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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 October 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 [ ]
Indicated by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of December 6, 2002, the registrant had 39,524,584 shares of common stock,
$.01 par value per share, outstanding.
ALLOY, INC.
CONTENTS
PAGE
NO.
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets, October 31, 2002 (unaudited)
and January 31, 2002 (audited) . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Condensed Statements of Operations, Three Months Ended
October 31, 2002 (unaudited) and October 31, 2001 (unaudited) . . 4
Consolidated Condensed Statements of Comprehensive (Loss) Income,
Three Months Ended October 31, 2002 (unaudited) and October 31, 2001
(unaudited). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Consolidated Condensed Statements of Operations, Nine Months Ended
October 31, 2002 (unaudited) and October 31, 2001 (unaudited). . . 6
Consolidated Condensed Statements of Comprehensive (Loss) Income,
Nine Months Ended October 31, 2002 (unaudited) and October 31, 2001
(unaudited). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Consolidated Condensed Statements of Cash Flows, Nine Months Ended
October 31, 2002 (unaudited) and October 31, 2001 (unaudited) . . . . . . 8
Consolidated Condensed Statement of Changes in Stockholders' Equity,
Nine Months Ended October 31, 2002 (unaudited) and
October 31, 2001 (unaudited). . . . . . . . . . . . . . . . . . . . . . . 9
Notes to Consolidated Condensed Financial Statements (unaudited) . . 11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk. . . 31
Item 4. Controls and Procedures . . . . . . . . . . . . . . . . . . . 31
PART II - OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 32
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 . . . . . . . . . . . . . . . . . . . . . . 32
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, October 31,
2002 2002
----------- -----------
(audited) (unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 61,618 $ 16,183
Available-for-sale marketable securities 15,049 35,131
Accounts receivable, net 13,662 38,835
Inventories, net 16,400 32,264
Prepaid catalog costs 1,786 3,859
Other current assets 1,984 3,374
-------- --------
TOTAL CURRENT ASSETS 110,499 129,646
Property and equipment, net 8,554 9,985
Goodwill, net 178,474 256,043
Intangible and other assets, net 12,680 16,131
-------- --------
TOTAL ASSETS $310,207 $411,805
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 11,199 $ 32,343
Deferred revenues 15,481 21,093
Accrued expenses and other current liabilities 18,389 14,921
-------- --------
TOTAL CURRENT LIABILITIES 45,069 68,357
Long-term liabilities 358 173
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 1,613 shares issued and outstanding, respectively 15,046 15,092
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 1,613 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 39,485,559 shares issued and outstanding, respectively 349 395
Additional paid-in capital 324,719 387,846
Accumulated deficit (75,250) (60,045)
Deferred compensation (31) (8)
Accumulated other comprehensive (loss) income (53) 126
Less common stock held in treasury, at cost; none and 8,275 shares, respectively -- (131)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 249,734 328,183
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $310,207 $411,805
======== ========
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 October 31,
2001 2002
------------ ------------
NET MERCHANDISE REVENUES $ 31,761 $ 41,270
SPONSORSHIP AND OTHER REVENUES 12,702 51,956
------------ ------------
TOTAL REVENUES 44,463 93,226
COST OF GOODS SOLD 17,861 47,687
------------ ------------
GROSS PROFIT 26,602 45,539
------------ ------------
OPERATING EXPENSES:
Selling and marketing 21,484 28,055
General and administrative 3,221 4,701
Amortization of goodwill and other intangible assets 4,709 1,180
------------ ------------
TOTAL OPERATING EXPENSES 29,414 33,936
------------ ------------
(LOSS) INCOME FROM OPERATIONS (2,812) 11,603
INTEREST INCOME, NET 223 330
------------ ------------
(LOSS) INCOME BEFORE INCOME TAXES (2,589) 11,933
PROVISION FOR INCOME TAXES 75 336
------------ ------------
NET (LOSS) INCOME $ (2,664) $ 11,597
============ ============
PREFERRED STOCK DIVIDENDS AND ACCRETION 1,927 605
------------ ------------
NET (LOSS) INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (4,591) $ 10,992
============ ============
BASIC AND DILUTED (LOSS) EARNINGS PER SHARE OF
COMMON STOCK:
Basic (loss) earnings attributable to common
stockholders per share $ (0.18) $ 0.28
============ ============
Diluted (loss) earnings attributable to common
stockholders per share $ (0.18) $ 0.28
============ ============
WEIGHTED AVERAGE BASIC COMMON SHARES OUTSTANDING 24,991,646 38,856,057
============ ============
WEIGHTED AVERAGE DILUTED COMMON SHARES OUTSTANDING 24,991,646 39,684,118
============ ============
The accompanying Notes are an integral part of these financial statements.
4
ALLOY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(AMOUNTS IN THOUSANDS)
(unaudited)
For the three months
ended October 31,
2001 2002
--------- ---------
Net (loss) income $(2,664) $11,597
Other comprehensive income, net of tax:
Net unrealized (loss) gain on available-for-sale securities (1) 42
--------- ---------
Comprehensive (loss) income $(2,665) $11,639
========= =========
The accompanying Notes are an integral part of these financial statements.
5
ALLOY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(unaudited)
For the nine months
ended October 31,
2001 2002
----------- -----------
NET MERCHANDISE REVENUES $ 77,274 $ 103,866
SPONSORSHIP AND OTHER REVENUES 24,165 91,765
----------- -----------
TOTAL REVENUES 101,439 195,631
COST OF GOODS SOLD 42,874 93,410
----------- -----------
GROSS PROFIT 58,565 102,221
----------- -----------
OPERATING EXPENSES:
Selling and marketing 54,372 71,978
General and administrative 9,511 12,818
Amortization of goodwill and other intangible assets 13,063 2,903
----------- ----------
TOTAL OPERATING EXPENSES 76,946 87,699
----------- ----------
(LOSS) INCOME FROM OPERATIONS (18,381) 14,522
INTEREST INCOME, NET 712 1,462
GAIN ON SALES OF MARKETABLE SECURITIES, NET 658 --
----------- ----------
(LOSS) INCOME BEFORE INCOME TAXES $ (17,011) $ 15,984
PROVISION FOR INCOME TAXES 75 779
----------- ----------
NET (LOSS) INCOME $ (17,086) $ 15,205
=========== ==========
CHARGE FOR BENEFICIAL CONVERSION FEATURE
OF PREFERRED STOCK ISSUED 6,745 --
PREFERRED STOCK DIVIDENDS AND ACCRETION 2,420 1,642
----------- -----------
NET(LOSS)INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (26,251) $ 13,563
=========== ===========
BASIC AND DILUTED (LOSS) EARNINGS PER SHARE OF
COMMON STOCK:
Basic (loss) earnings attributable to
common stockholders per share $ (1.15) $ 0.36
=========== ===========
Diluted (loss) earnings attributable to
common stockholders per share $ (1.15) $ 0.34
=========== ===========
WEIGHTED AVERAGE BASIC COMMON SHARES OUTSTANDING 22,760,110 38,005,450
=========== ===========
WEIGHTED AVERAGE DILUTED COMMON SHARES OUTSTANDING 22,760,110 39,598,541
=========== ===========
The accompanying Notes are an integral part of these financial statements.
6
ALLOY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(AMOUNTS IN THOUSANDS)
(unaudited)
For the nine months
ended October 31,
2001 2002
----------- -----------
Net (loss) income $ (17,086) $ 15,205
Other comprehensive income, net of tax:
Net unrealized gain on available-for-sale securities 14 179
----------- ----------
Comprehensive (loss) income $ (17,072) $ 15,384
=========== ==========
The accompanying Notes are an integral part of these financial statements.
7
ALLOY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(unaudited)
For the nine months
ended October 31,
2001 2002
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(17,086) $ 15,205
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities:
Depreciation and amortization 14,856 6,081
Compensation charge for issuance of stock options 188 23
Realized gain on sales of marketable securities, net (658) --
Changes in operating assets and liabilities - net of effect of
business acquisitions:
Accounts receivable, net (9,695) (10,961)
Inventories (1,617) (14,716)
Prepaid catalog costs (847) (1,621)
Other current assets 1,003 (847)
Other assets 9 149
Accounts payable, accrued expenses and other 4,440 10,130
------- -------
Net cash (used in) provided by operating activities (9,407) 3,443
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (8,306) (75,878)
Proceeds from the sales and maturities of marketable securities 21,980 55,975
Capital expenditures (1,827) (3,036)
Sale of capital assets -- 372
Cash paid in connection with acquisitions of businesses,
net of cash acquired (27,051) (77,294)
Purchase of mailing list, domain names and marketing rights (30) (4,850)
------- -------
Net cash (used in) investing activities (15,234) (104,711)
------- -------
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 4,203 1,103
Payments of capitalized lease obligation (92) (282)
------- -------
Net cash provided by financing activities 30,831 55,833
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,190 (45,435)
CASH AND CASH EQUIVALENTS, beginning of period 9,338 61,618
------- -------
CASH AND CASH EQUIVALENTS, end of period $15,528 $16,183
======= =======
Supplemental disclosure of non-cash investing and financing activity:
Issuance of common stock and warrants in connection
with acquisitions $67,252 $ 5,469
Conversion of Series A and Series B Redeemable Convertible
Preferred stock into common stock $10,207 $ 1,596
The accompanying Notes are an integral part of these financial statements.
8
ALLOY, INC.
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(unaudited)
For the nine months ended October 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 acquisitions
of businesses 318,653 3 5,466 -- -- -- -- -- 5,469
Shares returned from escrow -- -- -- -- -- -- (8,275) $(131) (131)
Amortization of deferred
compensation -- -- -- -- 23 -- -- -- 23
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 136,469 2 1,594 -- -- -- -- -- 1,596
Issuance of common stock pursuant
to the exercise of options and
warrants and common stock
purchases under the employee
stock purchase plan 121,835 1 1,102 -- -- -- -- -- 1,103
Net income -- -- -- 15,205 -- -- -- -- 15,205
Accretion of discount and
dividends on Series B
Convertible Preferred Stock -- -- (1,642) -- -- -- -- -- (1,642)
Other comprehensive income, net -- -- -- -- -- 179 -- -- 179
---------- ------ --------- ----------- ------------ ------------- ------- ------ --------
Balance, October 31, 2002 39,493,834 $ 395 $387,846 $(60,045) $(8) $126 (8,275) $(131) $328,183
========== ====== ========= =========== ============ ============= ======= ====== ========
The accompanying Notes are an integral part of these financial statements.
9
ALLOY, INC.
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(unaudited)
For the nine months ended October 31, 2001
Accumulated
Other
Common Stock Comprehensive
--------------- Additional Accumulated Deferred Income
Shares Amount Paid-in Capital Deficit Compensation (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 5,369,298 54 67,198 -- -- -- 67,252
Cancellation of stock options
issued to employees -- -- (488) -- 488 -- --
Amortization of deferred
compensation -- -- -- -- 188 -- 188
Issuance of common stock
for conversion of Series A
Redeemable Convertible
Preferred Stock 877,193 9 10,198 -- -- -- 10,207
Issuance of common stock pursuant
to the exercise of options and
warrants and common stock purchases
under the employee stock purchase plan 647,645 6 4,197 -- -- -- 4,203
Net loss -- -- -- (17,086) -- -- (17,086)
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 -- -- (2,420) -- -- -- (2,420)
Loss on reclassification of
available-for-sale marketable
securities to trading securities,
net of other comprehensive income -- -- -- -- -- (840) (840)
---------- ---- -------- --------- ----- ----- ---------
Balance, October 31, 2001 28,140,094 $281 $230,210 $(76,737) $(52) $(1) $153,701
========== ==== ======== ========= ===== ===== =========
The accompanying Notes are an integral part of these financial statements
10
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
October 31, 2002 and for all periods presented have been made. The results of
operations for the periods ended October 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 October 31,
2001 2002
------------ ------------
(unaudited) (unaudited)
Numerator:
Net (loss) income $ (2,664) $ 11,597
Dividends and accretion on preferred stock 1,927 605
------------ ------------
Net (loss) income attributable to common stockholders $ (4,591) $ 10,992
============ ============
Denominator:
Weighted average basic common shares outstanding 24,991,646 38,856,057
============ ============
Contingently issuable common stock pursuant to acquisitions -- 577,771
Options to purchase common stock -- 250,290
------------ ------------
Weighted average diluted common shares outstanding 24,991,646 39,684,118
============ ============
Basic (loss) earnings attributable to common stockholders per share $ (0.18) $ 0.28
============ ============
Diluted (loss) earnings attributable to common stockholders per share $ (0.18) $ 0.28
============ ============
11
Nine months
ended October 31,
2001 2002
------------ ------------
(unaudited) (unaudited)
Numerator:
Net (loss) income $ (17,086) $ 15,205
Charge for beneficial conversion feature of preferred stock issued 6,745 --
Dividends and accretion on preferred stock 2,420 1,642
------------ ------------
Net (loss) income attributable to common stockholders $ (26,251) $ 13,563
============ ============
Denominator:
Weighted average basic common shares outstanding 22,760,110 38,005,450
============ ============
Contingently issuable common stock pursuant to acquisitions -- 892,441
Options to purchase common stock -- 700,650
------------- ------------
Weighted average diluted common shares outstanding 22,760,110 39,598,541
============ ============
Basic (loss) earnings attributable to common stockholders per share $ (1.15) $ 0.36
============ ============
Diluted (loss) earnings attributable to common stockholders per share $ (1.15) $ 0.34
============ ============
For the three months and nine months ended October 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 nine months
ended October 31, 2001 and October 31, 2002 excludes the securities listed below
because to include them in the calculation would be antidilutive:
Three months
ended October 31,
2001 2002
------------------ --------------
(unaudited) (unaudited)
Options to purchase common stock 1,211,762 --
Warrants to purchase common stock 122,172 --
Conversion of Series B Redeemable
Convertible Preferred Stock 1,600,366 1,485,767
Contingently issuable common shares pursuant to
acquisitions 1,061,873 --
--------- ---------
3,996,173 1,485,767
========= =========
12
Nine months
ended October 31,
2001 2002
------------------ --------------
(unaudited) (unaudited)
Options to purchase common stock 862,446 --
Warrants to purchase common stock 1,613 --
Conversion of Series B Redeemable
Convertible Preferred Stock 1,600,366 1,485,767
Contingently issuable common shares pursuant to
acquisitions 1,061,873 --
--------- ---------
3,526,298 1,485,767
========= =========
4. 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 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 Nine months
(amounts in thousands except per share data) ended October 31, ended October 31,
------------------------- -------------------------
2001 2002 2001 2002
(unaudited) (unaudited) (unaudited) (unaudited)
Reported net income $(2,664) $11,597 $(17,086) $15,205
Add back: goodwill amortization 4,709 -- 13,063 --
------- ------- -------- -------
Adjusted net (loss) income $ 2,045 $11,597 $ (4,023) $15,205
======= ======= ======== =======
Basic (loss) earnings attributable to common
stockholders per share
as reported $(0.18) $0.28 $(1.15) $0.36
as adjusted $ 0.00 $0.28 $(0.58) $0.36
Diluted (loss) earnings attributable to common
stockholders per share
as reported $(0.18) $0.28 $(1.15) $0.34
as adjusted $ 0.00 $0.28 $(0.58) $0.34
13
The acquired intangible assets as of January 31, 2002 and October 31, 2002 were
as follows:
January 31, 2002 October 31, 2002
(audited) (unaudited)
---------------------------- ----------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
(amounts in thousands) Amount Amortization Amount Amortization
---------- ------------ ---------- ------------
Amortized intangible
assets:
Mailing Lists $3,553 $293 $4,103 $1,048
Noncompete Agreements 2,635 206 2,695 798
Marketing Rights 800 33 5,650 1,396
Websites 595 42 741 257
---------- ------------ ---------- ------------
$7,583 $574 $13,189 $3,499
========== ============ ========== ============
Nonamortized intangible
assets:
Trademarks $4,130 -- $4,620 --
========== ============ ========== ============
In April 2002, 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 three years. The estimated remaining
amortization expense for the fiscal year ending January 31, 2003 is $1.2 million
and for each of the next four fiscal years through the fiscal year ending
January 31, 2007 is $4.7 million, $2.6 million, $1.0 million and $124,000,
respectively.
Alloy is continuing the review and determination of the fair value of the assets
acquired and liabilities assumed for acquisitions completed in the fiscal year
ending January 31, 2003. Accordingly, the allocations of the purchase prices are
subject to revision based on the final determination of appraised and other fair
values.
Goodwill
The changes in the carrying amount of goodwill for the nine months ended October
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 77,569
---------
Net balance as of October 31, 2002 (unaudited) $ 256,043
=========
14
5. 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 the impact on its consolidated financial statements.
In October 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.
6. 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 nine
month periods ended October 31, 2002 and October 31, 2001 (in thousands):
(unaudited)
Direct
Marketing Content All Other Consolidated
--------- --------- --------- ------------
Results for the three months ended October 31, 2002:
Revenue from external customers $ 92,448 $ 778 $ -- $ 93,226
Operating income (loss) before depreciation
and amortization of intangible assets 14,134 (125) -- 14,009
Depreciation and amortization of
intangible assets (2,401) (5) -- (2,406)
Interest income, net -- -- 330 330
Income (loss) before income taxes 11,733 (130) 330 11,933
Provision for income taxes (300) (36) -- (336)
Net income (loss) 11,433 (166) 330 11,597
Total assets $354,266 $ 6,225 $ 51,314 $ 411,805
(Unaudited)
Direct
Marketing Content All Other Consolidated
--------- --------- --------- ------------
Results for the three months ended October 31, 2001:
Revenue from external customers $ 43,368 $1,095 $ -- $ 44,463
Operating income before depreciation
and amortization of goodwill and
other intangible assets 2,589 75 -- 2,664
Depreciation and amortization of
goodwill and other intangible assets (4,984) (492) -- (5,476)
Interest income, net -- -- 223 223
(Loss) income before income taxes (2,395) (417) 223 (2,589)
Provision for income taxes (75) -- -- (75)
Net (loss) income (2,470) (417) 223 (2,664)
Total assets $181,223 $6,680 $ 17,736 $ 205,639
15
(unaudited)
Direct Marketing Content All Other Consolidated
---------------- ------- --------- ------------
Results for the nine months ended October 31, 2002:
Revenue from external customers $192,803 $2,828 $ -- $195,631
Operating income before depreciation and amortization
of intangible assets 20,436 167 -- 20,603
Depreciation and amortization of intangible assets (6,062) (19) -- (6,081)
Interest income, net -- -- 1,462 1,462
Income before income taxes 14,374 148 1,462 15,984
Provision for income taxes (731) (48) (779)
Net income 13,643 100 1,462 15,205
Total assets $354,266 $6,225 $51,314 $411,805
(unaudited)
Direct Marketing Content All Other Consolidated
---------------- ------- --------- ------------
Results for the nine months ended October 31, 2001:
Revenue from external customers $98,649 $ 2,790 $ -- $101,439
Operating loss before depreciation and amortization
of goodwill and other intangible assets (3,426) (98) -- (3,524)
Depreciation and amortization of goodwill and
other intangible assets (13,407) (1,450) -- (14,857)
Interest income, net -- -- 712 712
Realized gain on sales of marketable securities, net -- -- 658 658
(Loss) income before income taxes (16,833) (1,548) 1,370 (17,011)
Provision for income taxes (75) -- -- (75)
Net (loss) income (16,908) (1,548) 1,370 (17,086)
Total assets $181,223 $ 6,680 $17,736 $205,639
The carrying amount of goodwill by reportable segment as of October 31, 2002 and
January 31, 2002 was as follows (in thousands):
Goodwill
------------------------------------
January 31, 2002 October 31, 2002
----------------- ----------------
Direct Marketing $173,123 $250,530
Content 5,351 5,513
----------------- ----------------
Total $178,474 $256,043
================= ================
7. RECENT ACQUISITIONS
In August 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.
In July 2002, Alloy acquired all of the issued and outstanding stock of MPM
Holding, Inc. ("MPM Holding"), whose sole operating asset was 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.
In May 2002, Alloy acquired substantially all 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.
16
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.
8. SUBSEQUENT EVENTS
On December 13, 2002, Alloy acquired all of the issued and outstanding stock of
Old Glory Boutique Distributing, Inc., a direct marketing company with a
database of approximately 300,000 names. Alloy paid $9.59 million in cash to
complete the acquisition.
17
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 to 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 12 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 executing
sponsorship and advertising programs.
RESULTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 31, 2001 AND OCTOBER 31, 2002
The following table sets forth the statement of operations data for the periods
indicated as a percentage of revenues:
Three months ended
October 31,
2001 2002
--------- --------
Net merchandise revenues 71.4% 44.3%
Sponsorship and other revenues 28.6 55.7
--------- --------
Total revenues 100.0 100.0
Cost of goods sold 40.2 51.2
--------- --------
Gross profit 59.8 48.8
Operating expenses:
Selling and marketing 48.3 30.1
General and administrative 7.2 5.0
Amortization of goodwill and other intangible assets 10.6 1.3
--------- --------
Total operating expenses 66.1 36.4
(Loss) income from operations (6.3) 12.4
Interest income, net 0.5 0.4
Provision for income taxes (0.2) (0.4)
--------- --------
Net (loss) income (6.0)% 12.4%
========= ========
18
REVENUES
Merchandise Revenues. Net merchandise revenues increased from $31.8 million in
the three months ended October 31, 2001 to $41.3 million in the three months
ended October 31, 2002, a 30% increase. The increase in merchandise revenues for
the third quarter of the fiscal year ending January 31, 2003 ("fiscal 2002")
versus the third quarter of the fiscal year ended January 31, 2002 ("fiscal
2001") was due primarily to improved catalog circulation productivity, increased
catalog circulation to our expanded name database and the inclusion of a full
quarter of merchandise revenues from Dan's Competition, Inc. ("Dan's Comp")
versus approximately one month of revenues in the third quarter of fiscal 2001
from Dan's Comp, which we acquired in September 2001.
Sponsorship and Other Revenues. Sponsorship and other revenues increased to
$52.0 million in the third quarter of fiscal 2002 from $12.7 million in the
third quarter of fiscal 2001, an increase of 309% due to our enlarged in-house
advertising sales force, our broadened client base, an increased range of
advertising and marketing services offered, and the revenue contributions
resultant from recently acquired businesses, principally, the 360 Youth division
of MarketSource Corporation, which we acquired in November 2001, and MPM
Holding, which we acquired in July 2002.
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 media
we procure for clients, the marketing publications we develop and the magazines
we produce. Our cost of goods sold increased from $17.9 million in the three
months ended October 31, 2001 to $47.7 million in the three months ended October
31, 2002, a 167% increase. The increase in cost of goods sold in the third
quarter of fiscal 2002 as compared with the third quarter of fiscal 2001 was due
primarily to the increase in volume of merchandise sales to our growing customer
base, our expanded newspaper advertisement placement operation and the costs of
our enlarged location-based marketing services activities.
Our gross profit as a percentage of total revenues decreased from 59.8% in the
three months ended October 31, 2001 to 48.8% in the three months ended October
31, 2002 due primarily to the lower gross margin of sponsorship and other
revenues comprising a larger portion of our total revenue base as we expanded
our newspaper, event marketing, sampling and customer acquisition business
activities in the third 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 30.6% from $21.5 million
in the three months ended October 31, 2001 to $28.0 million in the three months
ended October 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; the addition of sales staff associated with recently
acquired media and marketing services businesses; and increased spending on
website maintenance. As a percentage of total revenues, our selling and
marketing expenses decreased from 48.3% in the third quarter of fiscal 2001 to
30.1% in the third 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 $3.7 million and $2.8 million
for the three months ended October 31, 2002 and October 31, 2001, respectively.
19
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 45.9% from $3.2 million in the three
months ended October 31, 2001 to $4.7 million in the three months ended October
31, 2002. As a percentage of total revenues, our general and administrative
expenses decreased from 7.2% in the third quarter of fiscal 2001 to 5.0% in the
third 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 continue 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 October 31, 2002
as compared with amortization of goodwill and other intangible assets of $4.7
million in the three months ended October 31, 2001. As a result of adopting SFAS
No. 142, our amortization expense was significantly less in the third quarter of
fiscal 2002 than in the third quarter of fiscal 2001, because goodwill is no
longer subject to amortization and instead requires an impairment review at
least annually. We expect our amortization expense of intangible assets to
increase as we acquire additional businesses.
20
INCOME (LOSS) FROM OPERATIONS
Our income from operations was $11.6 million in the third quarter of fiscal 2002
compared to a $2.8 million loss from operations in the third quarter of fiscal
2001. The transition from operating loss to operating income reflects greater
efficiency in selling merchandise to our name database and achieving economies
of scale in selling larger advertising and marketing services packages across a
wider range of clients, together with the elimination of goodwill amortization
for the third quarter of fiscal 2002.
INTEREST INCOME, NET
Interest income, net of expense, includes investment income from our cash
equivalents and from available-for-sale marketable securities and expenses
related to our financing obligations. In the three months ended October 31,
2002, we generated net interest income of $330,000 versus $223,000 in the three
months ended October 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 October 31, 2002, we were subject to income tax
expense of $336,000 due to operating income generated at the state level as
compared with $75,000 for the three months ended October 31, 2001. No federal
income tax in the third quarter of fiscal 2001 or fiscal 2002 was due as we
continued to utilize available net operating loss carry forwards.
NINE MONTHS ENDED OCTOBER 31, 2001 AND OCTOBER 31, 2002
The following table sets forth the statements of operations data for the periods
indicated as a percentage of revenues:
Nine months
ended October 31,
2001 2002
-------- --------
Net merchandise revenues 76.2% 53.1%
Sponsorship and other revenues 23.8 46.9
-------- --------
Total revenues 100.0 100.0
Cost of goods sold 42.3 47.7
-------- --------
Gross profit 57.7 52.3
Operating expenses:
Selling and marketing 53.6 36.8
General and administrative 9.4 6.6
Amortization of goodwill and other
intangible assets 12.9 1.5
-------- --------
Total operating expenses 75.9 44.9
(Loss) income from operations (18.2) 7.4
Interest income, net 0.7 0.8
Gain on sales of marketable securities, net 0.7 --
Provision for income taxes -- (0.4)
-------- --------
Net (loss) income (16.8)% 7.8%
======== ========
REVENUES
Merchandise Revenues. Net merchandise revenues increased from $77.3 million in
the nine months ended October 31, 2001 to $103.9 million in the nine months
ended October 31, 2002, a 34% increase. The increase in merchandise revenues for
the first nine months of fiscal 2002 versus the first nine months 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 nine months of revenue contribution in fiscal 2002 as compared with one
month of revenue contribution in fiscal 2001 from Dan's Comp, which we acquired
in September 2001.
21
Sponsorship and Other Revenues. Sponsorship and other revenues increased to
$91.8 million in the first nine months of fiscal 2002 from $24.2 million in the
first nine months of fiscal 2001, an increase of 280% 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 nine months of fiscal 2002, along with the revenue
contributions resultant from recently acquired businesses, principally, Cass
Communications, which we acquired in August 2001, the 360 Youth division of
MarketSource Corporation, which we acquired in November 2001, and MPM Holding,
which we acquired in July 2002.
COST OF GOODS SOLD
Our cost of goods sold increased from $42.9 million in the nine months ended
October 31, 2001 to $93.4 million in the nine months ended October 31, 2002, a
118% increase. The increase in cost of goods sold in the first nine months of
fiscal 2002 as compared with the first nine months of fiscal 2001 was due
primarily to the increase in volume of merchandise sales to our growing customer
base, the costs of our enlarged location-based marketing services activities and
our expanded newspaper advertisement placement operation.
Our gross profit as a percentage of total revenues decreased from 57.7% in the
nine months ended October 31, 2001 to 52.3% in the nine months ended October 31,
2002 due primarily to the lower gross margin of our sponsorship and other
revenues comprising a larger portion of our total revenue base resulting from
our expanded newspaper, event marketing, customer acquisition and sampling
businesses.
OPERATING EXPENSES
Selling and Marketing. Selling and marketing expenses increased 32% from $54.3
million in the nine months ended October 31, 2001 to $72.0 million in the nine
months ended October 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; the addition of sales staff associated
with recently acquired media and marketing services businesses; and increased
spending on website maintenance. As a percentage of total revenues, our selling
and marketing expenses decreased from 53.6% in the first nine months of fiscal
2001 to 36.8% in the first nine months of fiscal 2002 primarily due to our more
targeted merchandise marketing to our enlarged name database, improved
fulfillment efficiencies resulting from increased shipping activity, improved
advertising sales force productivity and reduced general advertising and
marketing activity. Shipping and handling costs, which we include in selling and
marketing expenses, were $8.9 million and $7.3 million for the nine months ended
October 31, 2002 and October 31, 2001, respectively.
General and Administrative. General and administrative expenses increased 34.7%
from $9.5 million in the nine months ended October 31, 2001 to $12.8 million in
the nine months ended October 31, 2002. As a percentage of total revenues, our
general and administrative expenses decreased from 9.4% in the first nine months
of fiscal 2001 to 6.6% in the first nine months 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 $2.9 million in the nine months
ended October 31, 2002 as compared with $13.1 million in the nine months ended
October 31, 2001. As a result of adopting SFAS No. 142, our amortization expense
decreased significantly in the first nine months of fiscal 2002 compared with
the first nine months of fiscal 2001. We expect our amortization expense of
intangible assets to increase as we acquire additional businesses.
22
INCOME (LOSS) FROM OPERATIONS
Our income from operations was $14.5 million in the first nine months of fiscal
2002 compared to the $18.4 million loss from operations in the first nine months
of fiscal 2001. The transition from operating loss to operating income reflects
greater efficiency in selling merchandise to our name database and achieving
economies of scale in selling larger advertising and marketing services packages
across a wider range of clients, together with the elimination of goodwill
amortization for the first nine months of fiscal 2002.
INTEREST INCOME, NET
In the nine months ended October 31, 2002, we generated net interest income of
$1.5 million as compared to $712,000 in the nine months ended October 31, 2001
due to the investment of net proceeds raised in our public equity offering in
February 2002, as well as our private placements of common equity in fiscal
2001.
INCOME TAX EXPENSE
In the nine month period ended October 31, 2002, we were subject to income tax
expense of $779,000 due to operating income generated at the state level as
compared to $75,000 for the nine month period ended October 31, 2001. No
federal income tax in the first nine months of fiscal 2001 and fiscal 2002 will
be due as we utilize net operating loss carry forwards.
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 October 31, 2002, we had approximately $51.3 million of cash,
cash equivalents and short-term investments. Our principal commitments at
23
October 31, 2002 consisted 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 $3.4 million in the first nine
months of fiscal 2002 as a result of more efficient database marketing, greater
advertising sales force productivity and general expense control, offset in part
by increased inventory to support future merchandise sales and increased
accounts receivable resultant from our enlarged advertising sales base. Net cash
used in operating activities was $9.4 million in the nine months ended October
31, 2001 to fund our operating loss, increased accounts receivable and increased
inventory.
Cash used in investing activities was $104.7 million in the first nine months of
fiscal 2002 due to the net application of $19.9 million of cash to acquire
marketable securities, $77.3 million to acquire businesses, $2.7 million for
capital expenditures and $4.9 million to acquire databases and marketing rights.
Cash used in investing activities of $15.2 million in the first nine months of
fiscal 2001 resulted from $27.0 million used in connection with business
acquisitions, $1.8 million used for capital expenditures and $30,000 to acquire
databases, offset by $13.7 million provided by net sales and maturities of
marketable securities.
Net cash provided by financing activities was $55.8 million in the nine months
ended October 31, 2002 due primarily to the gross proceeds from our public
equity offering in February 2002. In the nine months ended October 31, 2001, net
cash provided by financing activities of $30.8 million resulted primarily from
our issuances of Series A and Series B Redeemable Convertible Preferred Stock.
Our liquidity position as of October 31, 2002 consisted of $51.3 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 October 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.
24
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 risks discussed below under "Risks 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.
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.
25
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 October 31, 2002, we had an accumulated deficit of approximately
$60.0 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 $195.6 million for the first nine
months of fiscal 2002. 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
were able to analyze its data more effectively than we can, our competitive
position, and therefore our business, could suffer.
26
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, Dan's Comp and, from our acquisition of GFLA,
Inc. ("Girlfriends LA") in March 2002, Girlfriends LA 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.
27
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 firsthalf 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 attempt to maintain inventory levels to meet anticipated quantities of
products demanded by our customers. If we underestimate quantities demanded by
our customers and our vendors cannot restock, 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.
28
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. For example,
in November 2002, 32 states approved model legislation that would permit state
and local jurisdictions to begin collecting tax on sales over the internet. If
the Streamlined Sales Tax Project is adopted by up to ten additional states, and
approved by Congress, additional taxes could be imposed on the sale of goods and
services through the internet. This and other 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 and could otherwise have a material and adverse effect on our
business. 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.
29
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 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
similar to us, have experienced extreme price and volume fluctuations that have
often been disproportionate to the operating performance of these companies, and
we may experience similar fluctuations in the future. 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.
30
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As of October 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.
ITEM 4. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures. Our principal executive
officer and principal financial officer, after evaluating the effectiveness of
our disclosure controls and procedures (as defined in the Exchange Act Rules
13a-14(c) and 15d-14(c)) on December 2, 2002, have concluded that, based on such
evaluation, our disclosure controls and procedures were adequate and effective
to ensure that material information relating to us, including our consolidated
subsidiaries, was made known to them by others within those entities,
particularly during the period in which this Quarterly Report on Form 10-Q was
being prepared.
(b) Changes in Internal Controls. There were no significant changes in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation, nor were there any
significant deficiencies or material weaknesses in our internal controls.
Accordingly, no corrective actions were required or undertaken.
31
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 Wessels and Landenburg
Thalmann & Co., Inc. The complaint purportedly is filed on behalf of persons
purchasing our 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)(5) of the Exchange 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. The amended complaint asserts
violations of Section 10(b) of the Exchange Act and mirrors allegations asserted
against scores of other issuers sued by plaintiffs' counsel. Pursuant to an
omnibus agreement negotiated with a representative of the plaintiffs' counsel,
Messrs. Diamond and Johnson have been dismissed from the litigation without
prejudice. Management believes that the remaining allegations against us are
without merit and intends to vigorously defend the claims. To that end, and in
accordance with the Court's case management instructions, we have joined in a
global motion to dismiss the amended complaints which was filed by the issuers'
liaison counsel. That motion is sub judice.
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 August 19, 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 7,798 shares of unregistered common
stock to the two former shareholders of Triple Dot and the four former
securityholders of Y-Access.
On September 13, 2002, as performance-based partial consideration for our prior
acquisition of all of the issued and outstanding capital stock of Target
Marketing and Promotions, Inc. ("Target"), a Massachusetts corporation, we
issued an aggregate of 68,401 shares of unregistered common stock to the two
former shareholders of Target.
On October 23, 2002, as performance-based partial consideration for our prior
acquisition of all of the Strength Magazine assets of Rapid Service Company
("Rapid Service"), an Ohio corporation, we issued an aggregate of 27,248 shares
of unregistered common stock to Rapid Service.
The securities issued in the foregoing transactions were offered and sold in
reliance upon exemptions from 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.
Not applicable.
ITEM 5. OTHER INFORMATION.
On December 13, 2002, we acquired all of the issued and outstanding stock of Old
Glory Boutique Distributing, Inc., a direct marketing company with a database of
approximately 300,000 names. We paid $9.59 million in cash to complete the
acquisition.
32
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).
3.3 Certificate of Amendment to Restated Certificate of Incorporation (filed
as Exhibit 3.1 to Current Report on Fork 8-K, filed with the SEC on August 13,
2001 and incorporated herein by reference).
10.1 Third Lease Modification and Extension Agreement, dated as of August 31,
2002 between Abner Properties Company c/o Williams USA Realty Services, Inc.
and Alloy, Inc.
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.
None.
33
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: December 16, 2002 By: /s/ Samuel A. Gradess
-------------------------
Samuel A. Gradess
Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer)
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;
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;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report, whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: December 16, 2002 By: /s/ Samuel A. Gradess
----------------------------
Samuel A. Gradess
Chief Financial Officer
(Principal Financial Officer)
34
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 the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
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;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report, is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report, whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: December 16, 2002 By: /s/ Matthew C. Diamond
-----------------------------
Matthew C. Diamond
Chief Executive Officer
(Principal Executive Officer)
35
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).
3.3 Certificate of Amendment to Restated Certificate of Incorporation (filed
as Exhibit 3.1 to Current Report on Fork 8-K, filed with the SEC on August 13,
2001 and incorporated herein by reference).
10.1 Third Lease Modification and Extension Agreement, dated as of August 31,
2002 between Abner Properties Company c/o Williams USA Realty Services, Inc.
and Alloy, Inc.
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