453			394

Net loss attributable to common stockholders			$	(841	)	$	(9,637	)

Basic and diluted loss per share of common stock:




	Basic loss attributable to common stockholders per share		$	(0.02	)	$	(0.23	)

	Diluted loss attributable to common stockholders per share		$	(0.02	)	$	(0.23	)

Weighted average basic common shares outstanding				40,149,100			42,457,030

Weighted average diluted common shares outstanding				40,149,100			42,457,030

The accompanying Notes are an integral part of these financial statements.

ALLOY, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS



	For the Three
	Months Ended
	April 30,

	2003			2004


	(Amounts in
	thousands)

	(Unaudited)




Net loss	$	(388	)	$	(9,243	)




Other comprehensive loss net of tax:




Net unrealized loss on available-for-sale securities		(139	)		(10	)

Comprehensive loss	$	(527	)	$	(9,253	)

The accompanying Notes are an integral part of these financial statements.

ALLOY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS



		For the Three Months
		Ended April 30,

		2003			2004


		(Amounts in thousands)
		(Unaudited)




CASH FLOWS FROM OPERATING ACTIVITIES:




Net loss		$	(388	)	$	(9,243	)




Adjustments to reconcile net loss to net cash used in operating activities:




Depreciation and amortization			2,828			3,790




Deferred tax benefit			(322	)		—




Amortization of debt issuance costs			—			128




Compensation charge for restricted stock			—			351




Changes in operating assets and liabilities — net of effect of business acquisitions:




	Accounts receivable, net		(5,426	)		(2,650	)




	Inventories		1,097			3,041




	Prepaid catalog costs		360			608




	Other current assets		(1,926	)		(2,250	)




	Other assets		(23	)		44




	Accounts payable, accrued expenses and other		(6,652	)		(2,480	)

Net cash used in operating activities			(10,452	)		(8,661	)

CASH FLOWS FROM INVESTING ACTIVITIES:




Purchase of marketable securities			(7,130	)		(3,054	)




Proceeds from the sales and maturities of marketable securities			24,748			7,799




Capital expenditures			(935	)		(1,595	)




Sale and disposal of capital assets			18			2




Cash paid in connection with acquisitions of businesses, net of cash acquired			(208	)		(5,131	)




Purchase of mailing lists			—			(28	)

Net cash provided by (used in) investing activities			16,493			(2,007	)

CASH FLOWS FROM FINANCING ACTIVITIES:




Exercise of options and warrants and common stock purchases under the employee stock purchase plan			217			18




Repurchase of common stock			(2,984	)		—




Net borrowings under line of credit agreements			—			3,084




Payment of bank-loan			—			(23	)




Payments of capitalized lease obligations			(78	)		(87	)

Net cash (used in) provided by financing activities			(2,845	)		2,992

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			3,196			(7,676	)




CASH AND CASH EQUIVALENTS, beginning of period			35,187			27,273

CASH AND CASH EQUIVALENTS, end of period		$	38,383		$	19,597

Cash paid during the period for interest		$	4		$	1,990




Supplemental disclosure of non-cash investing and financing activity:




Issuance of common stock and warrants in connection with acquisitions		$	8,317		$	3,379




Preferred stock dividends and accretion		$	453		$	394

The accompanying Notes are an integral part of these financial statements.

ALLOY, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY



	For the Three Months Ended April 30, 2004

														Accumulated
	Common Stock				Additional									Other			Treasury Stock
					Paid-In			Accumulated			Deferred			Comprehensive
	Shares		Amount		Capital			Deficit			Compensation			Loss			Shares			Amount			Total


	(Amounts in thousands, except share data)

	(Unaudited)




Balance, January 31, 2004		42,701,767	$	427	$	412,594		$	(127,170	)	$	(1,411	)	$	(30	)		(608,275	)	$	(3,115	)	$	281,295




Issuance of common stock for acquisitions of businesses		560,344		6		3,373			—			—			—			—			—			3,379




Issuance of common stock pursuant to the exercise of options		4,000		—		18			—			—			—			—			—			18




Net loss		—		—		—			(9,243	)		—			—			—			—			(9,243	)




Issuance of restricted stock		308,000		3		37			—			(40	)		—			—			—			—




Amortization of restricted stock		—		—		—			—			351			—			—			—			351




Adjustment of stock options for terminated employees		—		—		(7	)		—			7			—			—			—			—




Accretion of discount and dividends on Series B Convertible Preferred Stock		—		—		(394	)		—			—			—			—			—			(394	)




Unrealized loss on available-for-sale marketable securities		—		—		—			—			—			(10	)		—			—			(10	)

Balance, April 30, 2004		43,574,111	$	436	$	415,621		$	(136,413	)	$	(1,093	)	$	(40	)		(608,275	)	$	(3,115	)	$	275,396

The accompanying Notes are an integral part of these financial statements.

ALLOY, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY



	For the Three Months Ended April 30, 2003

											Accumulated
	Common Stock				Additional						Other			Treasury Shares
					Paid-In			Accumulated			Comprehensive
	Shares		Amount		Capital			Deficit			Income (Loss)			Shares			Amount			Total


	(Amounts in thousands, except share data)

	(Unaudited)




Balance, January 31, 2003		40,082,024	$	401	$	396,963		$	(51,955	)	$	164			(8,275	)	$	(131	)	$	345,442




Issuance of common stock for acquisitions of businesses		1,545,947		15		8,302			—			—			—			—			8,317




Repurchase of common stock		—		—		—			—			—			(600,000	)		(2,984	)		(2,984	)




Cancellation of accrued issuance costs in connection with public stock offering		—		—		102			—			—			—			—			102




Issuance of common stock pursuant to the exercise of options and common stock purchases under the employee stock purchase plan		52,470		1		216			—			—			—			—			217




Net loss		—		—		—			(388	)		—			—			—			(388	)




Accretion of discount and dividends on Series B Convertible Preferred Stock		—		—		(453	)		—			—			—			—			(453	)




Unrealized loss on available-for-sale marketable securities		—		—		—			—			(139	)		—			—			(139	)

Balance, April 30, 2003		41,680,441	$	417	$	405,130		$	(52,343	)	$	25			(608,275	)	$	(3,115	)	$	350,114

The accompanying Notes are an integral part of these financial statements.

ALLOY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.	Business and Financial Statement Presentation

Alloy, Inc. (“Alloy” or the “Company”) is a media, marketing services, direct marketing and retail company targeting Generation Y, the approximately 60 million boys and girls in the United States between the ages of 10 and 24. Alloy’s business integrates direct mail catalogs, retail stores, print media, display media boards, websites, on-campus marketing programs and promotional events, and features a portfolio of brands that are well known among Generation Y consumers and advertisers. Alloy reaches a significant portion of Generation Y consumers through its various media assets, marketing service programs, direct marketing activities, and retail stores. As a result, Alloy is able to offer advertisers targeted access to the youth market. Alloy sells third-party branded and private label products in key Generation Y spending categories, including apparel, action sports equipment and accessories, directly to the youth market. Additionally, Alloy’s assets have enabled it to build a comprehensive database that includes information about approximately 27 million Generation Y consumers.

Alloy generates revenue from three principal sources — direct marketing, retail stores, and sponsorship and other activities. From its catalogs and websites, Alloy sells branded products in key Generation Y spending categories, including apparel, action sports equipment, and accessories directly to the youth market. Alloy’s retail stores segment derives revenue primarily from the sale of apparel, accessories and home furnishings to consumers. Alloy generates sponsorship and other activities revenues largely from traditional, blue chip advertisers that seek highly targeted, measurable and effective marketing programs to reach Generation Y. Advertisers can reach Generation Y through integrated marketing programs that include its catalogs, books, websites, and display media boards, as well as through promotional events, product sampling, college and high school newspaper advertising, customer acquisition programs and other marketing services that Alloy provides.

The accompanying unaudited interim consolidated financial statements have been prepared by Alloy. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, comprehensive losses and cash flows at April 30, 2004 and for all periods presented have been made. The results of operations for the periods ended April 30, 2003 and April 30, 2004 are not necessarily indicative of the operating results for a full fiscal year. Certain information and footnote disclosures prepared in accordance with generally accepted accounting principles (“GAAP”) and normally included in the financial statements have been condensed or omitted. Certain balances in the prior year have been reclassified to conform to the presentation adopted in the current year.

It is suggested that these financial statements and accompanying notes (the “Notes”) be read in conjunction with the consolidated financial statements and accompanying notes related to Alloy’s fiscal year ended January 31, 2004 (“fiscal 2003”) included in Alloy’s Annual Report on Form 10-K for the fiscal year ended January 31, 2004 which was filed with the Securities and Exchange Commission (“SEC”) on May 27, 2004.


2.	Stock-Based Employee Compensation Cost

The Company accounts for its stock option plans in accordance with the provisions of Accounting Principles Board Opinion No. 25 (“APB No. 25”), “Accounting for Stock Issued to Employees,” and related interpretations. As such, compensation expense would be recorded on the date of grant only if the then current market price of the underlying stock exceeded the exercise price. The Company discloses the pro forma effect on net loss and loss per share attributable to common stockholders as required by SFAS No. 123, “Accounting for Stock-Based Compensation,” recognizing as expense over the vesting period the fair value of all stock-based awards on the date of grant.

Shares issued under the employee stock purchase plan are considered noncompensatory for the determination of compensation expense under APB No. 25, but the fair value of the benefit related to

ALLOY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

acquiring such shares at a discount is included as compensation expense in the pro forma disclosures required by SFAS No. 123.

The following table reflects the effect on net loss attributable to common stockholders and loss per share attributable to common stockholders if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation. These pro forma effects may not be representative of future amounts since the estimated fair value of stock options on the date of grant is amortized to expense over the vesting period and additional options may be granted in future years.



		Three Months Ended
		April 30,

		2003			2004


		(Unaudited)
		(Amounts in thousands,
		except per share data)




Net loss attributable to common stockholders — as reported:		$	(841	)	$	(9,637	)




	Add: Total stock-based employee compensation costs included in reported net loss, net of taxes		—			351




	Less: Total stock-based employee compensation costs determined under fair value based method for all awards, net of taxes		(3,035	)		(2,518	)

Net loss attributable to common stockholders — pro forma:		$	(3,876	)	$	(11,804	)

Basic loss attributable to common stockholders per share:




	As reported	$	(0.02	)	$	(0.23	)




	Pro forma	$	(0.10	)	$	(0.28	)




Diluted loss attributable to common stockholders per share:




	As reported	$	(0.02	)	$	(0.23	)




	Pro forma	$	(0.10	)	$	(0.28	)

SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure an amendment of FASB Statement No. 123,” which was issued in December 2002, provides alternative methods of transition for an entity that changes to the fair value based method of accounting for stock-based compensation and requires more prominent disclosure of the pro forma impact on earnings per share. The disclosure portion of the statement was adopted in 2002. On April 22, 2003, the FASB determined that fair value of stock-based compensation should be recognized as a cost in the financial statements. On March 31, 2004, the FASB issued an exposure draft that provides for a comment period, which ends June 30, 2004. The proposed statement would be effective for awards that are granted, modified, or settled in fiscal years beginning after December 15, 2004. The Company has not yet determined the impact of this statement on its consolidated financial position, results of operations or cash flows.


3.	Restricted Cash

Restricted cash represents the cash that backs our line of credit. Restricted cash totaled approximately $3.3 million as of January 31, 2004 and April 30, 2004. Restricted cash primarily represents collateral for standby letters of credit issued in connection with the Company’s merchandise sourcing activities. The restriction will be removed after the letters of credit expire or are cancelled.


4.	Unbilled Accounts Receivable

Unbilled accounts receivable are a normal part of the Company’s sponsorship business as some receivables are normally invoiced in the month following the completion of the earnings process.

At January 31, 2004 and April 30, 2004, accounts receivable included approximately $4.3 million and $9.2 million, respectively, of unbilled receivables. At April 30, 2003, accounts receivable included approximately $5.9 million of unbilled receivables.

ALLOY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


5.	Net Loss Per Share

The following table sets forth the computation of net loss per share. Alloy has applied the provisions of SFAS No. 128, “Earnings Per Share,” in the calculations below. Amounts in thousands, except share and per share data:



	Three Months Ended April 30,

	2003			2004


	(Unaudited)




Numerator:




Net loss	$	(388	)	$	(9,243	)




Dividend and accretion on preferred stock		453			394

Net loss attributable to common stockholders	$	(841	)	$	(9,637	)

Denominator:




Weighted average basic common shares outstanding		40,149,100			42,457,030

Weighted average diluted common shares outstanding		40,149,100			42,457,030

Basic loss attributable to common stockholders per share	$	(0.02	)	$	(0.23	)

Diluted loss attributable to common stockholders per share	$	(0.02	)	$	(0.23	)

The calculation of fully diluted loss per share for the three months ended April 30, 2003 and 2004 excludes the securities listed below because to include them in the calculation would be antidilutive:



	Three Months Ended
	April 30,

	2003		2004


	(Unaudited)




Options to purchase common stock		6,907,111		7,927,196




Warrants to purchase common stock		1,813,540		1,917,295




Conversion of Series A and Series B Convertible Preferred Stock		1,544,730		1,357,329




Conversion of 5.375% Convertible Debentures		—		8,274,628




Restricted stock		—		308,000

		10,265,381		19,784,448


6.	Goodwill and Intangible Assets

In June 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets.” Under SFAS No. 142, goodwill and intangible assets with indefinite lives that were acquired after June 30, 2001 are no longer amortized but instead evaluated for impairment at least annually. With respect to goodwill and intangibles with indefinite lives that were acquired prior to July 1, 2001, Alloy adopted the nonamortization provisions of SFAS No. 142 as of February 1, 2002.

Alloy completed the required impairment testing of goodwill and other indefinite-lived intangible assets for fiscal 2003 and recognized a goodwill impairment charge of $56.7 million in its direct marketing segment since the carrying amount of the reporting unit’s goodwill exceeded the implied fair value of the reporting unit’s goodwill. The Company concluded that there was no impairment in its sponsorship and other segment

ALLOY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

since the implied fair value of the goodwill exceeded the carrying amount of the reporting unit’s goodwill. Also, during the fourth quarter of fiscal 2003, an impairment charge for trademarks of $1.9 million and $2.0 million was recognized in the direct marketing segment and the sponsorship and other segment, respectively. The Company will perform its annual impairment testing for its reporting units during the fourth quarter of fiscal 2004.

The acquired intangible assets as of January 31, 2004 and April 30, 2004 were as follows (amounts in thousands):



	January 31, 2004				April 30, 2004

	Gross				Gross
	Carrying		Accumulated		Carrying		Accumulated
	Amount		Amortization		Amount		Amortization


					(Unaudited)




Amortized intangible assets:




Mailing Lists	$	3,858	$	2,416	$	3,886	$	2,695




Non-competition Agreements		5,060		2,527		5,860		2,929




Websites		2,890		961		2,890		1,193




Client Relationships		7,405		2,441		8,505		3,049




Leasehold Interests		300		41		300		42

	$	19,513	$	8,386	$	21,441	$	9,908

Nonamortized intangible assets:




Trademarks	$	9,535	$	—	$	9,535	$	—

The weighted average amortization period for acquired intangible assets subject to amortization is approximately three years. The estimated remaining amortization expense for the fiscal year ending January 31, 2005 (“fiscal 2004”) is $4.7 million, and for each of the next four fiscal years through the fiscal year ending January 31, 2009 is $3.2 million, $1.4 million, $721,000 and $558,000, respectively.

Alloy is continuing the review and determination of the fair value of certain assets acquired and liabilities assumed for acquisitions completed during the last nine months of fiscal 2003 and the first three months of fiscal 2004. Accordingly, the allocations of the purchase price are subject to revision based on the final determination of appraised and other fair values and the resolution of pre-acquisition contingencies.


	*Goodwill*

The changes in the carrying amount of goodwill for the three months ended April 30, 2004 are as follows (amounts in thousands):






Gross balance as of January 31, 2004	$	301,442




Accumulated goodwill amortization as of January 31, 2004		(26,646	)

Net balance as of January 31, 2004		274,796




Goodwill adjustments during the three months ended April 30, 2004		5,925

Net balance as of April 30, 2004	$	280,721

The goodwill associated with the acquisitions during the prior twelve months is subject to revision based on the final determination of appraised and other fair values along with the resolution of pre-acquisition contingencies. Goodwill adjustments during the first three months of fiscal 2004 primarily relate to an approximate $5.6 million increase in goodwill for the acquisitions during the first quarter of fiscal 2004. Other

ALLOY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

goodwill adjustments during the first three months of fiscal 2004 relate to changes to acquisition costs of approximately $364,000.


7.	Recently Issued Accounting Pronouncements

In December 2003, the SEC released Staff Accounting Bulletin No. 104 (‘SAB No. 104”), “Revenue Recognition”, which supersedes SAB No. 101, “Revenue Recognition in Financial Statements.” SAB No. 104 clarifies existing guidance regarding revenues for contracts which contain multiple deliverables to make it consistent with Emerging Issues Task Force No. 00-21 (“EITF 00-21”), “Accounting for Revenue Arrangements with Multiple Deliverables.” The adoption of SAB No. 104 did not have a material impact on the Company’s revenue recognition policies, nor its consolidated results of operations or financial position.

In January 31, 2003 the FASB issued FASB Interpretation No. 46 — “Consolidation of Variable Interest Entities” (“FIN 46”). FIN 46 requires the consolidation of entities that cannot finance their activities without the support of other parties and that lack certain characteristics of a controlling interest, such as the ability to make decisions about the entity’s activities via voting or similar rights. An entity that consolidates a variable interest entity is the primary beneficiary of the entity’s activities. FIN 46 applied immediately to variable interest entities created after January 31, 2003, and required application in the first period ending after December 15, 2003 for entities in which an enterprise holds a variable interest entity that it acquired before February 1, 2003. The adoption of FIN 46 did not have a material impact on the Company’s consolidated results of operations or financial position. In December of 2003, the FASB revised FIN 46 (“FIN 46R”), which delayed the required implementation date for variable interest entities until the end of the first reporting period that ends after March 15, 2004. The adoption of FIN 46R did not have a material impact on the Company’s consolidated results of operations or financial position.


8.	Segment Reporting

Alloy has three reportable segments: direct marketing, retail stores, and sponsorship and other. During September 2003, Alloy changed the name of its catalog and online commerce business from the merchandise segment to the direct marketing segment and identified a third reportable segment — retail stores. Alloy’s management reviews financial information related to these reportable segments and uses the measure of income from operations to evaluate performance and allocated resources. Reportable data for Alloy’s segments were as follows (amounts in thousands):



		Three Months Ended
		April 30,

		2003		2004

Net Revenues:




Direct marketing		$	29,971	$	30,640




Retail stores			—		13,641




Sponsorship and other			39,473		43,566

	Total Net Revenues	$	69,444	$	87,847

ALLOY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



		Three Months Ended
		April 30,

		2003			2004

Operating (Loss) Income:




Direct marketing		$	(1,473	)	$	(1,400	)




Retail stores			—			(2,276	)




Sponsorship and other			5,446			4,131




Corporate			(5,006	)		(9,002	)

	Total Operating Loss		(1,033	)		(8,547	)




Interest income (expense) and other income, net			287			(686	)

Loss before income taxes		$	(746	)	$	(9,233	)

Included in operating loss for the three months ended April 30, 2003 are expenses of $380,000 in the direct marketing segment due to restructuring charges representing future contractual lease payments, exit costs, severance and personnel costs, and the write-off of related leasehold improvements related to the closing of the Company’s Girlfriends LA (“GFLA”) facility. In conjunction with the GFLA facility closure, the Company also wrote off approximately $150,000 of inventory during the first quarter of fiscal 2003. This charge is included in cost of goods sold as part of the direct marketing segment for the three-months ended April 30, 2003.

Operating loss for the three months ended April 30, 2004 includes an approximate $126,000 restructuring charge in the sponsorship and other segment. The restructuring charge is comprised of severance costs associated with the relocation from California to New York of the Company’s Market Place Media (“MPM”) business.

Cost of goods sold for the three-months ended April 30, 2004 included costs related to sponsorship and other revenues of $986,000. Costs of goods sold for the three-months ended April 30, 2003, had no costs related to sponsorship and other revenues.



		Three Months
		Ended April 30,

		2003		2004

Depreciation and Amortization:




Direct marketing		$	797	$	1,123




Retail stores			—		792




Sponsorship and other			1,954		1,552




Corporate			77		323

	Total Depreciation and Amortization	$	2,828	$	3,790

ALLOY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



		Three Months
		Ended April 30,

		2003		2004

Capital Expenditures:




Direct marketing		$	402	$	711




Retail stores			—		69




Sponsorship and other			183		516




Corporate			350		299

	Total Capital Expenditures	$	935	$	1,595


		January 31, 2004		April 30, 2004

Total Assets:




Direct marketing		$	100,516	$	97,198




Retail stores			20,963		20,520




Sponsorship and other			261,024		276,962




Corporate			66,888		50,378

	Total Assets	$	449,391	$	445,058

The carrying amount of goodwill by reportable segment as of April 30, 2004 and January 31, 2004 was as follows (amounts in thousands):


	January 31, 2004		April 30, 2004

Direct marketing	$	64,957	$	64,957




Retail stores		—		—




Sponsorship and other		209,839		215,764

Total	$	274,796	$	280,721


9.	Restructuring Charges

During the fourth quarter of fiscal 2002, the Company recognized a restructuring charge of $2.6 million in its direct marketing segment related to its decision to outsource its CCS unit’s fulfillment activity to New Roads Inc, a third party service provider (“New Roads”). In the first quarter of 2003, the Company recognized a charge of approximately $380,000 in its direct marketing segment related to its decision to outsource its GFLA fulfillment activities to New Roads. In the third quarter of fiscal 2003, the Company recognized a charge of approximately $350,000 in its direct marketing segment related to its decision to exit the New Roads facility and to transfer its fulfillment activities for its Alloy and CCS units to its recently acquired distribution center in Hanover, Pennsylvania.

As part of the dELiA*s acquisition, Alloy assumed a $6.5 million restructuring liability. Alloy was contractually obligated to pay certain termination costs to three executives of dELiA*s. Management has estimated liabilities related to the net present value of these termination costs to be approximately $2.7 million. In addition, management estimated $3.8 million of store exit and lease costs and severance related to the closing of up to 17 dELiA*s retail stores.

During the first quarter of fiscal 2004, the Company made the decision to relocate the operations of its MPM business from Santa Barbara, California to the Company’s principal office in New York, New York and terminated several MPM employees. As a result, and in accordance with SFAS 146 “Accounting for Costs Associated with Exit or Disposal Activities” (“Statement No. 146”), the Company recognized a restructuring

ALLOY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

charge in the sponsorship and other segment of approximately $126,000 in the first quarter of fiscal 2004. The $126,000 restructuring charge is comprised of severance costs. The MPM business is expected to relocate to the New York office by the end of the second quarter of fiscal 2004. Additional charges representing additional severance costs, future contractual lease payments and the write-off of related leasehold improvements will be recognized during the second quarter of fiscal 2004 when the MPM business is physically relocated from Santa Barbara to New York.

The following tables summarize the Company’s restructuring activities (in thousands):


							Severance &
	Asset			Contractual			Personnel
Type of cost	Impairments			Obligations			Costs			Total

Balance at January 31, 2003	$	—		$	1,596		$	—		$	1,596

Restructuring Costs Fiscal 2003		31			655			44			730




dELiA*s restructuring liability		—			6,311			212			6,523




Payments and Write-offs Fiscal 2003		(31	)		(2,519	)		(82	)		(2,632	)

Balance at January 31, 2004		—			6,043			174			6,217

Restructuring Costs Fiscal 2004		—			—			126			126




Payments Fiscal 2004		—			(597	)		(48	)		(645	)

Balance at April 30, 2004	$	—		$	5,446		$	252		$	5,698

A summary of the Company’s restructuring liability by location and/or business, as of January 31, 2004 and April 30, 2004 is as follows (in thousands):


	January 31,		April 30,
	2004		2004

CCS facility, San Luis Obispo, California	$	1,066	$	912




MPM facility, Santa Barbara, California		—		126




dELiA*s restructuring liability		5,151		4,660

Total	$	6,217	$	5,698

The Company anticipates that the remaining restructuring accruals will be settled by January 31, 2008. As of April 30, 2004, the restructuring accruals are classified as a current liability and a long-term liability of $4.0 million and $1.7 million, respectively.


10.	Common Stock

On January 29, 2003, Alloy adopted a stock repurchase program authorizing the repurchase of up to $10.0 million of its common stock from time to time in the open market at prevailing market prices or in privately negotiated transactions. Alloy has repurchased 600,000 shares for approximately $3.0 million under this plan through April 30, 2004. All 600,000 shares were repurchased during the first quarter of fiscal 2003.


11.	Restricted Stock Plan

In May 2003 and March 2004, the Company issued 300,000 and 8,000 shares of Common Stock, respectively, as restricted stock under the Company’s Amended and Restated 1997 Employee, Director and Consultant Stock Option and Stock Incentive Plan (the “1997 Plan”). The shares issued pursuant to the 1997 Plan are subject to restrictions on transfer and certain other conditions. During the restriction period, plan participants are entitled to vote and receive dividends on such shares. Upon issuance of the 308,000 shares

ALLOY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

pursuant to the 1997 Plan, deferred compensation expenses equivalent to the market value of the shares on the respective dates of grant were charged to stockholders’ equity and are being amortized over the approximate twenty-month to forty month vesting periods. The compensation expense amortized with respect to the restricted shares during the three months ended April 30, 2003 and April 30, 2004 was $0 and $351,000, respectively.


12.	Recent Acquisitions


	*Insite Advertising, Inc.*

On March 26, 2004, Alloy acquired all of the issued and outstanding stock of Insite Advertising, Inc. (“Insite”). InSite is a national indoor media company targeting consumers between the ages of 18-34. OnSite Promotions, a division of InSite, is an event-marketing and promotions company that creates customized programs for its clients. The InSite network of out-of-home media assets and the OnSite division further extend Alloy’s reach to the 18-34 demographic through its promotional marketing arm, AMP (Alloy Marketing and Promotions) and its media and marketing division, 360 Youth. To complete the acquisition, Alloy paid approximately $5.1 million in cash and issued shares of common stock valued at approximately $2.9 million, plus additional future consideration if certain financial performance targets are met. As of April 30, 2004, the total cash paid including acquisition costs, net of cash acquired, approximated $4.8 million. The total cost of this acquisition, net of cash acquired and including acquisition costs, is estimated to be $7.7 million. Alloy has recorded approximately $5.4 million of goodwill representing the excess of purchase price over the fair value of the net assets acquired. In addition, Alloy has preliminarily identified specific intangible assets consisting of customer relationships valued at $1.1 million and non-competition agreements valued at $800,000.

The operations of this acquisition have been included in Alloy’s financial statements since the date of the acquisition. The assets acquired and liabilities assumed were recorded at estimated fair values as determined by Alloy’s management based on available information and on assumptions as to future operations. The allocations of the purchase price are subject to revision based on the final determination of appraised and other fair values and the resolution of pre-acquisition contingencies.


13.	Convertible Senior Debentures

On July 23, 2003, Alloy issued and sold $65.0 million aggregate principal amount of 20-Year Convertible Senior Debentures due August 1, 2023 (the “Debentures”) in the 144A private placement market. Lehman Brothers, Inc., CIBC World Market Corp., J.P. Morgan Securities Inc., and S.G. Cowen Securities Corporation were the initial purchasers (the “Initial Purchasers”) of the Debentures. The Debentures have an annual coupon rate of 5.375%, payable in cash semi-annually. The Debentures are convertible at any time prior to maturity, unless previously redeemed, at the option of the holders into shares of Alloy’s common stock at a conversion price of approximately $8.375 per share, subject to certain adjustments. The calculation of diluted loss per share for fiscal 2003 excluded the conversion of these securities as to include them in the calculation would be anti-dilutive. The Debentures are Alloy’s general unsecured obligations and will be equal in right of payment to its existing and future senior unsecured indebtedness; and are senior in right of payment to all of its future subordinated debt. Alloy may not redeem the Debentures until August 1, 2008. On August 20, 2003, Alloy issued and sold an additional $4.3 million aggregate principal amount of the Debentures to the Initial Purchasers pursuant to the exercise of an over-allotment option granted to the Initial Purchasers in the original purchase agreement. Alloy used a significant portion of the net proceeds from this offering for the acquisition of dELiA*s and intends to use the remaining portion for future acquisitions, working capital, capital expenditures and general corporate purposes.

On February 17, 2004, Alloy approved the repurchase of up to $5.0 million aggregate principal amount of the Debentures. As of June 8, 2004, none of the Debentures have been repurchased.

ALLOY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


14.	Mortgage Note Payable

dELiA*s was subject to certain covenants under a mortgage loan agreement relating to dELiA*s’ fiscal 1999 purchase of a distribution facility in Hanover, Pennsylvania, including a covenant to maintain a fixed charge coverage ratio at the time Alloy acquired dELiA*s. As a result of its financial performance, dELiA*s was in default of the fixed charge coverage ratio. The default has been waived for the duration of the loan. On April 19, 2004, dELiA*s entered into a Mortgage Note Modification Agreement extending the term for five years with a fifteen-year amortization schedule. The modified loan bears interest at LIBOR plus 225 basis points. Alloy guaranteed the modified loan and is subject to a quarterly financial covenant to maintain a funds flow coverage ratio with which Alloy is not currently in compliance. As a result of this default, the $2.9 million outstanding principal balance as of April 30, 2004 relating to dELiA*s mortgage loan agreement is classified as a current liability on the accompanying consolidated balance sheets. The mortgage loan is secured by the building and related property.


15.	Credit Facility

dELiA*s has a credit agreement with Wells Fargo Retail Finance LLC (the “Wells Fargo Credit Agreement”). The Wells Fargo Credit Agreement consists of a revolving line of credit that permits dELiA*s to borrow up to $20 million. Until October 31, 2004, dELiA*s retains the right to request an increase of the limit to $25 million which the lender has the right to approve at its sole discretion. The credit line is secured by dELiA*s’ assets and borrowing availability fluctuates depending on dELiA*s’ levels of inventory and certain receivables. The Wells Fargo Credit Agreement contains certain covenants and default provisions, including a limitation on dELiA*s’ capital expenditures. At dELiA*s’ option, borrowings under this facility bear interest at Wells Fargo Bank’s prime rate plus 25 basis points or at LIBOR plus 250 basis points, but at no time will the rate be less than 4.25%. A fee of 0.375% per year is assessed monthly on the unused portion of the line of credit as defined in the agreement. The facility matures in April 2006. The credit facility is considered a current liability because the lender has access to dELiA*s lockbox facility and the agreement contains a subjective acceleration clause. In addition, the Wells Fargo Credit Agreement contains a change of control event, which was triggered when Alloy purchased dELiA*s and allowed the lender to call the loan at any time. The lender has agreed to waive any default caused in connection with Alloy’s acquisition of dELiA*s. As of April 30, 2004, there was a $3.1 million credit facility balance, there were no outstanding documentary letters of credit, the standby letters of credit were $2.9 million, and unused available credit was $945,000.


16.	Subsequent Events

Change of Independent Accountants

On May 28, 2004, the Audit Committee of our Board of Directors (the “Board”) dismissed KPMG LLP (“KPMG”) as our independent auditors effective immediately. The Audit Committee made the decision to engage BDO Seidman, LLP (“BDO”) as our independent auditors for the fiscal year ending January 31, 2005, effective as of May 28, 2004.

During our two most recent fiscal years ended January 31, 2003 and January 31, 2004, and through May 28, 2004, there were no “reportable events” as listed in Item 304(a)(1)(v)(A)-(D) of Regulation S-K adopted by the Securities and Exchange Commission (the “Commission”), except that, in performing its audit of our Consolidated Financial Statements for our fiscal year ended January 31, 2004, KPMG noted two matters involving our internal controls that it considered to be reportable conditions and/or material weaknesses under the standards established by the American Institute of Certified Public Accountants. A reportable condition, which may or may not be determined to be a material weakness, involves matters relating to significant deficiencies in the design or operation of internal controls that, in KPMG’s judgment, could adversely affect our ability to record, process, summarize and report financial data consistent with the assertions of management on the financial statements. The first reportable condition identified by KPMG

ALLOY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

related to the absence of appropriate reviews and approvals of transactions, accounting entries and systems output at our dELiA*s subsidiary. According to KPMG, numerous adjusting entries came about as a result of its audit procedures at dELiA*s that indicated a lack of timely and appropriate management review during the closing process. This reportable condition was not considered to be a material weakness.

The second identified reportable condition was considered a material weakness and concerned the ability of accounting personnel to properly apply all relevant accounting pronouncements related to goodwill, intangible assets and other long-lived assets. Specifically, KPMG indicated that when we applied the provisions of FASB No. 142 relating to the annual assessment of goodwill and other indefinite-lived intangible assets carrying value, we incorrectly applied the provisions of SFAS No. 142 needed to calculate the impairment amounts, and failed to test separately the carrying values of our other indefinite-lived intangible assets. KPMG also indicated that we incorrectly applied the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” in calculating impairment amounts of other long-lived assets. In addition, they noted that we had not formally documented triggering events for impairment testing under either standard. Consequently, we did not properly identify the adjustments that arose due to the weakness in our internal control process, and KPMG indicated that we need to implement modifications and upgrades to our financial reporting process to ensure that this situation does not occur in the future.

The reportable condition and material weakness have been discussed in detail by management, our Audit Committee and KPMG, and we have authorized KPMG to respond fully to the inquiries of BDO, our new independent auditors, concerning the subject matter of the foregoing reportable conditions.

Nasdaq Delisting Hearing

As a result of the late filing of our Annual Report on Form 10-K for our fiscal year ended January 31, 2004 by the extended due date of April 30, 2004, we received a letter from the Nasdaq staff indicating that we were not in compliance with the filing requirements for continued listing on The Nasdaq National Market as set forth in Nasdaq Marketplace Rule 4310(c)(14). As stated in the Nasdaq letter, our common stock was subject to delisting from The Nasdaq National Market because of such late filing. We requested a hearing before the Nasdaq Listing Qualifications Panel (the “Panel”) to review the staff determination, and the delisting proceedings were stayed automatically pending the results of that hearing. That hearing was held on May 27, 2004. Also on May 27, 2004, and prior to the hearing, we filed our Annual Report on Form 10-K for our fiscal year ended January 31, 2004, bringing us into compliance with the Nasdaq standards for continued listing on The Nasdaq National Market. On June 7, 2004, we received a letter from Nasdaq containing the decision of the Panel. The decision noted that, although we had filed our delinquent Form 10-K and evidenced compliance with all other requirements for continued listing on The Nasdaq National Market, because of our recent change of auditors the Panel determined to monitor our filing of this Quarterly Report on Form 10-Q so as to ensure our continued compliance with the Nasdaq’s filing requirement in the near term. Thus, the Panel determined to continue the listing of our securities on the The Nasdaq National Market pursuant to a requirement that we file this Form 10-Q on or before June 14, 2004.


Item 2.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations.*

The following discussion of our financial condition and results of operations should be read in conjunction with the Financial Statements and the related Notes included elsewhere in this report on Form 10-Q. Descriptions of all documents incorporated by reference herein or included as exhibits hereto are qualified in their entirety by reference to the full text of such documents so incorporated or referenced. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to, those under “Risk Factors That May Affect Future Results” and elsewhere in this report.

Executive Summary and Outlook for Fiscal Year 2004

During the first quarter of fiscal 2004, we made substantial progress in building a teen-focused merchandising business with a strong consumer connection through targeted direct marketing activities, complemented by a retail store presence. We continued to wind down our Girlfriends LA and Old Glory catalog businesses, leaving us with dELiA*s and Alloy focused on the teen girl market and CCS and Dan’s Comp focused on the teen boy market. We have re-located the fulfillment and call center activities for the Alloy and CCS catalogs from a third party to efficient Company-owned facilities. A number of key management changes and additions have been made in strategic areas to establish the creative, buying and planning teams necessary to execute the successful selection and presentation of youth-focused merchandise to gain target consumer acceptance. Since our acquisition of dELiA*s in September 2003, we have closed six dELiA*s retail stores as of June 8, 2004 and continue to evaluate the remaining underperforming locations to rationalize the store portfolio and drive improved financial performance in our retail stores segment. We continue to believe that the synergies we expect to result from combining our direct marketing operations with those of dELiA*s, leveraging our combined scale, selling across our combined databases while controlling overall catalog circulation, and consolidating fulfillment operations in dELiA*s’ Hanover, Pennsylvania warehouse should begin to be demonstrated in the second half of fiscal 2004.

We continue to review expansion of our sponsorship and other businesses. In March of 2004 we acquired Insite Advertising, a national indoor media company, to further extend our marketing reach to the 18-34 year old demographic. In addition, we plan to remain focused in our previously announced efforts to separate our sponsorship and merchandising businesses at an opportune time in the foreseeable future.

Results of Operations


	*Three Months Ended April 30, 2004 Compared with Three Months Ended April 30, 2003*


	Consolidated Results of Operations

The following table sets forth the statement of operations data for the periods indicated as a percentage of revenues:



	Three Months
	Ended April 30,

	2003			2004

Direct marketing revenues		43.2	%		34.9	%




Retail stores revenues		—			15.5




Sponsorship and other revenues		56.8			49.6

Total revenues		100.0			100.0




Cost of revenues		54.7			53.1

Gross profit		45.3			46.9




Operating expenses:




Selling and marketing		36.6			41.0




General and administrative		7.1			13.8




Amortization of intangible assets		2.6			1.7




Restructuring charge		0.5			0.1

Total operating expenses		46.8			56.6




Loss from operations		(1.5	)		(9.7	)




Interest and other income (expense), net		0.4			(0.8	)




Provision for income tax benefit (expense)		0.5			(0.0	)

Net loss		(0.6	)%		(10.5	)%


	Segment Results of Operations

The tables below present our revenues and operating income (loss) by segment for each of the three months ended April 30, 2003 and 2004 (amounts in thousands):



		Three Months Ended
		April 30,						Percent
								Change 2003
		2003			2004			vs 2004

Net Revenues:




Direct marketing		$	29,971		$	30,640			2.2	%




Retail stores			—			13,641			NM




Sponsorship and other			39,473			43,566			10.4

	Total Net Revenues	$	69,444		$	87,847			26.5	%

Operating Income (Loss):




Direct marketing		$	(1,473	)	$	(1,400	)		5.0	%




Retail stores			—			(2,276	)		NM




Sponsorship and other			5,446			4,131			(24.1	)




Corporate			(5,006	)		(9,002	)		(79.8	)

	Total Operating Loss	$	(1,033	)	$	(8,547	)		(727.4	)%

NM — Not meaningful

Net Revenues

Total Net Revenues. Total net revenues increased 26.5% to $87.8 million in the three months ended April 30, 2004 from $69.4 million in the three months ended April 30, 2003.

Direct Marketing Revenues. Direct marketing revenues increased 2.2% from $30.0 million in the three months ended April 30, 2003 to $30.6 million in the three months ended April 30, 2004. The increase in direct marketing revenues for the first quarter of the fiscal year ending January 31, 2005 (“fiscal 2004”) versus the first quarter of the fiscal year ended January 31, 2004 (“fiscal 2003”) resulted primarily from revenues related to our dELiA*s brand which we acquired in September 2003. dELiA*s direct marketing revenue for the first quarter of fiscal 2004 totaled $10.2 million, which offset the decreased sales from our Alloy, Girlfriends LA, Old Glory, CCS, and Dan’s Comp brands. We ceased the catalog operations of our Girlfriends LA and Old Glory brands during the first quarter of fiscal 2004. The decrease in revenues in our Alloy, CCS and Dan’s Comp brands resulted primarily from a planned decline in catalog circulation, together with lower sales productivity in the Alloy title.

Retail Stores Revenues. Retail stores revenues totaled $13.6 million for the three months ended April 30, 2004. The retail revenue was generated from dELiA*s 62 retail stores during the quarter.

Sponsorship and Other Revenues. Sponsorship and other revenues increased 10.4% from $39.5 million in the first quarter of fiscal 2003 to $43.6 million in the first quarter of fiscal 2004. The increase in sponsorship and other revenues in the first quarter of fiscal 2004 as compared with the first quarter of fiscal 2003 was due primarily to the addition of revenues from the operations of OCM that we acquired in May 2003.

Cost of Revenues

Cost of revenues consists of the cost of the merchandise sold plus the freight cost to deliver the merchandise to the warehouse and retail stores, together with the direct costs attributable to the sponsorship and advertising programs we provide, and the marketing publications we produce. Our total cost of revenues increased 22.8% from $38.0 million in the three months ended April 30, 2003 to $46.6 million in the three months ended April 30, 2004. The increase in cost of revenues in the first quarter of fiscal 2004 as compared with the first quarter of fiscal 2003 was due primarily to the additional costs of goods sold from OCM (acquired in May 2003) and cost of merchandise sold from dELiA*s (acquired in September 2003), offset partially by decreases in cost of goods sold related to the revenue declines of the Alloy, CCS and Dan’s Comp direct marketing brands and the wind-down of our Girlfriends LA and Old Glory brands.

Our gross profit as a percentage of total revenues increased from 45.3% in the three months ended April 30, 2003 to 46.9% in the three months ended April 30, 2004. This increase was due primarily to the increased percentage of direct marketing and retail store segment revenues of total revenues in the first quarter of fiscal 2004. Gross profit percentages may fluctuate significantly in future periods due primarily to the changing revenue contributions of our different operating segments and the changing revenue contributions of our different sponsorship segment activities.

Total Operating Expenses

Selling and Marketing. Selling and marketing expenses consist primarily of our catalog production and mailing costs; our call centers and fulfillment operations expenses; dELiA*s retail store costs; freight costs to deliver goods to our merchandise customers; compensation of our sales and marketing personnel; marketing costs; and information technology expenses related to the maintenance and marketing of our websites and support for our advertising sales activities. These selling and marketing expenses increased from $25.4 million in the three months ended April 30, 2003 to $36.0 million in the three months ended April 30, 2004 due primarily to:

• the inclusion of dELiA*s selling and marketing expenses (acquired in September 2003); and

• the inclusion of OCM’s selling and marketing expenses (acquired in May 2003).

As a percentage of total revenues, our selling and marketing expenses increased from 36.6% in the first quarter of fiscal 2003 to 41.0% in the first quarter of fiscal 2004, due primarily to reduced catalog overall productivity (revenues per book circulated) and the high selling and marketing expenses as a percentage of revenues for dELiA*s unprofitable retail store operations.

General and Administrative. General and administrative expenses consist primarily of salaries and related costs for our executive, administrative, finance and management personnel, as well as support services and professional service fees. These expenses increased from $5.0 million in the three months ended April 30, 2003 to $12.1 million in the three months ended April 30, 2004. The increase in general and administrative expenses primarily was driven by:

• the addition of OCM’s expenses;

• the inclusion of dELiA*s expenses; and

• increased expenses associated with growing a public company such as professional fees, insurance premiums, occupancy costs due to office expansions, and telecommunications costs.

Our general and administrative expenses as a percentage of total revenues increased from 7.1% in the first quarter of fiscal 2003 to 13.8% in the first quarter of fiscal 2004, due primarily to the addition of high general and administrative expenses as a percentage of revenues in the acquired dELiA*s business and senior management hiring in our direct marketing and retail store segment, along with increased professional services costs due to outstanding litigation and increased audit fees.

Amortization of Intangible Assets. Amortization of intangible assets was approximately $1.5 million in the three months ended April 30, 2004 as compared with $1.8 million in the three months ended April 30, 2003. The decrease in amortization expense resulted from certain identified intangible assets becoming fully amortized during the fourth quarter of fiscal 2003 and the impairment of certain identified intangible assets during the fourth quarter of fiscal 2003, offset partially by our acquisition activities during the last twelve months and the associated allocation of purchase price to identified intangible assets. All of our acquisitions have been accounted for under the purchase method of accounting.

Restructuring Charge. During the first quarter of fiscal 2003, we made the strategic decision to outsource substantially all of our fulfillment activities for our Girlfriends LA unit to New Roads. We determined that we would not be able to sublease our existing fulfillment facilities due to the real estate market conditions. As a result, and in accordance with SFAS No. 146 and SFAS No. 144, we recognized a first quarter charge of approximately $380,000 in our direct marketing segment, representing the future contractual lease payments, severance and personnel costs, and the write-off of related leasehold improvements. During the first quarter of fiscal 2004, we made the decision to relocate the MPM business from Santa Barbara, California to the our principal office in New York, New York and terminated several MPM employees. As a result, and in accordance with SFAS 146, we recognized a restructuring charge in the sponsorship and other segment of approximately $126,000 in the first quarter of fiscal 2004. The $126,000 restructuring charge is comprised of severance costs. The MPM business is expected to relocate to the New York office by the end of the second quarter of fiscal 2004. Additional charges representing additional severance costs, future contractual lease payments and the write-off of related leasehold improvements will be recognized during the second quarter of fiscal 2004 when the MPM business is physically relocated from Santa Barbara to New York. We will continue to review our operations to determine the necessity of our facilities, equipment, and personnel.

Loss from Operations

Total Loss from Operations. Our loss from operations was $8.5 million in the first quarter of fiscal 2004 while our loss from operations was $1.0 million in the first quarter of fiscal 2003. The increase in operating loss is primarily due to the increased operating loss from the dELiA*s retail operations that we acquired in September 2003, decreased operating income from our sponsorship and other operations, and increased corporate expenses.

Direct Marketing Loss from Operations. Our loss from direct marketing operations was $1.4 million in the first quarter of fiscal 2004 while our loss from direct marketing operations was $1.5 million in the first quarter of fiscal 2003. Excluding the restructuring charge related to Girlfriends LA in the first quarter of fiscal 2003, the direct marketing operating loss increased in the first quarter of fiscal 2004 primarily as a result of the costs of transitioning and integrating our previously outsourced fulfillment and call center activities to our Hanover, Pennsylvania facilities.

Retail Stores Loss from Operations. Our loss from retail stores operations was $2.3 million in the first quarter of fiscal 2004. The loss was generated from the dELiA*s retail stores.

Sponsorship and Other Income from Operations. Our income from sponsorship and other operations decreased 24.1% to $4.1 million in the first quarter of fiscal 2004 from $5.4 million in the first quarter of fiscal 2003. This decrease resulted primarily due to lower revenues and margins in our event marketing activities, together with OCM’s seasonal operating loss, offset by stronger advertising placement income resultant from higher gross margins.

Interest and Other Income (Expense), Net

Interest and other income, net of expense, includes income from our cash equivalents and from available-for-sale marketable securities and expenses related to our financing obligations. In the three months ended April 30, 2004, we generated interest income of $120,000 and interest expense of $1.2 million primarily related to the issuance in July and August 2003 of our Debentures, as compared with interest income of $291,000 and interest expense of $4,000 in the three months ended April 30, 2003. During the first quarter of fiscal 2004, we recognized other income of $388,000 related to a working capital adjustment resulting from the MPM acquisition. The decrease in interest income resulted primarily from lower interest rates and the lower cash and cash equivalents and available-for-sale marketable securities balances during the quarter ended April 30, 2004 as compared with the quarter ended April 30, 2003.

Income Tax Benefit (Expense)

In the three months ended April 30, 2004 we recorded an income tax expense of $10,000 due to taxable operating income generated at the state level. In the three months ended April 30, 2003 we recorded an income tax benefit of $358,000 due to the taxable loss generated in the quarter. Included in the tax benefit was a refund of $36,000 for an amended prior year tax return. At April 30, 2003 and prior to our acquisition of dELiA*s, we had expected the loss generated in the first quarter to be offset by taxable income during the second half of fiscal 2003.

Liquidity and Capital Resources

We have financed our operations to date primarily through the sale of equity and debt securities as we generated negative cash flow from operations prior to fiscal 2002 and for the three months ended April 30, 2004. At April 30, 2004, we had approximately $35.3 million of unrestricted cash, cash equivalents and short-term investments along with $4.2 million of marketable securities classified as non-current assets due to their stated maturities and our intention to hold them for more than one year. Our principal commitments at April 30, 2004 consisted of the Debentures, accounts payable, bank loans, accrued expenses, and obligations under operating and capital leases.

Net cash used in operating activities was $8.7 million in the first three months of fiscal 2004 compared with net cash used in operating activities of $10.5 million in the first three months of fiscal 2003. The reduced cash usage was primarily due to tighter working capital management reflected by a smaller increase in operating assets net of operating liabilities, partially offset by the increased net loss in fiscal 2004 as compared with the net loss in fiscal 2003.

Cash used in investing activities was approximately $2.0 million in the three months of fiscal 2004, due primarily to the usage of $5.1 million to acquire businesses and $1.6 million for capital expenditures, offset by the net cash proceeds of $4.7 million from our sales, purchases and maturities of available-for-sale marketable

securities. In the first three months of fiscal 2003, $16.5 million of cash was provided by investing activities, due primarily to net cash proceeds of $17.6 million from our sales, purchases and maturities of available-for-sale marketable securities offset by $1.0 million for capital expenditures.

Net cash provided by financing activities was $3.0 million in the three months ended April 30, 2004 compared with $2.8 million of cash used in financing activities in the three months ended April 30, 2003. The cash provided by financing activities in the three months ended April 30, 2004 was due primarily to $3.1 million of net borrowings under our line of credit agreement. In the three months ended April 30, 2003, net cash used in financing activities of $2.8 million resulted primarily from the repurchase of 600,000 shares of our common stock for approximately $3.0 million.

Our liquidity position as of April 30, 2004 consisted of $35.3 million of unrestricted cash, cash equivalents and short-term investments. We expect our liquidity position to meet our anticipated cash needs for working capital and capital expenditures, for at least the next 24 months, excluding the impact of any potential, as yet unannounced acquisitions. If cash generated from our operations is insufficient to satisfy our cash needs, we may be required to raise additional capital. If we raise additional funds through the issuance of equity securities, our stockholders may experience significant dilution. Furthermore, additional financing may not be available when we need it or, if available, financing may not be on terms favorable to us or to our stockholders. If financing is not available when required or is not available on acceptable terms, we may be unable to develop or enhance our products or services. In addition, we may be unable to take advantage of business opportunities or respond to competitive pressures. Any of these events could have a material and adverse effect on our business, results of operations and financial condition.

On January 29, 2003, we adopted a stock repurchase program authorizing the repurchase of up to $10.0 million of our common stock from time to time in the open market at prevailing market prices or in privately negotiated transactions. We have repurchased 600,000 shares for approximately $3.0 million under this plan through June 8, 2004. All 600,000 shares were repurchased during the three months ended April 30, 2003.

On February 17, 2004, we approved the repurchase of up to $5.0 million aggregate principal amount of the Debentures. As of June 8, 2004, none of the Debentures have been repurchased.

Critical Accounting Policies and Estimates

During the first three months of fiscal 2004, there were no changes in the Company’s policies regarding the use of estimates and other critical accounting policies. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” found in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2004, for additional information relating to the Company’s use of estimates and other critical accounting policies.

Effect of New Accounting Standards

We have described the impact anticipated from the adoption of certain new accounting pronouncements effective in fiscal 2003 and the first quarter of fiscal 2004 in Note 7 to the consolidated financial statements.

Special Note Regarding Forward-Looking Statements

Statements in this report expressing our expectations and beliefs regarding our future results or performance are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that involve a number of substantial risks and uncertainties. When used in this Form 10-Q, the words “anticipate,” “may,” “could,” “plan,” “believe,” “estimate,” “expect” and “intend” and similar expressions are intended to identify such forward-looking statements.

Such statements are based upon management’s current expectations and are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by the

forward-looking statements. Actual results may differ materially from those projected or suggested in such forward-looking statements as a result of various factors, including, but not limited to the following:

• changes in business and economic conditions and other adverse conditions in our markets;

• increased competition;

• our inability to achieve and maintain profitability;

• merchandising and marketing strategies;

• inventory performance;

• changes in consumer preferences or fashion trends;

• seasonality of the retail and direct-marketing businesses;

• significant increases in paper, printing and postage costs;

• litigation that may have an adverse effect on the financial results or reputation of the Company;

• reliance on third-party suppliers;

• our ability to successfully implement our operating, marketing, acquisition and expansion strategies; and

• natural disasters and terrorist attacks.

For a discussion of these and other factors, see the risks discussed in our Annual Report on Form 10-K for the year ended January 31, 2004 in Item 1 — Business, under the caption “Risk Factors That May Affect Future Results.”

Although we believe the expectations reflected in the forward-looking statements are reasonable, they relate only to events as of the date on which the statements are made, and we cannot assure you that our future results, levels of activity, performance or achievements will meet these expectations. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We do not intend to update any of the forward-looking statements after the date of this report to conform these statements to actual results or to changes in our expectations, except as may be required by law.


Item 3.	*Quantitative and Qualitative Disclosures About Market Risk.*

As of April 30, 2004, we held a portfolio of $19.8 million in fixed income marketable securities for which, due to the conservative nature of our investments and relatively short duration, interest rate risk is mitigated. We do not own any derivative financial instruments in our portfolio. Accordingly, we do not believe there is any material market risk exposure with respect to derivatives or other financial instruments that would require disclosure under this item.


Item 4.	*Controls and Procedures.*

The Registrant’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Registrant’s disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be included in this quarterly report has been made known to them in a timely fashion.

The Registrant’s Chief Executive Officer and Chief Financial Officer also conducted an evaluation of the Registrant’s internal control over financial reporting to determine whether any changes occurred during the quarter covered by this report that have materially affected, or are reasonably likely to affect, the Registrant’s internal control over financial reporting. Based on the evaluation, there have been no such changes during the quarter covered by this report.

PART II. OTHER INFORMATION


Item 1.	*Legal Proceedings.*

On or about November 5, 2001, a putative class action complaint was filed in the United States District Court for the Southern District of New York naming as defendants us, James K. Johnson, Jr., Matthew C. Diamond, BancBoston Robertson Stephens, Volpe Brown Whelan and Company, Dain Rauscher Wessel and Ladenburg Thalmann & Co., Inc. The complaint purportedly was filed on behalf of persons purchasing our common stock between May 14, 1999 and December 6, 2000 and alleges violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 (the “Securities Act”) and Section 10(b) of the Securities Exchange Act of 1934 (the “’34 Act”) and Rule 10b-5 promulgated thereunder. On or about April 19, 2002, plaintiff filed an amended complaint against us, the individual defendants and the underwriters of our initial public offering. The amended complaint asserts violations of Section 10(b) of the ’34 Act and mirrors allegations asserted against scores of other issuers sued by plaintiffs’ counsel. Pursuant to an omnibus agreement negotiated with representatives of the plaintiffs’ counsel, Messrs. Diamond and Johnson have been dismissed from the litigation without prejudice. In accordance with the Court’s case management instructions, we joined in a global motion to dismiss the amended complaints, which was filed by the issuers’ liaison counsel. By opinion and order dated February 19, 2003, the District Court denied in part and granted in part the global motion to dismiss. With respect to us, the Court dismissed the Section 10(b) claim and let the plaintiffs proceed on the Section 11 claim. Accordingly, the remaining claim against us will focus solely on whether the registration statement filed in connection with our initial public offering contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statement therein not misleading. Although we have not retained a damages expert at this time, the dismissal of the Section 10(b) claim likely will reduce the potential damages that plaintiffs can claim. Management believes that the remaining allegations against us are without merit. We and the individual defendants have retained Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, PC in connection with this matter. We participated in the Court-ordered mediation with the other issuer defendants, the issuers’ insurers and plaintiffs to explore whether a global resolution of the claims against the issuers could be reached. To this end, a memorandum of understanding setting forth the proposed terms of a settlement was signed by counsel to several issuers, including our counsel, which is not binding upon us. In a press release dated June 26, 2003, plaintiffs’ counsel announced that the memorandum of understanding had been signed, and that the process of obtaining the approval of all parties to the settlement was underway. We are participating in that process. Any definitive settlement, however, will require final approval by the Court after notice to all class members and a fairness hearing.

On or about March 8, 2003, several putative class action complaints were filed in the United States District Court for the Southern District of New York naming as defendants us, James K. Johnson, Jr., Matthew C. Diamond and Samuel A. Gradess. The complaints purportedly were filed on behalf of persons who purchased our common stock between August 1, 2002 and January 23, 2003, and, among other things, allege violations of Section 10(b) and Section 20(a) of the ’34 Act and Rule 10b-5 promulgated thereunder stemming from a series of allegedly false and misleading statements made by us to the market between August 1, 2002 and January 23, 2003. At a conference held on May 30, 2003, the Court consolidated the actions described above. On August 5, 2003, Plaintiffs filed a consolidated class action complaint (the “Consolidated Complaint”) naming the same defendants, which supersedes the initial complaint. Relying in part on information allegedly obtained from former employees, the Consolidated Complaint alleges, among other things, misrepresentations of our business and financial condition and the results of operations during the period from March 16, 2001 through January 23, 2003 (the “class period”), which artificially inflated the price of our stock, including without limitation, improper acceleration of revenue, misrepresentation of expense treatment, failure to properly account for and disclose consignment transactions, and improper deferral of expense recognition. The Consolidated Complaint further alleges that during the class period the individual defendants and the Company sold stock and completed acquisitions using our stock. We and the individual defendants filed a joint answer to the Consolidated Complaint on September 26, 2003. The individual defendants have retained the law firm of Cahill, Gordon & Reindel in connection with this matter. We have retained the law firm of Katten Muchin Zavis Rosenman in connection with this matter.

Management believes that the allegations against the Company and Messrs. Diamond, Gradess and Johnson are without merit and intends to vigorously defend the action.

dELiA*s currently is party to a purported class action litigation, which originally was filed in two separate complaints in Federal District Court for the Southern District of New York in 1999 against dELiA*s Inc. and certain of its officers and directors. These complaints were consolidated. The consolidated complaint alleges, among other things, that the defendants violated Rule 10b-5 under the ’34 Act by making material misstatements and by failing to disclose certain allegedly material information regarding trends in the business during part of 1998. The parties have reached an agreement on a full settlement of the action, which was approved by the court on April 21, 2004. The entire settlement amount will be covered by dELiA*s insurance carrier.

On or about February 1, 2002, a complaint was filed in the Circuit Court of Cook County, Illinois naming dELiA*s as a defendant. The complaint purportedly was filed on behalf of the State of Illinois under the False Claims Act and the Illinois Whistleblower Reward and Protection Act and seeks unspecified damages and penalties for dELiA*s alleged failure to collect and remit use tax on items sold by dELiA*s through its catalogs and website to Illinois residents. On April 8, 2004, the complaint was served on dELiA*s by the Illinois Attorney General’s Office, which assumed prosecution of the complaint from the original filer. dELiA*s has retained the law firm of Katten Muchin Zavis Rosenman in connection with this matter. Management believes the proceedings are without merit and intends to defend the action vigorously.

We are involved in additional legal proceedings that have arisen in the ordinary course of business. We believe that, apart from the actions set forth above, there is no claim or litigation pending, the outcome of which could have a material adverse effect on our financial condition or operating results.


Item 2.	*Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.*

On January 29, 2003, we adopted a stock repurchase program authorizing the repurchase of up to $10.0 million of our common stock from time to time in the open market at prevailing market prices or in privately negotiated transactions. Since the inception of our share repurchase program, we have repurchased a total of 600,000 shares for approximately $3.0 million. All 600,000 shares were repurchased during the first quarter of fiscal 2003.


Item 3.	*Defaults upon Senior Securities.*

Not applicable.


Item 4.	*Submission of Matters to a Vote of Security Holders.*

Not applicable


Item 5.	*Other Information.*

Not applicable.


Item 6.	*Exhibits and Reports on Form 8-K.*

(a) Exhibits


3	.1	Restated Certificate of Incorporation (filed as Exhibit 3.1 to Registration Statement on Form S-1, No. 333-74159, and incorporated herein by reference).
3	.2	Certificate of Amendment to Restated Certificate of Incorporation (filed as Exhibit 3.1 to Current Report on Form 8-K, filed with the SEC on August 13, 2001 and incorporated herein by reference).
3	.3	Certificate of Amendment of Restated Certificate of Incorporation of Alloy Online, Inc. (incorporated by reference to Alloy’s Current Report on Form 8-K filed March 13, 2002).
3	.4	Certificate of Designations, Preferences, and Rights of the Series B Convertible Preferred Stock of Alloy Online, Inc. (filed as Exhibit 3.1 to Current Report on Form 8-K, filed with the SEC on June 21, 2001 and incorporated herein by reference).
3	.5	Certificate of Designations of Series C Junior Participating Preferred Stock of Alloy, Inc. (incorporated by reference to Exhibit 4.0 to the Registrant’s Current Report on Form 8-K filed April 14, 2003).
3	.6	Restated Bylaws (filed as Exhibit 3.2 to Registration Statement on Form S-1, No. 333-74159, and incorporated herein by reference).
10	.1.1	Mortgage Note dated August 6, 1999 made by dELiAs Distribution Company in favor of Allfirst Bank (incorporated by reference to dELiAs Inc. Quarterly Report on Form 10-Q filed September 14, 1999).
10	.1.2*	Mortgage Note Modification Agreement and Declaration of No Set-off dated April 19, 2004, between dELiA*s Distribution Company and Manufacturers and Traders Trust Company.
10	.2.1	Construction Loan Agreement dated August 6, 1999, among dELiAs Distribution Company, dELiAs Inc. and Allfirst Bank (incorporated by reference to dELiA*s Inc. Quarterly Report on Form 10-Q filed September 14, 1999).
10	.2.2*	Amendment to Construction Loan Agreement dated April 19, 2004, among dELiAs Distribution Company, dELiAs Corp. and Alloy, Inc.
10	.3.1*	Continuing Guaranty dated April 19, 2004, given by dELiA*s Corp. in favor of Manufacturers and Traders Trust Company.
10	.3.2*	Continuing Guaranty dated April 19, 2004, given by Alloy, Inc. in favor of Manufacturers and Traders Trust Company.
31	.1*	Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer
31	.2*	Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer
32	.1*	Certification of Matthew C. Diamond, Chief Executive Officer, dated June 9, 2004, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
32	.2*	Certification of Samuel A. Gradess, Chief Financial Officer, dated June 9, 2004, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.

* Filed herewith

(b) Reports on Form 8-K.

During the fiscal quarter ended April 30, 2004, we filed the following Current Report on Form 8-K:

1) On April 5, 2004, we filed a Current Report on Form 8-K to report under Item 7 (Exhibits) and Item 12 (Results of Operations and Financial Condition), a press release (attached as Exhibit 99.1) regarding our financial results for the fiscal quarter and full year ended January 31, 2004.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

ALLOY, INC.

By: /s/ SAMUEL A. GRADESS

Samuel A. Gradess

Chief Financial Officer

(Principal Financial Officer and

Duly Authorized Officer)

Date: June 9, 2004

EXHIBIT INDEX


3	.1	Restated Certificate of Incorporation (filed as Exhibit 3.1 to Registration Statement on Form S-1, No. 333-74159, and incorporated herein by reference).
3	.2	Certificate of Amendment to Restated Certificate of Incorporation (filed as Exhibit 3.1 to Current Report on Form 8-K, filed with the SEC on August 13, 2001 and incorporated herein by reference).
3	.4	Certificate of Amendment of Restated Certificate of Incorporation of Alloy Online, Inc. (incorporated by reference to Alloy’s Current Report on Form 8-K filed March 13, 2002).
3	.4	Certificate of Designations, Preferences, and Rights of the Series B Convertible Preferred Stock of Alloy Online, Inc. (filed as Exhibit 3.1 to Current Report on Form 8-K, filed with the SEC on June 21, 2001 and incorporated herein by reference).
3	.5	Certificate of Designations of Series C Junior Participating Preferred Stock of Alloy, Inc. (incorporated by reference to Exhibit 4.0 to the Registrant’s Current Report on Form 8-K filed April 14, 2003).
3	.6	Restated Bylaws (filed as Exhibit 3.2 to Registration Statement on Form S-1, No. 333-74159, and incorporated herein by reference).
10	.1.1	Mortgage Note dated August 6, 1999 made by dELiAs Distribution Company in favor of Allfirst Bank (incorporated by reference to dELiAs Inc. Quarterly Report on Form 10-Q filed September 14, 1999).
10	.1.2*	Mortgage Note Modification Agreement and Declaration of No Set-off dated April 19, 2004, between dELiA*s Distribution Company and Manufacturers and Traders Trust Company.
10	.2.1	Construction Loan Agreement dated August 6, 1999, among dELiAs Distribution Company, dELiAs Inc. and Allfirst Bank (incorporated by reference to dELiA*s Inc. Quarterly Report on Form 10-Q filed September 14, 1999).
10	.2.2*	Amendment to Construction Loan Agreement dated April 19, 2004, among dELiAs Distribution Company, dELiAs Corp. and Alloy, Inc.
10	.3.1*	Continuing Guaranty dated April 19, 2004, given by dELiA*s Corp. in favor of Manufacturers and Traders Trust Company.
10	.3.2*	Continuing Guaranty dated April 19, 2004, given by Alloy, Inc. in favor of Manufacturers and Traders Trust Company.
31	.1*	Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.
31	.2*	Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.
32	.1*	Certification of Matthew C. Diamond, Chief Executive Officer, dated June 9, 2004, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
32	.2*	Certification of Samuel A. Gradess, Chief Financial Officer, dated June 9, 2004, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.

* Filed herewith

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents


	•	the inclusion of dELiA*s selling and marketing expenses (acquired in September 2003); and

	•	the inclusion of OCM’s selling and marketing expenses (acquired in May 2003).


	•	the addition of OCM’s expenses;

	•	the inclusion of dELiA*s expenses; and

	•	increased expenses associated with growing a public company such as professional fees, insurance premiums, occupancy costs due to office expansions, and telecommunications costs.


	•	changes in business and economic conditions and other adverse conditions in our markets;

	•	increased competition;

	•	our inability to achieve and maintain profitability;

	•	merchandising and marketing strategies;

	•	inventory performance;

	•	changes in consumer preferences or fashion trends;

	•	seasonality of the retail and direct-marketing businesses;

	•	significant increases in paper, printing and postage costs;

	•	litigation that may have an adverse effect on the financial results or reputation of the Company;

	•	reliance on third-party suppliers;

	•	our ability to successfully implement our operating, marketing, acquisition and expansion strategies; and

	•	natural disasters and terrorist attacks.



	Samuel A. Gradess
	Chief Financial Officer
	(Principal Financial Officer and
	Duly Authorized Officer)