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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2002
[ ] 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 (I.R.S. Employer Identification No.)
of incorporation or organization)
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 (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of September 6, 2002, the registrant had 39,290,354 shares of common stock,
$.01 par value per share, outstanding.
ALLOY, INC.
CONTENTS
PART I - FINANCIAL INFORMATION
PAGE
NO.
Item 1. Financial Statements
Consolidated Condensed Balance Sheets, July 31, 2002 (unaudited)
and January 31, 2002 (audited) ...................................... 3
Consolidated Condensed Statements of Operations, Three Months Ended
July 31, 2002 (unaudited) and July 31, 2001 (unaudited) ............. 4
Consolidated Condensed Statements of Comprehensive (Loss) Income,
Three Months Ended July 31, 2002 (unaudited) and July 31, 2001
(unaudited) ......................................................... 6
Consolidated Condensed Statements of Operations, Six Months Ended
July 31, 2002 (unaudited) and July 31, 2001 (unaudited).............. 7
Consolidated Condensed Statements of Comprehensive (Loss) Income,
Six Months Ended July 31, 2002 (unaudited) and July 31, 2001
(unaudited) ......................................................... 9
Consolidated Condensed Statements of Cash Flows, Six Months Ended
July 31, 2002 (unaudited) and July 31, 2001 (unaudited) ............. 10
Consolidated Condensed Statement of Changes in Stockholders' Equity,
Six Months Ended July 31, 2002 (unaudited) and
July 31, 2001(unaudited) ............................................ 12
Notes to Consolidated Condensed Financial Statements (unaudited) .... 14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................... 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ......................................... 31
Item 2. Changes in Securities and Use of Proceeds ................. 32
Item 3. Defaults Upon Senior Securities ........................... 32
Item 4. Submission of Matters to a Vote of Security Holders ....... 32
Item 5. Other Information ......................................... 33
Item 6. Exhibits and Reports on Form 8-K .......................... 33
SIGNATURES .......................................................... 34
CERTIFICATIONS ...................................................... 34
EXHIBIT INDEX ....................................................... 36
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ALLOY, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
January 31, July 31,
2002 2002
----------- -----------
(audited) (unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 61,618 $ 31,007
Available-for-sale marketable securities 15,049 33,052
Accounts receivable, net 13,662 25,039
Inventories, net 16,400 24,214
Prepaid catalog costs 1,786 3,284
Other current assets 1,984 3,187
-------- --------
TOTAL CURRENT ASSETS 110,499 119,783
Property and equipment, net 8,554 8,519
Goodwill, net 178,474 245,566
Intangible and other assets, net 12,680 16,852
-------- --------
TOTAL ASSETS $310,207 $390,720
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 11,199 $ 24,869
Deferred revenues 15,481 20,463
Accrued expenses and other current liabilities 18,389 14,872
-------- --------
TOTAL CURRENT LIABILITIES 45,069 60,204
Long-term liabilities 358 251
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; 1,765 and 1,715 shares issued and outstanding, respectively 15,046 15,570
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; 1,765 and 1,715 shares issued and outstanding as Series B
Redeemable Convertible Preferred Stock (above), respectively -- --
Common Stock; $01 par value; 200,000,000 shares authorized; 34,916,877
and 39,264,556 shares issued and outstanding, respectively 349 393
Additional paid-in capital 324,719 386,007
Accumulated deficit (75,250) (71,642)
Deferred compensation (31) (16)
Accumulated other comprehensive (loss) income (53) 84
Less common stock held in treasury, at cost; none and 8,275, respectively -- (131)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 249,734 314,695
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $310,207 $390,720
======== ========
The accompanying Notes are an integral part of these financial statements
3
ALLOY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(unaudited)
For the three months
ended July 31,
2001 2002
------------ ------------
NET MERCHANDISE REVENUES $ 21,780 $ 31,530
SPONSORSHIP AND OTHER REVENUES 6,955 20,443
------------ ------------
TOTAL REVENUES 28,735 51,973
COST OF GOODS SOLD 12,650 24,163
------------ ------------
GROSS PROFIT 16,085 27,810
------------ ------------
OPERATING EXPENSES:
Selling and marketing 15,405 22,498
General and administrative 3,341 3,985
Amortization of goodwill and other intangible assets 4,613 1,189
------------ ------------
TOTAL OPERATING EXPENSES 23,359 27,672
------------ ------------
(LOSS) INCOME FROM OPERATIONS (7,274) 138
INTEREST INCOME, NET 286 597
------------ ------------
(LOSS) INCOME BEFORE INCOME TAXES (6,988) 735
PROVISION FOR INCOME TAXES -- 197
------------ ------------
NET (LOSS) INCOME $ (6,988) $ 538
============ ============
CHARGE ATTRIBUTABLE TO BENEFICIAL CONVERSION
FEATURE OF PREFERRED STOCK ISSUED 3,976 --
PREFERRED STOCK DIVIDEND AND ACCRETION 368 479
------------ ------------
NET (LOSS) INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (11,332) $ 59
============ ============
4
BASIC AND DILUTED LOSS PER SHARE OF
COMMON STOCK:
Basic (loss) earnings attributable to common
stockholders per share $ (0.51) $ 0.00
============ ============
Diluted (loss) earnings attributable to common
stockholders per share $ (0.51) $ 0.00
============ ============
WEIGHTED AVERAGE BASIC COMMON SHARES OUTSTANDING 22,254,923 38,204,132
============ ============
WEIGHTED AVERAGE DILUTED COMMON SHARES OUTSTANDING 22,254,923 39,991,747
============ ============
The accompanying Notes are an integral part of these financial statements.
5
ALLOY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(AMOUNTS IN THOUSANDS)
(unaudited)
For the three months
ended July 31,
2001 2002
------- -------
Net (loss) income $(6,988) $ 538
Other comprehensive income, net of tax:
Net unrealized gain on available-for-sale securities 1 195
------- ------
Comprehensive (loss) income $(6,987) $ 733
======= ======
The accompanying Notes are an integral part of these financial statements.
6
ALLOY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(unaudited)
For the six months
ended July 31,
2001 2002
----------- -----------
NET MERCHANDISE REVENUES $ 45,513 $ 62,597
SPONSORSHIP AND OTHER REVENUES 11,463 39,809
----------- -----------
TOTAL REVENUES 56,976 102,406
COST OF GOODS SOLD 25,013 45,723
----------- -----------
GROSS PROFIT 31,963 56,683
----------- -----------
OPERATING EXPENSES:
Selling and marketing 32,888 43,939
General and administrative 6,290 8,100
Amortization of goodwill and other intangible assets 8,354 1,724
----------- ----------
TOTAL OPERATING EXPENSES 47,532 53,763
----------- ----------
(LOSS) INCOME FROM OPERATIONS (15,569) 2,920
INTEREST INCOME, NET 489 1,132
GAIN ON SALES OF MARKETABLE SECURITIES, NET 658 --
----------- ----------
(LOSS) INCOME BEFORE INCOME TAXES $ (14,422) $ 4,052
PROVISION FOR INCOME TAXES -- 444
----------- ----------
NET (LOSS) INCOME $ (14,422) $ 3,608
=========== ==========
CHARGE FOR BENEFICIAL CONVERSION FEATURE
OF PREFERRED STOCK ISSUED 6,745 --
PREFERRED STOCK DIVIDENDS AND ACCRETION 493 1,037
----------- -----------
NET(LOSS)INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (21,660) $ 2,571
=========== ===========
7
BASIC AND DILUTED LOSS PER SHARE OF
COMMON STOCK:
Basic (loss) earnings attributable to
common stockholders per share $ (1.00) $ 0.07
=========== ===========
Diluted (loss) earnings attributable to
common stockholders per share $ (1.00) $ 0.06
=========== ===========
WEIGHTED AVERAGE BASIC SHARES OUTSTANDING 21,659,774 37,573,097
=========== ===========
WEIGHTED AVERAGE DILUTED COMMON SHARES OUTSTANDING 21,659,774 39,649,757
=========== ===========
The accompanying Notes are an integral part of these financial statements.
8
ALLOY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(AMOUNTS IN THOUSANDS)
(unaudited)
For the six months
ended July 31,
2001 2002
----------- -----------
Net (loss) income $ (14,422) $ 3,608
Other comprehensive income, net of tax:
Net unrealized gain on available-for-sale securities 15 137
----------- ----------
Comprehensive (loss) income $ (14,407) $ 3,745
=========== ==========
The accompanying Notes are an integral part of these financial statements.
9
ALLOY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(unaudited)
For the six months
ended July 31,
2001 2002
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(14,422) $ 3,608
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities:
Depreciation and amortization 9,381 3,674
Compensation charge for issuance of stock options 151 15
Realized gain on sales of marketable securities, net (658) --
Changes in operating assets and liabilities - net of effect of
business acquisitions - (increase) decrease in:
Accounts receivable, net (184) 1,797
Inventories (1,303) (6,666)
Prepaid catalog costs (1,057) (1,046)
Other current assets 674 (712)
Other assets (1) 161
Accounts payable, accrued expenses and other (2,846) 4,647
------- -------
Net cash (used in) provided by operating activities (10,265) 5,478
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (5,623) (68,523)
Proceeds from the sales of marketable securities 15,880 50,657
Capital expenditures (1,404) (1,964)
Sale of capital assets -- 372
Cash paid in connection with acquisitions of businesses,
net of cash acquired (5,872) (67,351)
Purchase of mailing list, domain names and marketing rights (30) (4,850)
------- -------
Net cash provided by (used in) investing activities 2,951 (91,659)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock -- 55,012
Net proceeds from sale of Series A and Series B Redeemable
Convertible Preferred Stock 26,720 --
Exercise of stock options and warrants
and common stock purchases under the employee stock purchase plan 958 741
Payments of capitalized lease obligation (69) (183)
------- -------
Net cash provided by financing activities 27,609 55,570
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 20,295 (30,611)
10
CASH AND CASH EQUIVALENTS, beginning of period 9,338 61,618
------- -------
CASH AND CASH EQUIVALENTS, end of period $29,633 $31,007
======= =======
Supplemental disclosure of non-cash investing and financing activity:
Issuance of common stock and warrants in connection
with acquisitions $112,077 $ 4,467
Conversion of Series B Redeemable Convertible Preferred
Stock into common stock -- $ 513
The accompanying Notes are an integral part of these financial statements.
11
ALLOY, INC.
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(unaudited)
For the six months ended July 31, 2002
Accumulated
Other
Common Stock Additional Comprehensive Treasury Shares
------------------ Paid-in Accumulated Deferred Income ---------------
Shares Amount Capital Deficit Compensation (Loss) Shares Amount Total
---------- ------ --------- ----------- ------------ ------------- ------- ------ --------
Balance, February 1, 2002 34,916,877 $349 $324,719 $(75,250) $(31) $(53) -- -- $249,734
Issuance of common stock
and warrants for acquisition
of business 215,206 2 4,465 -- -- -- -- -- 4,467
Shares returned from escrow -- -- -- -- -- -- (8,275) (131) (131)
Amortization of deferred
compensation -- -- -- -- 15 -- -- -- 15
Issuance of common stock
in connection with public
offering, net of issuance costs 4,000,000 40 56,607 -- -- -- -- -- 56,647
Issuance of common stock
for conversion of Series B
Redeemable Convertible
Preferred Stock 43,913 1 513 -- -- -- -- -- 514
Issuance of common stock pursuant
to the exercise of options and
warrants and the employee stock
purchase plan 88,560 1 740 -- -- -- -- -- 741
Net income -- -- -- 3,608 -- -- -- -- 3,608
Accretion of discount and
dividends on Series B
Convertible Preferred Stock -- -- (1,037) -- -- -- -- -- (1,037)
Other comprehensive income, net -- -- -- -- -- 137 -- -- 137
---------- ------ --------- ----------- ------------ ------------- ------- ------ --------
Balance, July 31, 2002 39,264,556 $393 $386,007 $(71,642) $(16) $84 (8,275) $(131) $314,695
========== ====== ========= =========== ============ ============= ======= ====== ========
The accompanying Notes are an integral part of these financial statements.
12
ALLOY, INC.
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(unaudited)
For the six months ended July 31, 2001
Common Stock Accumulated Other
--------------- Additional Accumulated Deferred Comprehensive
Shares Amount Paid-in Capital Deficit Compensation Income (Loss) Total
---------- ------ ---------------- ------------ ------------- ------------------ -------
Balance, February 1, 2001 21,245,958 $212 $140,864 $(52,906) $(728) $ 839 $ 88,281
Issuance of common stock for
acquisitions of businesses 1,510,610 15 12,062 -- -- -- 12,077
Cancellation of stock options
issued to employees -- -- (115) -- 115 -- --
Amortization of deferred
compensation -- -- -- -- 151 -- 151
Issuance of common stock pursuant
to the exercise of options and
warrants and common stock purchases
under the employee stock purchase plan 374,973 4 955 -- -- -- 959
Net loss -- -- -- (14,422) -- -- (14,422)
Impact of beneficial conversion
feature in issuance of Series A and
Series B Redeemable Convertible
Preferred Stock -- -- 6,745 (6,745) -- -- --
Issuance of warrants to purchase
common stock -- -- 3,916 -- -- -- 3,916
Accretion of discount and
dividends on Series A and Series B
Redeemable Convertible Preferred Stock -- -- (493) -- -- -- (493)
Loss on reclassification of
available-for-sale marketable
securities to trading securities,
net of other comprehensive income -- -- -- -- -- (839) (839)
---------- ---- -------- -------- ----- ---- --------
Balance, July 31, 2001 23,131,541 $231 $163,934 $(74,073) $(462) -- $ 89,630
========== ==== ======== ======== ===== ==== ========
The accompanying Notes are an integral part of these financial statements
13
ALLOY, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited financial statements have been prepared by Alloy,
Inc. ("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 income/losses and cash flows at
July 31, 2002 and for all periods presented have been made. The results of
operations for the periods ended July 31, 2001 and 2002 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 and normally included in the financial
statements have been condensed or omitted. It is suggested that these financial
statements and accompanying notes (the "Notes") be read in conjunction with the
financial statements and accompanying notes related to Alloy's fiscal year ended
January 31, 2002 included in Alloy's Annual Report on Form 10-K for the fiscal
year ended January 31, 2002 filed with the Securities and Exchange Commission
("SEC") on May 1, 2002.
2. BUSINESS
Alloy was incorporated in the State of Delaware on January 22, 1996. Alloy is a
media, direct marketing and marketing services company targeting Generation Y,
the more than 60 million boys and girls in the United States between the ages of
10 through 24. Alloy's business integrates direct mail catalogs, print media,
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 the Generation Y consumers
through its various media assets, direct marketing activities and marketing
service programs, and as a result, Alloy is able to offer advertisers targeted
access to the youth market and to sell third-party branded products in key
Generation Y spending categories, including apparel, action sports equipment and
accessories directly to the youth market.
3. NET (LOSS) EARNINGS PER SHARE
The following table sets forth the computation of net (loss) earnings per share.
Alloy has applied the provisions of Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share" in the calculations below. Amounts in
thousands, except share and per share data:
Three months
ended July 31,
2001 2002
------------ ------------
(unaudited) (unaudited)
Numerator:
Net (loss) income $ (6,988) $ 538
Charge for beneficial conversion feature of preferred stock issued 3,976 --
Dividend and accretion on preferred stock 368 479
------------ ------------
Net (loss) income attributable to common stockholders $ (11,332) $ 59
============ ============
Denominator:
Weighted average basic common shares outstanding 22,254,923 38,204,132
============ ============
Warrants to purchase common stock -- 6,063
Contingently issuable common stock pursuant to acquisitions -- 1,015,856
Options to purchase common stock -- 765,696
------------ ------------
14
Weighted average diluted common shares outstanding 22,254,923 39,991,747
============ ============
Basic (loss) earnings attributable to common stockholders per share $ (0.51) $ 0.00
============ ============
Diluted (loss) earnings attributable to common stockholders per share $ (0.51) $ 0.00
============ ============
Six months
ended July 31,
2001 2002
------------ ------------
(unaudited) (unaudited)
Numerator:
Net (loss) income $ (14,422) $ 3,608
Charge for beneficial conversion feature of preferred stock issued 6,745 --
Dividend and accretion on preferred stock 493 1,037
------------ ------------
Net (loss) income attributable to common stockholders $ (21,660) $ 2,571
============ ============
Denominator:
Weighted average basic common shares outstanding 21,659,774 37,573,097
============ ============
Warrants to purchase common stock -- 44,427
Contingently issuable common stock pursuant to acquisitions -- 1,102,617
Options to purchase common stock -- 929,616
------------- ------------
Weighted average diluted common shares outstanding 21,659,774 39,649,757
============ ============
Basic (loss) earnings attributable to common stockholders per share $ (1.00) $ 0.07
============ ============
Diluted (loss) earnings attributable to common stockholders per share $ (1.00) $ 0.06
============ ============
15
For the three months and six months ended July 31, 2002, diluted earnings per
common share are based upon the weighted average number of common shares
outstanding during the period assuming the issuance of common shares for all
dilutive potential common shares outstanding.
The calculation of diluted loss per share for the three months and six months
ended July 31, 2001 and July 31, 2002 excludes the securities listed below
because to include them in the calculation would be antidilutive:
Three months
ended July 31,
2001 2002
------------------ --------------
(unaudited) (unaudited)
Options to purchase common stock 931,762 --
Warrants to purchase common stock 8,224 --
Conversion of Series A and Series B Redeemable
Convertible Preferred Stock 2,428,475 1,576,108
Contingently issuable common shares pursuant to
acquisitions 424,855 --
--------- ---------
3,793,316 1,576,108
========= =========
Six months
ended July 31,
2001 2002
------------------ ---------------
(unaudited) (unaudited)
Options to purchase common stock 698,218 --
Warrants to purchase common stock 7,625 --
Conversion of Series A and Series B Redeemable
Convertible Preferred Stock 2,428,475 1,576,108
Contingently issuable common shares pursuant to
acquisitions 424,855 --
--------- ---------
3,559,713 1,576,108
========= =========
4. DERIVATIVE FINANCIAL INSTRUMENTS
As of July 31, 2002, Alloy does not have any freestanding derivative
instruments, or instruments with embedded derivative features.
5. GOODWILL AND INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board (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
16
nonamortization provisions of SFAS No. 142 as of February 1, 2002. Alloy has
completed the required impairment testing of goodwill and other intangibles with
indefinite lives as of February 1, 2002, and has concluded that there was no
impairment of such assets at that date.
The following table reconciles previously reported net income as if the
provisions of SFAS No. 142 had been in effect in 2001:
Three months Six months
(amounts in thousands except per share data) ended July 31, ended July 31,
------------------------- -------------------------
2001 2002 2001 2002
(unaudited) (unaudited) (unaudited) (unaudited)
Reported net income $(6,988) $538 $(14,442) $3,608
Add back: goodwill amortization 4,613 -- 8,354 --
------- ----- ------- ------
Adjusted net (loss) income $(2,375) $ 538 $(6,068) $3,608
======= ===== ======= ======
Basic (loss) earnings attributable to common
stockholders per share
as reported $(0.51) $0.00 $(1.00) $0.07
as adjusted $(0.30) $0.00 $(0.61) $0.07
Diluted (loss) earnings attributable to common
stockholders per share
as reported $(0.51) $0.00 $(1.00) $0.06
as adjusted $(0.30) $0.00 $(0.61) $0.06
17
January 31, 2002 July 31, 2002
(unaudited) (unaudited)
---------------------------- ----------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
(amounts in thousands) Amount Amortization Amount Amortization
---------- ------------ ---------- ------------
Amortized intangible
assets:
Mailing Lists $3,553 $293 $4,103 $791
Noncompete Agreements 2,635 206 2,695 600
Marketing Rights 800 33 5,650 739
Websites 595 42 741 189
---------- ------------ ---------- ------------
$7,583 $574 $13,189 $2,319
========== ============ ========== ============
Nonamortized intangible
asset:
Trademarks $4,130 -- $4,620 --
========== ============ ========== ============
Alloy purchased a two year right to serve as the agent for selling, licensing
and marketing the media assets of a youth-oriented website for $4.9 million.
The weighted average amortization period for acquired intangible assets
subject to amortization is approximately 3 years. The estimated remaining
amortization expense for fiscal 2002 is $2.4 million and for each of the next
four years through fiscal 2007 is $4.7 million, $2.6 million, $1.0 million and
$124,000.
Alloy is continuing the review and determination of the fair value of the
assets acquired and liabilities assumed for acquisitions completed in fiscal
2002. Accordingly, the allocations of the purchase prices are subject to
revision based on the final determination of appraised and other fair values.
18
Goodwill
The changes in the carrying amount of goodwill for the six months ended July 31,
2002 are as follows (in thousands):
Gross balance as of January 31, 2002 $ 205,120
Accumulated goodwill amortization as of January 31, 2002 (26,646)
---------
Net balance as of January 31, 2002 178,474
Goodwill acquired during the year 67,092
---------
Net balance as of July 31, 2002 (unaudited) $ 245,566
=========
7. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143, effective for fiscal years beginning after June 15,
2002, addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. Alloy is currently analyzing this statement and has not yet
determined its impact on the consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," effective for exit or disposal activities
that are initiated after December 31, 2002. This standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Alloy does not expect that the implementation of this standard will have a
material impact on its financial condition, results of operations or cash flows.
8. SEGMENT REPORTING
Alloy has two operating segments: direct marketing and content. Reportable data
for Alloy's operating segments were as follows for the three month and six month
periods ended July 31, 2002 and July 31, 2001 (in thousands):
(Unaudited)
Direct
Marketing Content All Other Consolidated
--------- --------- --------- ------------
Results for the three months ended July 31, 2002:
Revenue from external customers $ 50,789 $ 1,184 $ -- $ 51,973
Operating income before depreciation
and amortization of intangible assets 2,059 255 -- 2,314
Depreciation and amortization of
intangible assets (2,169) (7) -- (2,176)
Interest income, net -- -- 597 597
(Loss) income before taxes (110) 248 597 735
Provision for income taxes (196) (1) -- (197)
Net (loss) income (306) 247 597 538
Total assets $320,717 $ 5,946 $64,057 $ 390,720
(Unaudited)
Direct
Marketing Content All Other Consolidated
--------- --------- --------- ------------
Results for the three months ended July 31, 2001:
Revenue from external customers $ 27,796 $ 939 $ -- $ 28,735
Operating loss before depreciation
and amortization of goodwill and
other intangible assets (2,030) (91) -- (2,121)
Depreciation and amortization of
goodwill and other intangible assets (4,660) (493) -- (5,153)
Interest income, net -- -- 286 286
(Loss) income before taxes (6,690) (584) 286 (6,988)
Net (loss) income (6,690) (584) 286 (6,988)
Total assets $ 94,509 $7,214 $ 35,259 $ 136,982
19
(unaudited)
Direct Marketing Content All Other Consolidated
---------------- ------- --------- ------------
Results for the six months ended July 31, 2002:
Revenue from external customers $100,356 2,050 $ -- $102,406
Operating income before depreciation and amortization
of intangible assets 6,302 292 -- 6,594
Depreciation and amortization of intangible assets (3,660) (14) -- (3,674)
Interest income, net -- -- 1,132 1,132
Income before taxes 2,642 278 1,132 4,052
Provision for income taxes (432) (12) (444)
Net income 2,210 266 1,132 3,608
Total assets $320,717 $5,946 $64,057 $390,720
(unaudited)
Direct Marketing Content All Other Consolidated
---------------- ------- --------- ------------
Results for the six months ended July 31, 2001:
Revenue from external customers $ 55,281 $ 1,695 $ -- $ 56,976
Operating loss before depreciation and amortization
of goodwill and other intangible assets (6,016) (172) -- (6,188)
Depreciation and amortization of goodwill and
other intangible assets (8,423) (958) -- (9,381)
Interest income, net -- -- 489 489
Realized gain on sales of marketable securities, net -- -- 658 658
(Loss) income before taxes (14,439) (1,130) 1,147 (14,422)
Net (loss) income (14,439) (1,130) 1,147 (14,422)
Total assets $ 94,509 $ 7,214 $35,259 $136,982
The carrying amount of goodwill by reportable segment as of July 31, 2002 and
January 31, 2002 was as follows:
Goodwill
-----------------------------------
(amounts in January 31, 2002 July 31, 2002
thousands) ----------------- --------------
Direct Marketing $173,123 $240,309
Content 5,351 5,257
---------------- -------------
Total $178,474 $245,566
================ =============
9. RECENT ACQUISITIONS
On July 22, 2002, Alloy acquired all of the issued and outstanding stock of MPM
Holding, Inc., whose sole operating asset is Armed Forces Communications, Inc,
d/b/a/ Market Place Media, a major media placement and promotions company
serving the college, multi-cultural and military markets through print,
broadcast, out-of-home and event media. Alloy paid $48 million in cash to
complete the acquisition, subject to adjustment based upon the outcome of a
final working capital audit.
On May 8, 2002, Alloy completed the acquisition of the assets of the Events and
Promotions business of Student Advantage, Inc. in exchange for $6.5 million in
cash and up to $1.5 million of future performance-based cash consideration, of
which $1 million has been paid as of September 10, 2002.
20
The operations of these acquisitions have been included in Alloy's financial
statements since the dates of the acquisitions. 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. For these acquisitions, Alloy is completing the review and
determination of the fair values of the assets acquired and liabilities assumed.
Accordingly, the allocations of the purchase prices are subject to revision
based on the final determination of appraised and other fair values.
10. SUBSEQUENT EVENTS.
On August 5, 2002 Alloy acquired substantially all of YouthStream Media
Networks, Inc.'s high school and college targeted marketing and media assets
which included over 20,000 out-of-home display media boards in high schools and
on college campuses, media placement capabilities in college and high school
newspapers, and event marketing services and contracts. Alloy paid $7 million in
cash to complete the acquisition.
21
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. 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. See "Special Note Regarding
Forward-Looking Statements".
OVERVIEW
We are a media, direct marketing and marketing services company targeting
Generation Y, the more than 60 million boys and girls in the United States
between the ages of 10 and 24. Our business integrates direct mail catalogs,
print media, websites, on-campus marketing programs and promotional events, and
features a portfolio of brands that are well known among Generation Y consumers
and advertisers. We reach a significant portion of Generation Y consumers
through our various media assets, direct marketing activities and marketing
services programs, and, as a result, we are able to offer advertisers targeted
access to the youth market and sell third-party branded products in key
Generation Y spending categories, including apparel, action sports equipment and
accessories directly to the youth market. Additionally, our assets have enabled
us to build a comprehensive database that includes detailed information about
more than 10 million Generation Y consumers. We believe we are the only
Generation Y-focused media company that combines significant marketing reach
with a comprehensive consumer database, providing us with a deep understanding
of the youth market.
We were incorporated in January 1996, launched our Alloy website in August 1996
and began generating meaningful revenues in August 1997 following the
distribution of our first Alloy catalog. Since then, we have grown both
organically and through the completion of strategic acquisitions. We generate
revenue from two principal sources: by selling merchandise and through
sponsorship and advertising programs.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JULY 31, 2001 AND JULY 31, 2002
The following table sets forth the statement of operations data for the periods
indicated as a percentage of revenues:
Three months ended July 31,
2001 2002
-------- --------
Net merchandise revenues 75.8% 60.7%
Sponsorship and other revenues 24.2 39.3
-------- --------
Total revenues 100.0 100.0
Cost of goods sold 44.0 46.5
-------- --------
Gross profit 56.0 53.5
Operating expenses:
Selling and marketing 53.6 43.3
General and administrative 11.6 7.7
Amortization of goodwill and other intangible assets 16.1 2.2
-------- --------
Total operating expenses 81.3 53.2
(Loss) income from operations (25.3) 0.3
22
Interest income, net 1.0 1.1
Provision for income taxes -- (0.4)
-------- --------
Net (loss) income (24.3)% 1.0%
======== ========
REVENUES
Merchandise Revenues. Net merchandise revenues increased from $21.8 million in
the three months ended July 31, 2001 to $31.5 million in the three months ended
July 31, 2002, a 45% increase. The increase in merchandise revenues for the
second quarter of the fiscal year ending January 31, 2003 ("fiscal 2002") versus
the second quarter of the fiscal year ended January 31, 2002 ("fiscal 2001") was
due primarily to the increased revenue resulting from the larger size of our
name database to which we marketed our merchandise offerings, our broadened
merchandise assortment, the revenue contribution from Dan's Competition ("Dan's
Comp"), which we acquired on September 28, 2001, and early commencement of the
back-to-school season catalog circulation in July 2002.
Sponsorship and Other Revenues. Sponsorship and other revenues increased to
$20.4 million in the second quarter of fiscal 2002 from $7.0 million in the
second quarter of fiscal 2001, an increase of 194% due to the selling efforts by
our enlarged in-house advertising sales force, which expanded relationships with
existing advertising clients and, established new relationships in the second
quarter of fiscal 2002, and a wider range of offered media services, and the
revenue contributions resultant from recently acquired businesses, principally,
the 360 Youth division of MarketSource Corporation acquired in November 2001 and
CASS Communications acquired in August 2001.
COST OF GOODS SOLD
Cost of goods sold consists of the cost of the merchandise sold plus the freight
cost to deliver the merchandise to the warehouse, together with the direct costs
attributable to the sponsorship and advertising programs we provide, the
marketing publications we develop and the magazines we produce. Our cost of
goods sold increased from $12.7 million in the three months ended July 31, 2001
to $24.2 million in the three months ended July 31, 2002, a 91% increase. The
increase in cost of goods sold in the second quarter of fiscal 2002 as compared
with the second quarter of fiscal 2001 was due primarily to the increase in
volume of merchandise sales to our growing customer base and the costs of our
enlarged location-based marketing services activities.
Our gross profit as a percentage of total revenues decreased from 56.0% in the
three months ended July 31, 2001 to 53.5% in the three months ended July 31,
2002 due primarily to the lower gross margin profile of sponsorship business as
event marketing, sampling and customer acquisition activities expanded in the
second quarter of fiscal 2002.
OPERATING EXPENSES
Selling and Marketing. Selling and marketing expenses consist primarily of
Alloy, CCS and Dan's Comp catalog production and mailing costs; Alloy, CCS and
Dan's Comp call centers and fulfillment operations expenses; freight costs to
deliver goods to our merchandise customers; compensation of our sales and
marketing personnel; marketing costs; and expenses related to the maintenance
and marketing of our websites. These expenses increased 46% from $15.4 million
in the three months ended July 31, 2001 to $22.5 million in the three months
ended July 31, 2002 due to the increased costs incurred in marketing, selling
and shipping to our expanded name database; the hiring of additional sales and
marketing personnel; and increased spending on website maintenance. As a
percentage of total revenues, our selling and marketing expenses decreased from
53.6% in the second quarter of fiscal 2001 to 43.3% in the second quarter of
fiscal 2002 primarily due to our more targeted merchandise marketing to our
enlarged name database, improved fulfillment efficiencies resulting from
increased shipping activity and reduced general advertising and marketing
activity. Shipping and handling costs, which we include in selling and marketing
expenses, were $2.5 million and $2.2 million for the three months ended July 31,
2002 and July 31, 2001, respectively.
23
In future periods we expect selling and marketing expenses in both our direct
marketing and content business segments to continue to increase in amount but to
continue to decrease as a percentage of total revenues. We believe that these
increases in amount will be principally related to expanded marketing to our
growing name database and the costs associated with fulfilling and shipping an
anticipated increased number of merchandise orders resulting therefrom. In
addition, we expect to continue hiring additional sales and marketing personnel
in an effort to increase advertising and sponsorship sales to more companies
that seek to reach the Generation Y community.
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 19% from $3.3 million in the three months
ended July 31, 2001 to $4.0 million in the three months ended July 31, 2002. As
a percentage of total revenues, our general and administrative expenses
decreased from 11.6% in the second quarter of fiscal 2001 to 7.7% in the second
quarter of fiscal 2002 as our fixed costs were sufficient to fund services for
an expanded revenue base. The increase in general and administrative expenses
was driven by an increase in compensation expense for additional personnel to
handle our growing business, together with expenses associated with growing a
public company, such as professional fees, insurance premiums and public
relations costs. We expect general and administrative expenses in both our
operating segments to grow as we hire additional personnel, and we expect to
incur additional general and administrative expenses related to the growth of
our business and our operations as a public company.
Amortization of Goodwill and Other Intangible Assets. Amortization of intangible
assets was approximately $1.2 million in the three months ended July 31, 2002 as
compared with goodwill and other intangible assets of $4.6 million in the three
months ended July 31, 2001. As a result of adopting SFAS No. 142, our
amortization expense decreased significantly in the second quarter of fiscal
2002 compared with the second quarter of fiscal 2001, because goodwill is no
longer subject to amortization. We expect our amortization expense to increase
as we acquire additional businesses.
(LOSS) INCOME FROM OPERATIONS
Our income from operations was $138,000 in the second quarter of fiscal 2002
compared to a $7.3 million loss from operations in the second quarter of fiscal
2001. The transition from operating loss to operating income reflects greater
efficiency in selling merchandise to our name database and economies of scale in
selling larger advertising and marketing services packages across a wider range
of clients, together with the elimination of goodwill amortization in the second
quarter of fiscal 2002.
INTEREST INCOME, NET
Interest 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 July 31, 2002, we generated net
interest income of $597,000 versus $286,000 in the three months ended July 31,
2001 due to the investment of proceeds raised in our public equity offering in
February 2002, as well as our private placement of common equity in January
2002.
INCOME TAX EXPENSE
In the three months ended July 31, 2002, we were subject to income tax expense
of $197,000 due to operating income generated at the state level. No federal
income tax will be due as we utilize net operating loss carry forwards. No tax
was due in the three months ended July 31, 2001 as we generated losses.
24
SIX MONTHS ENDED JULY 31, 2001 AND JULY 31, 2002
The following table sets forth the statement of operations for the periods
indicated as a percentage of revenues:
Six months
ended July 31,
2001 2002
-------- --------
Net merchandise revenues 79.9% 61.1%
Sponsorship and other revenues 20.1 38.9
-------- --------
Total revenues 100.0 100.0
Cost of goods sold 43.9 44.6
-------- --------
Gross profit 56.1 55.4
Operating expenses:
Selling and marketing 57.7 42.9
General and administrative 11.0 7.9
Amortization of goodwill and other
intangible assets 14.7 1.7
-------- --------
Total operating expenses 83.4 52.5
(Loss) income from operations (27.3) 2.9
Interest income, net 0.9 1.1
Gain on sales of marketable securities, net 1.1 --
Provision for income taxes -- (0.5)
-------- --------
Net (loss) income (25.3)% 3.5%
======== ========
REVENUES
Merchandise Revenues. Net merchandise revenues increased from $45.5 million in
the six months ended July 31, 2001 to $62.6 million in the six months ended July
31, 2002, a 38% increase. The increase in merchandise revenues for the first
half of fiscal 2002 versus the first half of fiscal 2001 was due primarily to
the increased size of our name database to which we marketed our merchandise
offerings, our broadened merchandise assortment, and the revenue contribution
from Dan's Comp, which we acquired on September 28, 2001.
Sponsorship and Other Revenues. Sponsorship and other revenues increased to
$39.8 million in the first half of fiscal 2002 from $11.5 million in the first
half of fiscal 2001, an increase of 247% due primarily to the selling efforts by
our in-house advertising sales force, which expanded relationships with existing
advertising clients and established new relationships in the first half of
fiscal 2002, along with the revenue contributions resultant from recently
acquired businesses, principally, the 360 Youth division of MarketSource
Corporation acquired in November 2001 and CASS Communications acquired in August
2001.
COST OF GOODS SOLD
Our cost of goods sold increased from $25.0 million in the six months ended July
31, 2001 to $45.7 million in the six months ended July 31, 2002, an 83%
increase. The increase in cost of goods sold in the first half of fiscal 2002 as
compared with the first half of fiscal 2001 was due primarily to the increase in
volume of merchandise sales to our growing customer base and the costs of our
enlarged location-based marketing services activities.
25
Our gross profit as a percentage of total revenues decreased from 56.1% in the
six months ended July 31, 2001 to 55.4% in the six months ended July 31, 2002
due primarily to the lower gross margin profile of our sponsorship activities
resulting from our expanded event marketing and sampling business.
OPERATING EXPENSES
Selling and Marketing. Selling and marketing expenses increased 34% from $32.9
million in the six months ended July 31, 2001 to $43.9 million in the six months
ended July 31, 2002 primarily due to the increased costs incurred in marketing,
selling and shipping to our expanded name database; the hiring of additional
sales and marketing personnel; and increased spending on website maintenance. As
a percentage of total revenues, our selling and marketing expenses decreased
from 57.7% in the first half of fiscal 2001 to 42.9% in the first half of fiscal
2002 primarily due to our more targeted merchandise marketing to our enlarged
name database, improved fulfillment efficiencies resulting from increased
shipping activity and reduced general advertising and marketing activity.
Shipping and handling costs, which we include in selling and marketing expenses,
were $5.2 million and $4.5 million for the six months ended July 31, 2002 and
July 31, 2001, respectively.
General and Administrative. General and administrative expenses increased 29%
from $6.3 million in the six months ended July 31, 2001 to $8.1 million in the
six months ended July 31, 2002. As a percentage of total revenues, our general
and administrative expenses decreased from 11.0% in the first half of fiscal
2001 to 7.9% in the first half of fiscal 2002 as we spread fixed costs over an
expanded revenue base. The increase in general and administrative expenses was
attributable primarily to an increase in compensation expense for additional
personnel to handle our growing business, together with expenses associated with
growing a public company such as professional fees, insurance premiums and
public relations costs.
Amortization of Goodwill and Other Intangible Assets. Amortization of goodwill
and other intangible assets was approximately $1.7 million in the six months
ended July 31, 2002 as compared with $8.4 million in the six months ended July
31, 2001. As a result of adopting SFAS No. 142, our amortization expense
decreased significantly in the first half of fiscal 2002 compared with the first
half of fiscal 2001. We expect our amortization expense to increase as we
acquire additional businesses.
LOSS (INCOME) FROM OPERATIONS
Our income from operations was $2.9 million in the first half of fiscal 2002
compared to the $15.6 million loss from operations in the first half of fiscal
2001. The transition from operating loss to operating income reflects greater
efficiency in selling merchandise to our name database and economies of scale in
selling larger advertising and marketing services packages across a wider range
of clients, together with the elimination of goodwill amortization in the first
half of fiscal 2002.
INTEREST INCOME, NET
In the six months ended July 31, 2002, we generated net interest income of $1.1
million as compared to $489,000 in the six months ended July 31, 2001 due to the
investment of net proceeds raised in our public equity offering in February
2002, as well as our private placement of common equity in January 2002.
INCOME TAX EXPENSE
In the six month period ended July 31, 2002, we were subject to income tax
expense of $444,000 due to operating income generated at the state level. No
federal income tax will be due as we utilize net operating loss carry forwards.
No tax was due in the six months ended July 31, 2001 as we generated taxable
losses.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations to date primarily through the sale of equity and
debt securities as we have generated negative cash flow from operations prior to
fiscal 2001. At July 31, 2002, we had approximately $64.1 million of cash, cash
equivalents and short-term investments. Our principal commitments at July 31,
2002 consisted
26
of accounts payable, accrued expenses and obligations under operating and
capital leases. In February 2002, we raised approximately $56.6 million, net of
expenses and underwriters' discounts, in an underwritten public offering of
4,000,000 shares of our common stock.
Net cash provided by operating activities was $5.5 million in the first half of
fiscal 2002 as a result of more efficient database marketing, greater media
sales force productivity and general expense control, offset in part by
increased inventory to support future merchandise sales. Net cash used in
operating activities was $10.3 million in the six months ended July 31, 2001 to
fund our operating loss and the reduction in accounts payable and accrued
liabilities.
Cash used in investing activities was $91.7 million in the first half of fiscal
2002 due to the net application of $17.9 million of cash to acquire marketable
securities, $67.4 million to acquire businesses, $2.0 million for capital
expenditures and $4.9 million to acquire databases and marketing rights. Cash
provided by investing activities of $3.0 million in the first half of fiscal
2001 resulted from $10.3 million provided by net sales and maturities of
marketable securities, offset in part by $5.9 million used in connection with
business acquisitions and $1.4 million used for capital expenditures.
Net cash provided by financing activities was $55.6 million in the six months
ended July 31, 2002 due primarily to the gross proceeds from our public equity
offering. In the six months ended July 31, 2001, net cash provided by financing
activities of $27.6 million resulted primarily from our issuance of Series A and
Series B Redeemable Convertible Preferred Stock.
Our liquidity position as of July 31, 2002 consisted of $64.1 million of cash,
cash equivalents and short-term investments. We expect our liquidity position to
meet our anticipated cash needs for working capital and capital expenditures,
excluding potential acquisitions, for at least the next 24 months. 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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143, effective for fiscal years beginning after June 15,
2002, addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. We are currently analyzing this statement and have not yet
determined its impact on the consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," effective for exit or disposal activities
that are initiated after December 31, 2002. This standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan. We
do not expect that the implementation of this standard will have a material
impact on our financial condition, results of operations or cash flows.
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 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 risks discussed below under "Risks That May Affect Future
Results."
27
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.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
The following risk factors and other information included in this Report should
be carefully considered. The risks and uncertainties described below are not the
only ones we face. Additional risks and uncertainties not presently known to us
or that we deem immaterial may also impair our business operations. If any of
the following risks actually occur, our business, financial condition or results
of operations could be materially and adversely affected.
WE MAY NOT BE ABLE TO ACHIEVE OR MAINTAIN PROFITABILITY.
Since our inception in January 1996, we have incurred significant net losses. We
have never reported positive net income for a full fiscal year, and we may never
do so. As of July 31, 2002, we had an accumulated deficit of approximately $71.6
million. Although we expect to generate positive net income in fiscal 2002,
there is no assurance that we will do so.
OUR BUSINESS MAY NOT GROW IN THE FUTURE.
Since our inception, we have rapidly expanded our business, growing from
revenues of $2.0 million for fiscal 1997 to $165.6 million for fiscal 2001. Our
continued growth will depend to a significant degree on our ability to increase
revenues from our merchandising businesses, to maintain existing sponsorship and
advertising relationships and to develop new relationships, to integrate
acquisitions, and to maintain and enhance the reach and brand recognition of our
existing media franchises and new media franchises that we create or acquire.
Our ability to implement our growth strategy will also depend on a number of
other factors, many of which are or may be beyond our control including:
- the continuing appeal of our media and marketing properties to
Generation Y consumers;
- the continued perception by participating advertisers and sponsors that
we offer an effective marketing channel for their products and
services;
- our ability to select products that appeal to our customer base and to
market such products effectively to our target audience;
- our ability to attract, train and retain qualified employees and
management; and
- our ability to make additional strategic acquisitions.
There can be no assurance that we will be able to implement our growth strategy
successfully.
WE MAY FAIL TO USE OUR GENERATION Y DATABASE AND OUR EXPERTISE IN MARKETING TO
GENERATION Y CONSUMERS SUCCESSFULLY, AND WE MAY NOT BE ABLE TO MAINTAIN THE
QUALITY AND SIZE OF OUR DATABASE.
The effective use of our Generation Y consumer database and our expertise in
marketing to Generation Y are important components of our business. If we fail
to capitalize on these assets, our business will be less successful. As
individuals in our database age beyond Generation Y, they may no longer be of
significant value to our business. We must therefore continuously obtain data on
new individuals in the Generation Y demographic in order to maintain and
increase the size and value of our database. If we fail to obtain sufficient new
names and information, our business could be adversely affected. Moreover, there
are other Generation Y-focused media businesses that possess similar information
about some segments of Generation Y. We compete for sponsorship and advertising
revenues based on the comprehensive nature of our database and our ability to
analyze and interpret the data in our database. Accordingly, if one or more of
our competitors were to create a database similar to ours, or if a competitor
28
were able to analyze its data more effectively than we can, our competitive
position, and therefore our business, could suffer.
OUR SUCCESS DEPENDS LARGELY ON THE VALUE OF OUR BRANDS, AND IF THE VALUE OF OUR
BRANDS WERE TO DIMINISH, OUR BUSINESS WOULD BE ADVERSELY AFFECTED.
The prominence of our Alloy, CCS and Dan's Comp catalogs and websites and our
related consumer magazines among our Generation Y target market, and the
prominence of our CASS Communications, 360 Youth, Private Colleges &
Universities and Market Place Media brands and media franchises with advertisers
are key components of our business. If our consumer brands or their associated
merchandise and editorial content lose their appeal to Generation Y consumers,
our business could be adversely affected. The value of our consumer brands could
also be eroded by misjudgments in merchandise selection or by our failure to
keep our content current with the evolving preferences of our audience. These
events would likely also reduce sponsorship and advertising sales for our
merchandise and publishing businesses and may also adversely affect our
marketing and services businesses. Moreover, we anticipate that we will continue
to increase the number of Generation Y consumers we reach, through means which
may include broadening the intended audience of our existing consumer brands or
creating or acquiring new media franchises or related businesses. Misjudgments
by us in this regard could damage our existing or future brands. If any of these
developments occur, our business would suffer.
OUR INABILITY TO ACQUIRE SUITABLE BUSINESSES OR TO MANAGE THEIR INTEGRATION
COULD HARM OUR BUSINESS.
We expect to expand our reach by continuing to acquire complementary businesses,
products and services. We compete with other media and related businesses for
these opportunities. Therefore, even if we identify targets we consider
desirable, we may not be able to complete those acquisitions on terms we
consider attractive or at all. We could have difficulty in assimilating
personnel and operations of the businesses we have acquired and may have similar
problems with future acquisitions. These difficulties could disrupt our
business, distract our management and employees and increase our expenses.
Furthermore, we may issue additional equity securities, potentially on terms
which could be dilutive to our existing stockholders.
OUR REVENUES AND INCOME COULD DECLINE DUE TO GENERAL ECONOMIC TRENDS, DECLINES
IN CONSUMER SPENDING AND SEASONALITY.
Our revenues are largely generated by discretionary consumer spending or
advertising seeking to stimulate that spending. Advertising expenditures and
consumer spending all tend to decline during recessionary periods, and may also
decline at other times. Accordingly, our revenues could decline during any
general economic downturn. In addition, our revenues have historically been
higher during the third and fourth fiscal quarters, coinciding with the start of
the school calendar and holiday season spending, than in the first half of our
fiscal year. Therefore, our results of operations in our third and fourth fiscal
quarters may not be indicative of our full fiscal year performance.
WE RELY ON THIRD PARTIES FOR SOME ESSENTIAL BUSINESS OPERATIONS, AND DISRUPTIONS
OR FAILURES IN SERVICE MAY ADVERSELY AFFECT OUR ABILITY TO DELIVER GOODS AND
SERVICES TO OUR CUSTOMERS.
We depend on third parties for important aspects of our business, including our
significant call center and fulfillment operations. We have limited control over
these third parties, and we are not their only client. To the extent some of our
inventory is held by these third parties, we also may face losses as a result of
inadequate security at these third-party facilities. In addition, we may not be
able to maintain satisfactory relationships with any of these third parties on
acceptable commercial terms. Further, we cannot be certain that the quality of
products and services that they provide will remain at the levels needed to
enable us to conduct our business effectively.
WE MUST EFFECTIVELY MANAGE OUR VENDORS TO MINIMIZE INVENTORY RISK AND MAINTAIN
OUR MARGINS.
We seek to avoid maintaining high inventory levels in an effort to limit the
risk of outdated merchandise and inventory writedowns. If we underestimate
quantities demanded by our customers and our vendors cannot restock,
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then we may disappoint customers who may then turn to our competitors. We
require our vendors to meet minimum restocking requirements, but if our vendors
cannot meet these requirements and we cannot find alternative vendors, we could
be forced to carry more inventory than we have in the past. Our risk of
inventory writedowns would increase if we were to hold large inventories of
merchandise that prove to be unpopular.
COMPETITION MAY ADVERSELY AFFECT OUR BUSINESS AND CAUSE OUR STOCK PRICE TO
DECLINE.
Because of the growing perception that Generation Y is an attractive demographic
for marketers, the markets in which we operate are competitive. Many of our
existing competitors, as well as potential new competitors in this market, have
longer operating histories, greater brand recognition, larger customer user
bases and significantly greater financial, technical and marketing resources
than we do. These advantages allow our competitors to spend considerably more on
marketing and may allow them to use their greater resources more effectively
than we can use ours. Accordingly, these competitors may be better able to take
advantage of market opportunities and be better able to withstand market
downturns than us. If we fail to compete effectively, our business will be
materially and adversely affected and our stock price will decline.
WE DEPEND ON OUR KEY PERSONNEL TO OPERATE OUR BUSINESS, AND WE MAY NOT BE ABLE
TO HIRE ENOUGH ADDITIONAL MANAGEMENT AND OTHER PERSONNEL TO MANAGE OUR GROWTH.
Our performance is substantially dependent on the continued efforts of our
executive officers and other key employees. The loss of the services of any of
our executive officers could adversely affect our business. Additionally, we
must continue to attract, retain and motivate talented management and other
highly skilled employees to be successful. We may be unable to retain our key
employees or attract, assimilate and retain other highly qualified employees in
the future.
WE ARE VULNERABLE TO NEW TAX OBLIGATIONS THAT COULD BE IMPOSED ON CATALOG AND
ONLINE COMMERCE TRANSACTIONS.
We do not collect sales or other similar taxes for shipments of goods into most
states. However, various states or foreign countries may seek to impose sales
tax obligations on us for our catalog and online merchandise sales. Proposals
have been made at state and local levels that would impose additional taxes on
the sale of goods and services through catalogs and the internet. Those
proposals, if adopted, could substantially impair the growth of our
merchandising businesses by making direct sales comparatively less attractive to
consumers than traditional retail purchasing. Existing federal legislation
limits the ability of states to impose taxes on internet-based transactions
until November 2003. A number of states have attempted to impose sales taxes on
catalog sales from businesses such as ours. A successful assertion by one or
more states that we should have collected or should be collecting sales taxes on
the sale of products could have a material and adverse effect on our business.
WE COULD FACE LIABILITY OR OUR ABILITY TO CONDUCT BUSINESS COULD BE ADVERSELY
AFFECTED BY GOVERNMENT AND PRIVATE ACTIONS CONCERNING PERSONALLY IDENTIFIABLE
DATA, INCLUDING PRIVACY.
Our direct marketing and database businesses are subject to federal and state
regulations requiring that we maintain the confidentiality of the names and
personal information of our customers and the individuals included in our
database. If we do not comply, we could become subject to liability. While these
provisions do not currently unduly restrict our ability to operate our business,
if those regulations become more restrictive, they could adversely affect our
business. In addition, laws or regulations that could impair our ability to
collect and use user names and other information on our websites may adversely
affect our business. For example, a federal law currently limits our ability to
collect personal information from website visitors who may be under age 13.
Further, claims could also be based on other misuses of personal information,
such as for unauthorized marketing purposes. If we violate any of these laws, we
could face a civil penalty. In addition, the attorneys general of various states
review company websites and their privacy policies from time to time. In
particular, an attorney general may examine such privacy policies to assure that
the policies overtly and explicitly inform users of the manner in which the
information they provide will be used and disclosed by the company. If one or
more attorneys general were to determine that our
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privacy policies fail to conform with state law, we also could face fines or
civil penalties.
WE COULD FACE LIABILITY FOR INFORMATION DISPLAYED IN OUR PRINT PUBLICATION MEDIA
OR DISPLAYED ON OR ACCESSIBLE VIA OUR WEBSITES.
We may be subjected to claims for defamation, negligence, copyright or trademark
infringement or based on other theories relating to the information we publish
in any of our print publication media and on our websites. These types of claims
have been brought, sometimes successfully, against marketing and media companies
in the past. We may be subject to liability based on statements made and actions
taken as a result of participation in our chat rooms or as a result of materials
posted by members on bulletin boards on our websites. Based on links we provide
to third-party websites, we could also be subjected to claims based upon online
content we do not control that is accessible from our websites.
WE COULD FACE LIABILITY FOR BREACHES OF SECURITY ON THE INTERNET.
To the extent that our activities or the activities of third-party contractors
involve the storage and transmission of information, such as credit card
numbers, security breaches could disrupt our business, damage our reputation and
expose us to a risk of loss or litigation and possible liability. We could be
liable for claims based on unauthorized purchases with credit card information,
impersonation or other similar fraud claims. These claims could result in
substantial costs and a diversion of our management's attention and resources.
OUR STOCK PRICE HAS BEEN VOLATILE, IS LIKELY TO CONTINUE TO BE VOLATILE, AND
COULD DECLINE SUBSTANTIALLY.
The price of our common stock has been, and is likely to continue to be,
volatile. In addition, the stock market in general, and companies whose stock is
listed on The Nasdaq National Market, including marketing and media companies,
have experienced extreme price and volume fluctuations that have often been
disproportionate to the operating performance of these companies. Broad market
and industry factors may negatively affect the market price of our common stock,
regardless of our actual operating performance.
WE ARE A DEFENDANT IN A CLASS ACTION SUIT AND DEFENDING THIS LITIGATION COULD
HURT OUR BUSINESS.
We have been named as a defendant in a securities class action lawsuit relating
to the allocation of shares by the underwriters of our initial public offering.
Defending against this litigation could result in substantial costs and a
diversion of our management's attention and resources, which could hurt our
business. In addition, if we lose this litigation, or settle on adverse terms,
our stock price may be adversely affected.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As of July 31, 2002, our exposure to market risk is principally confined to our
cash equivalents and marketable securities, all of which have maturities of less
than 24 months. We maintain a non-trading portfolio of investment-grade, liquid
debt securities that limits the amount of credit exposure to any one issue or
issuer.
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 us as
a defendant along with James K. Johnson, Matthew C. Diamond, BancBoston
Robertson Stephens, Volpe Brown Whelan & Company, Dain Rauscher Wessels, and
Ladenburg Thalmann & Co., Inc., the underwriters on our initial public offering.
The complaint purportedly is filed on behalf of persons who purchased 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, and Section 10(b) of the
Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated
thereunder.
31
Specifically, the complaint alleges that, in connection with our initial public
offering, we and the other defendants failed to disclose "excessive commissions"
purportedly solicited by and paid to the underwriter defendants in exchange for
allocating shares of our common stock to preferred customers and alleged
agreements among the underwriter defendants and preferred customers tying the
allocation of our IPO shares to agreements to make additional aftermarket
purchases at pre-determined prices. Plaintiffs claim that the failure to
disclose these alleged arrangements made our prospectus incorporated in our
registration statement for our IPO materially false and misleading. Plaintiffs
seek unspecified damages. We believe that the allegations are without merit and
intend to defend vigorously against the plaintiffs' claims.
On or about April 19, 2002, plaintiffs filed amended complaints against us, the
individual defendants and the underwriters. The amended complaints assert
violations of Section 10(b) of the Exchange Act and mirror allegations asserted
against other issuers sued by plaintiffs. Motions to dismiss the amended
complaint have been filed by the underwriter defendants and a liaison committee
consisting of counsel for various issuers litigating similar claims. We have
joined in the latter motion.
We are involved in additional legal proceedings which have arisen in the
ordinary course of business. We believe that there are no claims 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 AND USE OF PROCEEDS.
(a) Not applicable.
(b) Not applicable.
(c) Sales of Unregistered Securities.
On June 10, 2002, as performance-based partial consideration for our prior
acquisitions of all of the issued and outstanding capital stock of Triple Dot
Communications, Inc. ("Triple Dot"), a Massachusetts corporation, and all of the
membership interests of Y-Access LLC ("Y-Access"), a Massachusetts limited
liability company, we issued an aggregate of 93,570 shares of unregistered
common stock to the former two shareholders of Triple Dot and the former four
securityholders of Y-Access.
The securities issued in the foregoing transactions were offered and sold in
reliance upon exemptions from the Securities Act of 1933 (the "Securities Act")
and registration requirements set forth in Section 4(2) of the Securities Act,
and any regulations promulgated thereunder, relating to sales by an issuer not
involving any public offering. No underwriters were involved in the foregoing
sales of securities.
(d) Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On July 11, 2002, at our annual meeting, our stockholders voted in favor of the
proposal to re-elect Matthew C. Diamond and James K. Johnson, Jr. as directors,
with 27,103,176 votes cast for and 6,207,132 votes withheld for Mr. Diamond, and
with 27,205,576 votes cast for and 6,104,732 votes withheld for Mr. Johnson.
Each of Samuel A. Gradess, Peter Graham, David Yarnell and Edward A. Monnier is
a director whose term as a director continued after the annual meeting. Our
stockholders voted to ratify and confirm the selection of KPMG LLP as our
independent auditors for the fiscal year ending January 31, 2003, with
33,086,403 votes for, 221,055 votes against and 2,850 abstentions and broker
non-votes on the proposal. Our stockholders did not approve an amendment to our
Restated 1997 Employee, Director and Consultant Stock Option Plan (the "Plan")
to increase from 8,000,000 shares to 10,000,000 shares the aggregate number of
shares that may be issued from time to time pursuant to the Plan, with
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14,644,406 votes cast for, 11,961,242 votes cast against, 28,083 abstentions and
broker non-votes and 6,676,577 unvoted on the proposal. The proposal did not
pass because it did not receive the affirmative vote of the majority of the
stock outstanding and entitled to vote at the annual meeting and, as a
consequence, we are precluded from issuing more than 8,000,000 shares under the
Plan.
ITEM 5. OTHER INFORMATION.
As previously reported on our Current Report on Form 8-K, filed with SEC on May
30, 2002, and our Current Report on Form 8-K/A, filed with the SEC on July 19,
2002, we determined to dismiss Arthur Andersen LLP ("Arthur Andersen") as our
independent auditors, subsequent to their review of our quarterly financial
information related to our first fiscal quarter, and engage KPMG LLP ("KPMG") to
serve as our independent auditors, as of May 31, 2002, for our fiscal year ended
January 31, 2003. This determination was approved by our Board of Directors,
based on the recommendation of our Audit Committee. Arthur Andersen's review of
our quarterly financial information was completed on June 3, 2002. Accordingly,
effective as of the close of business on June 3, 2002, Arthur Andersen no longer
provided any services as our principal independent auditor.
On July 11, 2002, we adopted our 2002 Non-Qualified Stock Option Plan, which is
a broadly based non-qualified stock option plan to authorize the issuance of
non-qualified stock options to purchase up to 500,000 shares.
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 Restated Bylaws (filed as Exhibit 3.2 to Registration Statement on Form
S-1, No. 333-74159, and incorporated herein by reference).
10.1 2002 Non-Qualified Stock Option Plan.
10.2 Sublease Agreement, dated October 24, 2002 between Epigenx
Pharmaceuticals, Inc. and Armed Forces Communications, Inc., d/b/a Market Place
Media.
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States
Code).
(b) Reports on Form 8-K.
On May 30, 2002, we filed a Current Report on Form 8-K, reporting the dismissal
of Arthur Andersen LLP as our independent auditors, and the engagement of KPMG
LLP as our independent auditors.
On July 19, 2002, we filed a Current Report on Form 8-K/A, reporting the date
certain as of which Arthur Andersen LLP no longer performed services as our
independent auditors.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ALLOY, INC.
Date: September 16, 2002 By: /s/ Samuel A. Gradess
------------------ ----------------------------------------
Samuel A. Gradess,
Chief Financial Officer
(Principal Accounting and
Financial Officer)
CERTIFICATIONS
CERTIFICATION
I, Samuel A. Gradess, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Alloy, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
Date: September 16, 2002 By: /s/ Samuel A. Gradess
Samuel A. Gradess
Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION
I, Matthew C. Diamond, Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Alloy, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of
34
the circumstances under which such statements were made, not misleading with
respect to the period covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
Date: September 16, 2002 By: /s/ Matthew C. Diamond
Matthew C. Diamond
Chief Executive Officer
(Principal Executive Officer)
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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 Restated Bylaws (filed as Exhibit 3.2 to Registration Statement on Form
S-1, No. 333-74159, and incorporated herein by reference).
10.1 2002 Non-Qualified Stock Option Plan.
10.2 Sublease Agreement, dated October 24, 2002 between Epigenx
Pharmaceuticals, Inc. and Armed Forces Communications, Inc., d/b/a Market Place
Media.
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States
Code).
36