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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 April 30, 2003
[ ] 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 June 6, 2003, the registrant had 41,072,166 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, April 30, 2003 (unaudited)
and January 31, 2003 ....................................................... 3
Consolidated Condensed Statements of Operations, Three Months Ended
April 30, 2003 (unaudited) and April 30, 2002 (unaudited) .................. 4
Consolidated Condensed Statements of Comprehensive Income (Loss),
Three Months Ended April 30, 2003 (unaudited) and April 30, 2002
(unaudited) ................................................................ 5
Consolidated Condensed Statements of Cash Flows, Three Months Ended
April 30, 2003 (unaudited) and April 30, 2002 (unaudited) .................. 6
Consolidated Condensed Statement of Changes in Stockholders' Equity,
Three Months Ended April 30, 2003 (unaudited) and April 30, 2002
(unaudited) ................................................................ 7
Notes to Consolidated Condensed Financial Statements (unaudited) ........... 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................................. 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk ........ 24
Item 4. Controls and Procedures ......................................... 24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ................................................. 25
Item 2. Changes in Securities and Use of Proceeds ......................... 25
Item 3. Defaults Upon Senior Securities ................................... 25
Item 4. Submission of Matters to a Vote of Security Holders ............... 25
Item 5. Other Information ................................................. 25
Item 6. Exhibits and Reports on Form 8-K .................................. 25
SIGNATURES ................................................................. 26
CERTIFICATIONS ............................................................. 27
EXHIBIT INDEX ............................................................. 29
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, April 30,
2003 2003
----------- -----------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 35,187 $ 38,383
Available-for-sale marketable securities 23,169 5,412
Accounts receivable, net 30,022 35,448
Inventories 23,466 22,369
Prepaid catalog costs 2,100 1,740
Other current assets 10,130 12,378
-------- --------
TOTAL CURRENT ASSETS 124,074 115,730
Property and equipment, net 10,081 9,844
Deferred tax assets 5,621 5,621
Goodwill, net 270,353 269,011
Intangible and other assets, net 24,471 24,233
-------- --------
TOTAL ASSETS $434,600 $424,439
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 28,032 $ 22,528
Deferred revenues 15,106 13,905
Accrued expenses and other current liabilities 27,679 19,191
-------- --------
TOTAL CURRENT LIABILITIES 70,817 55,624
Deferred tax liabilities 2,698 2,698
Long-term liabilities 93 --
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; 1,613 and 1,613 shares issued and outstanding, respectively 15,550 16,003
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; 1,613 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; 40,082,024
and 41,680,441 shares issued, respectively 401 417
Additional paid-in capital 396,963 405,130
Accumulated deficit (51,955) (52,343)
Accumulated other comprehensive income 164 25
Less common stock held in treasury, at cost; 8,275 and 608,275 shares, respectively (131) (3,115)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 345,442 350,114
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $434,600 $424,439
======== ========
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 April 30,
2002 2003
REVENUES: ------------ ------------
NET MERCHANDISE REVENUES $ 31,067 $ 29,971
SPONSORSHIP AND OTHER REVENUES 19,366 39,473
------------ ------------
TOTAL REVENUES 50,433 69,444
COST OF REVENUES:
COST OF GOODS SOLD 15,841 14,830
COST OF SPONSORSHIP AND OTHER REVENUES 5,719 23,145
------------ ------------
TOTAL COST OF REVENUES 21,560 37,975
GROSS PROFIT 28,873 31,469
------------ ------------
OPERATING EXPENSES:
Selling and marketing 21,425 25,379
General and administrative 4,131 4,958
Amortization of intangible assets 535 1,785
Restructuring charge -- 380
------------ ------------
TOTAL OPERATING EXPENSES 26,091 32,502
------------ ------------
INCOME (LOSS) FROM OPERATIONS 2,782 (1,033)
INTEREST AND OTHER INCOME, NET 535 287
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 3,317 (746)
PROVISION FOR INCOME TAX EXPENSE (BENEFIT) 247 (358)
------------ ------------
NET INCOME (LOSS) $ 3,070 $ (388)
============ ============
PREFERRED STOCK DIVIDENDS AND ACCRETION 558 453
------------ ------------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS $ 2,512 $ (841)
============ ============
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE OF
COMMON STOCK:
Basic earnings (loss) attributable to common
stockholders per share $ 0.07 $ (0.02)
============ ============
Diluted earnings (loss) attributable to common
stockholders per share $ 0.06 $ (0.02)
============ ============
WEIGHTED AVERAGE BASIC COMMON SHARES OUTSTANDING 36,818,936 40,149,100
============ ============
WEIGHTED AVERAGE DILUTED COMMON SHARES OUTSTANDING 39,290,275 40,149,100
============ ============
The accompanying Notes are an integral part of these financial statements.
4
ALLOY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(AMOUNTS IN THOUSANDS)
(unaudited)
For the three months
ended April 30,
2002 2003
--------- ---------
Net income (loss) $ 3,070 $ (388)
Other comprehensive income (loss) net of tax:
Net unrealized (loss) on available-for-sale securities (59) (139)
--------- ---------
Comprehensive income (loss) $ 3,011 $ (527)
========= =========
The accompanying Notes are an integral part of these financial statements.
5
ALLOY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(unaudited)
For the three months
ended April 30,
2002 2003
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 3,070 $ (388)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,499 2,828
Compensation charge for issuance of stock options 8 --
Changes in operating assets and liabilities - net of effect of
business acquisitions:
Accounts receivable, net 1,346 (5,426)
Inventories 193 1,097
Prepaid catalog costs 922 360
Other current assets (1,003) (2,248)
Other assets 44 (23)
Accounts payable, accrued expenses and other (2,493) (6,652)
------- -------
Net cash provided by (used in) operating activities 3,586 (10,452)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (41,839) (7,130)
Proceeds from the sales and maturities of marketable securities 11,191 24,748
Capital expenditures (1,633) (935)
Sale of capital assets -- 18
Cash paid in connection with acquisitions of businesses,
net of cash acquired (9,319) (208)
Purchase of mailing list, domain names and marketing rights (3,500) --
------- -------
Net cash (used in) provided by investing activities (45,100) 16,493
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock 55,015 --
Exercise of stock options and warrants
and common stock purchases under the employee stock purchase plan 453 217
Purchase of company common stock -- (2,984)
Payments of capitalized lease obligations (89) (78)
------- -------
Net cash provided by (used in) financing activities 55,379 (2,845)
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 13,865 3,196
CASH AND CASH EQUIVALENTS, beginning of period 61,618 35,187
------- -------
CASH AND CASH EQUIVALENTS, end of period $75,483 $38,383
======= =======
Supplemental disclosure of non-cash investing and financing activity:
Issuance of common stock and warrants in connection
with acquisitions $ 1,923 $ 8,317
Conversion of Series B Redeemable Convertible
Preferred Stock into common stock $ 513 $ --
The accompanying Notes are an integral part of these financial statements.
6
ALLOY, INC.
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(unaudited)
For the three months ended April 30, 2003
Accumulated
Common Stock Additional Other Treasury Shares
------------------ Paid-in Accumulated Comprehensive ----------------
Shares Amount Capital Deficit Income Shares Amount Total
---------- ------ --------- ----------- ------------- --------- ------ --------
Balance, February 1, 2003 40,082,024 $401 $396,963 $(51,955) $164 (8,275) $(131) $345,442
Issuance of common stock
for acquisitions
of businesses 1,545,947 15 8,302 -- -- -- -- 8,317
Repurchase of common stock -- -- -- -- -- (600,000) (2,984) (2,984)
Cancellation of accrued
issuance costs in connection
with public stock offering -- -- 102 -- -- -- -- 102
Issuance of common stock pursuant
to the exercise of options and common stock
purchases under the employee
stock purchase plan 52,470 1 216 -- -- -- -- 217
Net loss -- -- -- (388) -- -- -- (388)
Accretion of discount and
dividends on Series B
Convertible Preferred Stock -- -- (453) -- -- -- -- (453)
Unrealized loss on available-
for-sale marketable securities -- -- -- -- (139) -- -- (139)
---------- ----- --------- ---------- ------------ ------- ------- --------
Balance, April 30, 2003 41,680,441 $ 417 $405,130 $(52,343) $ 25 (608,275) $(3,115) $350,114
========== ===== ========= ========== ============ ======== ======= ========
The accompanying Notes are an integral part of these financial statements.
ALLOY, INC.
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(unaudited)
For the three months ended April 30, 2002
Accumulated
Common Stock Additional Other
----------------------- Paid-in Accumulated Deferred Comprehensive
Shares Amount Capital Deficit Compensation (Loss) 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 20,000 -- 1,923 -- -- -- 1,923
Amortization of deferred
compensation -- -- -- -- 6 -- 6
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
Convertible Preferred Stock 43,913 -- 513 -- -- -- 513
Issuance of common stock pursuant
to the exercise of options and
warrants and the employee stock
purchase plan 54,060 1 452 -- -- -- 453
Net income -- -- -- 3,070 -- -- 3,070
Accretion of discount and
dividends on Series B
Convertible Preferred Stock -- -- (558) -- -- -- (558)
Unrealized loss on available-for-
sale marketable securities -- -- -- -- -- (59) (59)
---------- ---- -------- -------- ---- ----- --------
Balance, April 30, 2002 39,034,850 $390 $383,656 $(72,180) $(25) $(112) $311,729
========== ==== ======== ======== ==== ===== ========
The accompanying Notes are an integral part of these financial statements.
7
ALLOY, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. BUSINESS AND FINANCIAL STATEMENT PRESENTATION
Alloy, Inc. ("Alloy" or the "Company") is a media, marketing services and direct
marketing company targeting Generation Y, the more than 60 million boys and
girls in the United States between the ages of 10 and 24. Alloy's business
integrates direct mail catalogs, print media, display media boards, websites,
on-campus marketing programs and promotional events, and features a portfolio of
brands that are well known among Generation Y consumers and advertisers. Alloy
reaches a significant portion of Generation Y consumers through its various
media assets, marketing services programs and direct marketing activities and,
as a result, Alloy is able to offer advertisers targeted access to the youth
market.
Alloy generates revenue from two principal sources -- merchandising, and
sponsorship and other activities. From its catalogs and websites, Alloy sells
third-party branded products in key Generation Y spending categories, including
apparel, action sports equipment, and accessories directly to the youth market.
Alloy generates sponsorship and advertising revenues largely from traditional,
blue chip advertisers that seek highly targeted, measurable and effective
marketing programs to reach Generation Y consumers. Advertisers can reach
Generation Y consumers through integrated marketing programs that include
Alloy's catalogs, magazines, books, websites, and display media boards, as well
as through promotional events, product sampling, college and high school
newspaper advertising, customer acquisition programs and other marketing
services that Alloy provides.
The accompanying unaudited interim consolidated condensed financial statements
have been prepared by Alloy. In the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to present fairly
the financial position, results of operations, comprehensive income/losses and
cash flows at April 30, 2003 and for all periods presented have been made. The
results of operations for the periods ended April 30, 2002 and 2003 are not
necessarily indicative of the operating results for a full fiscal year. Certain
information and footnote disclosures prepared in accordance with generally
accepted accounting principles ("GAAP") and normally included in the financial
statements have been condensed or omitted. 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, 2003 ("fiscal 2002") included in Alloy's Annual Report on Form 10-K
for the fiscal year ended January 31, 2003 which was filed with the Securities
and Exchange Commission ("SEC") on May 1, 2003 and amended on May 16, 2003.
2. STOCK-BASED EMPLOYEE COMPENSATION COST
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, an Amendment of SFAS No.
123" ("Statement No. 148"). This statement amends SFAS No. 123, "Accounting for
Stock-Based Compensation," ("Statement No. 123") to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation, and requires additional
disclosures in interim and annual financial statements. The disclosure in
interim periods requires pro forma net income and net income per share as if the
Company adopted the fair value method of accounting for stock-based awards.
Under Statement No. 123, the Company accounts for its stock-based employee
compensation in accordance with the provisions of Accounting Principles Board
Opinion No. 25 ("APB No. 25"), "Accounting for Stock Issued to Employees," and
related interpretations. As such, compensation expense would be recorded on the
date of grant only if the then current market price of the underlying stock
exceeded the exercise price. The Company discloses the pro forma effect on net
income (loss) and earnings per share as required by Statement No. 148
recognizing as expense over the vesting period the fair value of all stock-based
awards on the date of grant.
8
The following table reflects the effect on net income (loss) and earnings (loss)
per share attributable to common stockholders if the Company had applied the
fair value recognition provisions of Statement No. 123, as amended by Statement
No. 148, to stock-based employee compensation. These pro forma effects may not
be representative of future amounts since the estimated fair value of stock
options on the date of grant is amortized to expense over the vesting period and
additional options may be granted in future years. Amounts in thousands, except
per share data:
Three months
ended April 30,
-------------------------------
2002 2003
------------ ------------
(unaudited) (unaudited)
Net income (loss) attributable to common stockholders:
As reported $ 2,512 $ (841)
Add: Total stock-based employee compensation costs
included in reported net income, net of taxes 8 --
Less: Total stock-based employee compensation costs
determined under fair value based method for
all awards, net of taxes (3,800) (3,035)
-------- --------
Pro forma $ (1,280) $ (3,876)
======== ========
Basic earnings (loss) attributable to common stockholders per share:
As reported $ 0.07 $ (0.02)
Pro forma $ (0.03) $ (0.10)
Diluted earnings (loss) attributable to common stockholders per share:
As reported $ 0.06 $ (0.02)
Pro forma $ (0.03) $ (0.10)
3. NET EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of net earnings (loss) per share.
Alloy has applied the provisions of SFAS No. 128, "Earnings Per Share" in the
calculations below. Amounts in thousands, except share and per share data:
Three months
ended April 30,
2002 2003
------------ ------------
(unaudited) (unaudited)
Numerator:
Net income (loss) $ 3,070 $ (388)
Dividends and accretion on preferred stock 558 453
------------ ------------
Net income (loss) attributable to common stockholders $ 2,512 $ (841)
============ ============
Denominator:
Weighted average basic common shares outstanding 36,818,936 40,149,100
============ ============
Contingently issuable common stock pursuant to acquisitions 1,252,200 --
Options to purchase common stock 1,125,741 --
Warrants to purchase common stock 93,398 --
------------ ------------
Weighted average diluted common shares outstanding 39,290,275 40,149,100
============ ============
Basic earnings (loss) attributable to common stockholders per share $ 0.07 $ (0.02)
============ ============
Diluted earnings (loss) attributable to common stockholders per share $ 0.06 $ (0.02)
============ ============
The calculation of fully diluted loss per share for the three months ended April
30, 2002 and 2003 excludes the securities listed below because to include them
in the calculation would be antidilutive. For purposes of this presentation, all
securities are assumed to be common stock equivalents and antidilutive.
Three months
ended April 30,
2002 2003
----------------- -----------------
(unaudited) (unaudited)
Options to purchase common stock 4,870,107 6,907,111
Warrants to purchase common stock 1,683,394 1,813,540
Conversion of Series A and Series B
Convertible Preferred Stock 1,554,803 1,544,730
--------- ----------
8,108,304 10,265,381
========= ==========
9
4. GOODWILL AND INTANGIBLE ASSETS
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." Under SFAS No. 142, goodwill and intangible assets with indefinite
lives that were acquired after June 30, 2001, are no longer amortized but
instead evaluated for impairment at least annually. With respect to goodwill and
intangibles with indefinite lives that were acquired prior to July 1, 2001,
Alloy adopted the nonamortization provisions of SFAS No. 142 as of February 1,
2002. Alloy completed the required impairment testing of goodwill and other
intangibles with indefinite lives for fiscal 2002 and concluded that there was
no impairment of such assets as the fair values of its reporting units exceeded
the carrying values of its reporting units. Additionally, the Company will
perform its annual impairment testing for its reporting units during fiscal
2003.
The acquired intangible assets as of January 31, 2003 and April 30, 2003 were as
follows:
January 31, 2003 April 30, 2003
(unaudited)
---------------------------- ----------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
(amounts in thousands) Amount Amortization Amount Amortization
---------- ------------ ---------- ------------
Amortized intangible
assets:
Mailing Lists $ 4,553 $ 1,314 $ 4,553 $ 1,588
Noncompete Agreements 3,695 1,074 3,845 1,378
Marketing Rights 5,650 3,052 5,650 3,708
Websites 841 331 916 415
Client Relationships 4,000 378 4,900 845
------- ------- ------- -------
$18,739 $ 6,149 $19,864 $ 7,934
======= ======= ======= =======
Nonamortized intangible
assets:
Trademarks $ 9,625 -- $ 9,835 --
======= ======= ======= =======
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, 2004 is $4.9
million, and for each of the next four fiscal years through the fiscal year
ending January 31, 2008 is $4.4 million, $2.2 million, $232,000 and $64,000,
respectively.
Alloy is continuing the review and determination of the fair value of certain
assets acquired and liabilities assumed for acquisitions completed in the fiscal
year ended 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 three months ended April
30, 2003 are as follows (in thousands):
Gross balance as of January 31, 2003 $296,999
Accumulated goodwill amortization as of January 31, 2003 (26,646)
---------
Net balance as of January 31, 2003 270,353
Goodwill adjustments during the quarter (1,342)
---------
Net balance as of April 30, 2003 $269,011
=========
Goodwill adjustments during the quarter primarily relate to the approximately
$1.3 million of re-allocations of net excess purchase price to identified
specific intangible assets for the Career Recruitment Media and YouthStream
Media Networks fiscal 2002 acquisitions. Other decreases in goodwill include
changes to acquisition costs of approximately $424,000 and the fair value of the
assets acquired and liabilities assumed of approximately $174,000 offset by
increases in goodwill for additional consideration for earnouts of approximately
$591,000.
10
5. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2002, the FASB issued Statement No. 148 as an amendment to Statement
No. 123, which provides alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-based
employee compensation (in accordance with Statement No. 123). The Company has
applied the accounting provisions of APB No. 25, and has made the annual pro
forma disclosures of the effect of adopting the fair value method of accounting
for employee stock options and similar instruments as required by Statement No.
123 and permitted under Statement No. 148. Statement No. 148 also requires pro
forma disclosure to be provided on a quarterly basis. The Company has included
the quarterly disclosure for the first quarter of the fiscal year ending January
31, 2004 ("fiscal 2003") in Note 2 and will continue to closely monitor
developments in the area of accounting for stock-based compensation.
In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("Statement No.
150"). Statement No. 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances), whereby
many of those instruments were previously classified as equity. Statement No.
150 is effective for all freestanding financial instruments entered into or
modified after May 31, 2003 otherwise it will become effective at the beginning
of the first interim period beginning after June 15, 2003. The Company is
currently evaluating the impact of the provisions of that statement.
In January 2003, the Securities and Exchange Commission issued a new disclosure
regulation, "Conditions for Use of Non-GAAP Financial Measures" (Regulation G),
which is effective for all public disclosures and filings made after March 28,
2003. Regulation G requires public companies that disclose or release
information containing financial measures that are not in accordance with GAAP
to include in the disclosure or release a presentation of the most directly
comparable GAAP financial measure. The Company became subject to regulation G in
fiscal 2003 and believes that it is in compliance with the new disclosure
requirements.
6. SEGMENT REPORTING
Alloy has two operating segments: merchandise, and sponsorship and other.
Alloy's management reviews financial information related to these operating
segments and uses the measure of income (loss) from operations to evaluate
performance and allocated resources. Reportable data for Alloy's operating
segments were as follows (amounts in thousands):
TOTAL ASSETS CAPITAL EXPENDITURES
Three months
ended April 30,
January 31, 2003 April 30, 2003 2002 2003
--------- ---------- --------- ----------
Merchandise $ 116,275 $ 114,646 $ 60 $ 402
Sponsorship and other 248,313 251,811 1,464 183
Corporate 70,012 57,982 108 350
--------- --------- --------- ---------
Total $ 434,600 $ 424,439 $ 1,632 $ 935
========= ========= ========= =========
REVENUES DEPRECIATION AND AMORTIZATION
Three months Three months
ended April 30, ended April 30,
2002 2003 2002 2003
--------- --------- --------- ---------
Merchandise $ 31,067 $ 29,971 $ 782 $ 797
Sponsorship and other 19,366 39,473 615 1,954
Corporate -- -- 102 77
--------- --------- --------- ---------
Total $ 50,433 $ 69,444 $ 1,499 $ 2,828
========= ========= ========= =========
11
OPERATING INCOME (LOSS)
Three months
ended April 30,
2002 2003
--------- ---------
Merchandise $ (742) $ (1,588)
Sponsorship and other 6,739 5,891
Corporate (3,215) (5,336)
--------- ---------
Total 2,782 (1,033)
Interest and other income, net 535 287
--------- ---------
Income (loss) before income taxes $ 3,317 $ (746)
========= =========
Included in operating income (loss) in the first quarter of fiscal 2003 are
expenses of $380,000 in the merchandise segment due to a restructuring charge
representing future contractual lease payments, severance and personnel costs,
and the write-off of related leasehold improvements. In conjunction with the
facility closure, the Company also wrote off approximately $150,000 of
inventory. This charge is included in cost of goods sold in the accompanying
consolidated condensed statement of operations.
The carrying amount of goodwill by reportable segment as of January 31, 2003 and
April 30, 2003 was as follows (in thousands):
January 31, 2003 April 30, 2003
----------------- ----------------
Sponsorship and other $191,602 $190,560
Merchandise 78,751 78,451
----------------- ----------------
Total $270,353 $269,011
================= ================
12
7. RESTRUCTURING CHARGES
During fiscal 2002, the Company made the strategic decision to outsource
substantially all of its fulfillment activities for its CCS unit to New Roads,
Inc. ("New Roads"). During the fourth quarter of fiscal 2002, the Company
determined that it would not be able to exit or sublease its existing
fulfillment facilities. In accordance with Emerging Issues Task Force Issue No.
94-3 and SAB No. 100, the Company recognized a restructuring charge of $2.6
million in the fourth quarter in its merchandise segment, representing the
future contractual lease payments and the write-off of related leasehold
improvements. The Company did not incur any significant personnel termination
obligations as a result of the facility closure.
During the first quarter of fiscal 2003, the Company made the strategic decision
to outsource substantially all of its fulfillment activities for its GFLA unit
to New Roads. The Company determined that it would not be able to sublease its
existing fulfillment facilities due to the real estate market conditions. In
accordance with SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" and SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," the Company recognized a charge of $380,000 in
the first quarter of 2003 in its merchandise segment, representing the future
contractual lease payments, severance and personnel costs, and the write-off of
related leasehold improvements. The Company incurred severance and personnel
costs of $44,000 as a result of the facility closure.
The following tables summarize the Company's restructuring activities (in
thousands):
Asset Contractual Severance &
Type of cost Impairments Obligations Personnel Costs Total
- ----------------------------- ------------- ------------ ----------------- ------
Restructuring Costs Fiscal 2002 $ 820 $ 1,751 -- $ 2,571
Payments and Write-offs Fiscal 2002 (820) (155) -- (975)
------- ------- ------- -------
Balance at January 31, 2003 -- 1,596 -- 1,596
======= ======= ======= =======
Restructuring Costs Fiscal 2003 31 305 44 380
Payments and Write-offs Fiscal 2003 (31) (85) (44) (160)
------- ------- ------- -------
Balance at April 30, 2003 -- $ 1,816 -- $ 1,816
======= ======= ======= =======
A summary of the Company's restructuring liability under contractual obligations
related to real estate lease and exit costs, by location, as of January 31, 2003
and April 30, 2003 is as follows (in thousands):
January 31, April 30,
2003 2003
---------- ------------
CCS facility, San Luis Obispo, California $ 1,596 $ 1,541
GFLA facility, Valencia, California -- 275
---------- -----------
Total Lease and Exit Cost Liability $ 1,596 $ 1,816
========== ===========
The Company anticipates that the remaining restructuring accruals will be
settled by January 31, 2006.
13
8. COMMON STOCK
On January 29, 2003, Alloy adopted a stock repurchase program authorizing the
repurchase of up to $10.0 million of its common stock from time to time in the
open market at prevailing market prices or in privately negotiated transactions.
Alloy has repurchased 600,000 shares for approximately $3.0 million under this
plan to date. All 600,000 shares were repurchased during the three months ended
April 30, 2003.
9. STOCKHOLDER RIGHTS PLAN
In April 2003, Alloy's Board of Directors adopted a Stockholder Rights Plan
("Plan") in which the Company declared a dividend of one preferred stock
purchase right (a "Right") for each outstanding share of common stock, par value
$0.01 per share (the "Common Shares"), of the Company. Each Right entitles the
registered holder to purchase from the Company a unit consisting of one
one-hundredth of a share (a "Unit") of Series C Junior Participating Preferred
Stock, $0.01 par value per share (the "Series C Preferred Stock"), at a purchase
price of $40.00 per Unit, subject to adjustment. Until the occurrence of certain
events, the Rights are represented by and traded in tandem with Alloy common
stock. Rights will be exercisable only if a person or group acquires beneficial
ownership of 20 percent (20%) or more of the Company's common stock or announces
a tender offer upon consummation of which such person or group would own 20% or
more of the common stock. Alloy is entitled to redeem the Rights at $.001 per
right under certain circumstances set forth in the Plan. The Rights themselves
have no voting power and will expire at the close of business on April 14, 2013,
unless earlier exercised, redeemed or exchanged. Each one one-hundredth of a
share of Series C Preferred Stock has the same voting rights as one share of
Alloy common stock, and each share of Series C Preferred Stock has 100 times the
voting power of one share of Alloy common stock.
10. SUBSEQUENT EVENTS
In May 2003, Alloy acquired substantially all of the assets and liabilities of
OCM Direct, Inc., Collegiate Carpets, Inc. and Carepackages, Inc., wholly owned
subsidiaries of Student Advantage, Inc., which companies were in the business of
direct marketing to college students and their parents a variety of college or
university endorsed products. Alloy has consolidated this business under its
wholly owned subsidiary, On Campus Marketing, LLC. Alloy paid approximately
$15.65 million in cash to complete the acquisition.
14
ITEM 2. MANAGEMENT`S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion of our financial condition and results of operations
should be read in conjunction with the Financial Statements and the related
Notes included elsewhere in this report on Form 10-Q. Descriptions of all
documents incorporated by reference herein or included as exhibits hereto are
qualified in their entirety by reference to the full text of such documents so
incorporated or referenced. This discussion contains forward-looking statements
that involve risks and uncertainties. Our actual results may differ materially
from those anticipated in these forward-looking statements as a result of
various factors, including, but not limited to, those under "Risk Factors That
May Affect Future Results" and elsewhere in this report.
OVERVIEW
We are a media, marketing services and direct marketing 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, display media boards, 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 14.0 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 rapidly, both
organically and through the completion of strategic acquisitions. We generate
revenue from two principal sources -- merchandising, and sponsorship and other
activities.
Our merchandising segment derives revenues and operating income from sales of
youth-focused merchandise including apparel, accessories and action-sports
equipment to consumers through our catalogs and websites.
Our sponsorship and other activities segment derives revenues largely from
traditional, blue chip advertisers that seek highly targeted, measurable and
effective marketing programs to reach Generation Y members. Advertisers can
reach members of Generation Y through integrated marketing programs that include
our catalogs, magazines, books, websites, and display media boards, as well as
through promotional events, product sampling, college and high school newspaper
advertising, customer acquisition programs and other marketing services that we
provide.
RESULTS OF OPERATIONS
THREE MONTHS ENDED APRIL 30, 2003 COMPARED WITH THREE MONTHS ENDED APRIL 30,
2002
Consolidated Results of Operations
The following table sets forth our statement of operations data for the periods
indicated, reflected as a percentage of revenues:
Three months
ended April 30,
----------------------------
2002 2003
---- ----
STATEMENTS OF OPERATIONS DATA
Net merchandise revenues .................................... 61.6% 43.2%
Sponsorship and other revenues .............................. 38.4 56.8
Total revenues .............................................. 100.0 100.0
Cost of revenues ............................................ 42.7 54.7
Gross profit ................................................ 57.3 45.3
Operating expenses:
Selling and marketing ....................................... 42.5 36.6
General and administrative .................................. 8.2 7.1
Amortization of intangible assets ........................... 1.1 2.6
Restructuring charge ........................................ -- 0.5
Total operating expenses .................................... 51.8 46.8
Income (loss) from operations ............................... 5.5 (1.5)
Interest and other income, net .............................. 1.1 0.4
Provision for income tax (expense) benefit .................. (0.5) 0.5
Net income (loss) ........................................... 6.1% (0.6)%
15
Segment Results of Operations
The tables below present our revenues and operating income (loss) by segment for
each of the quarters ended April 30, 2002 and 2003 (dollars in thousands):
Three months
ended April 30, Percent change
2002 2003 2002 vs 2003
--------- --------- --------------
REVENUES REVENUES
Net merchandise $ 31,067 $ 29,971 (3.5)%
Sponsorship and other 19,366 39,473 103.8
--------- ---------
Total Revenues $ 50,433 $ 69,444 37.7 %
Three months
ended April 30, Percent change
2002 2003 2002 vs 2003
---------- --------- --------------------
OPERATING INCOME (LOSS) OPERATING INCOME (LOSS)
Merchandise $ (742) $ (1,588) (114.0)%
Sponsorship and other 6,739 5,891 (12.6)
Corporate (3,215) (5,336) (66.0)
--------- ---------
Total operating income(loss) $ 2,782 $ (1,033) NM
NM-Not meaningful
Revenues
Total Revenues. Total revenues increased 37.7% to $69.4 million in the three
months ended April 30, 2003 from $50.4 million in the three months ended April
30, 2002.
Merchandise Revenues. Net merchandise revenues decreased 3.5% to $30.0 million
in the three months ended April 30, 2003 from $31.1 million in the three months
ended April 30, 2002. This decrease was due primarily to a modest reduction in
catalog circulation as we reduced the number of catalogs circulated to prospects
outside our database and non-buyers inside our database.
Sponsorship and Other Revenues. Sponsorship and other revenues increased 103.8%
to $39.5 million in the first quarter of fiscal 2003 from $19.4 million in the
first quarter of fiscal 2002 primarily due to the selling efforts of our
expanded advertising sales force and the broadened range of advertising and
marketing services we were able to offer. Our sales force, client base and
services were significantly augmented by the acquisitions of Market Place Media
in July 2002, Student Advantage Marketing Group in May 2002 and the marketing
assets of YouthStream Media Networks in August 2002.
16
Cost of Revenues
Cost of revenues consists of the cost of the merchandise sold plus the freight
cost to deliver the merchandise to the warehouse, together with the direct costs
attributable to the sponsorship and advertising programs we provide and the
publications we develop and produce. Our cost of revenues increased 76.1% to
$38.0 million in the three months ended April 30, 2003 from $21.6 million in the
three months ended April 30, 2002. This increase was due primarily to the
increase in costs associated with our substantially enlarged newspaper
advertising and field marketing activities.
Our gross profit as a percentage of total revenues decreased to 45.3% in the
three months ended April 30, 2003 from 57.3% in the three months ended April 30,
2002. This was due primarily to the lower gross margin profile of our
sponsorship and other revenues as we experienced significant growth in lower
margin activities such as newspaper advertising, event and field marketing, and
sampling programs. Gross profit percentages may fluctuate significantly in
future periods due primarily to the changing revenue contributions of our
different sponsorship activities.
Total Operating Expenses
Selling and Marketing. Selling and marketing expenses consist primarily of
catalog production and mailing costs; our call center and fulfillment operations
expenses; freight costs in shipping to our merchandise customers; salaries of
our sales and marketing personnel; marketing costs; and expenses related to the
development, maintenance and marketing of our websites. These selling and
marketing expenses increased 18.5% to $25.4 million in the three months ended
April 30, 2003 from $21.4 million in the three months ended April 30, 2002,
primarily due to the hiring of additional sales and marketing personnel; the
addition of sales staff associated with acquired media and marketing services
businesses; and an enlarged client service infrastructure to handle our expanded
sponsorship activities. As a percentage of total revenues, our selling and
marketing expenses decreased to 36.6% in the first quarter of fiscal 2003 from
42.5% in the first quarter of fiscal 2002. This decrease was due primarily to
improved advertising sales force productivity and expense leveraged over an
expanded revenue base.
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 20.0% to $5.0 million in the three months
ended April 30, 2003 from $4.1 million in the three months ended April 30, 2002.
The increase was attributable primarily to an increase in compensation expense
for additional personnel to handle our growing business, together with
administrative costs related to acquired companies and expenses associated with
a growing public company such as increased professional fees, insurance premiums
and public relations costs. As a percentage of total revenues, our general and
administrative expenses decreased to 7.1% for first quarter fiscal 2003 from
8.2% for first quarter fiscal 2002 as we spread our overhead expenses across an
enlarged revenue base. We expect general and administrative expenses to grow as
we hire additional personnel and incur additional expenses related to the growth
of our business and our operations.
Amortization of Intangible Assets. Amortization of intangible assets was
approximately $1.8 million in the three months ended April 30, 2003 as compared
with $535,000 in the three months ended April 30, 2002. The increase in expenses
resulted from our acquisition activities in the last nine months of fiscal 2003
and the associated allocation of purchase price to identified intangible assets.
All of our acquisitions have been accounted for under the purchase method of
accounting.
Restructuring Charge. During the first quarter of fiscal 2003, we wrote off an
abandoned facility lease and equipment no longer required in our business
operations when we determined that we could not sublet the space due to the soft
real estate market conditions. As a result, and in accordance with SFAS No. 146,
we took a first quarter charge of $380,000 representing the future contractual
lease payments, severance and personnel costs, and the write-off of related
leasehold improvements. We will continue to review our operations to determine
the necessity of our facilities, equipment and personnel.
Income (Loss) from Operations
Total Income (Loss) from Operations. Our loss from operations was $1.0 million
in the first quarter of fiscal 2003 while our income from operations was $2.8
million in the first quarter of fiscal 2002. The transition from operating
income to operating loss is a result of the increase in amortization of
intangible assets, the restructuring charge, and increased expenses supporting
the growth in sponsorship and other revenues.
Merchandise Income (Loss) from Operations. Our loss from merchandise operations
increased 114% to $1.6 million in the first quarter of fiscal 2003 from $742,000
in the first quarter of fiscal 2002. The increase resulted primarily from the
restructuring charge and increased fulfillment costs.
Sponsorship and Other Income (Loss) from Operations. Our income from sponsorship
and other operations decreased 12.6% to $5.9 million in the first quarter of
fiscal 2003 from $6.7 million in the first quarter of fiscal 2002. This decrease
resulted from greater amortization of acquired intangible assets and reduced
contribution from our print and interactive advertising services, offset
partially by greater economies of scale in selling a broader range of
advertising and marketing services packages across a wider range of clients.
17
Interest and Other Income, Net
Interest and other income net of expense includes income from our cash and cash
equivalents and from investments and expenses related to our financing
obligations. In the three months ended April 30, 2003 and April 30, 2002, we
generated net interest and other income of $287,000 and $535,000, respectively.
This 46.4% decrease resulted primarily from the lower cash and cash equivalents
and available-for-sale marketable securities during the quarter ended April 30,
2003 as compared with the quarter ended April 30, 2002.
Income Tax (Expense) Benefit
In the three months ended April 30, 2003 we recorded an income tax benefit of
$358,000 due to the taxable loss generated in the quarter. Included in the tax
benefit is a refund of $36,000 for an amended prior year tax return. We expect
the loss generated in the first quarter to be offset by taxable income during
the second half of fiscal 2003. In the three months ended April 30, 2002, we
were subject to income tax expense of $247,000 due to taxable operating income
generated at the state level.
SEASONALITY
Our historical revenues and operating results have varied significantly from
quarter to quarter due to seasonal fluctuations in consumer purchasing patterns
and the impact of acquisitions. Sales of apparel, accessories, footwear and
action sports equipment through our websites and catalogs have generally been
higher in our third and fourth fiscal quarters, which contain the key
back-to-school and holiday selling seasons, than in our first and second fiscal
quarters. We believe that advertising and sponsorship sales follow a similar
pattern with higher revenues in the third and fourth quarters, particularly the
third quarter, as marketers more aggressively attempt to reach our Generation Y
audience during these major consumer-spending seasons.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations to date primarily through the sale of equity as
we generated negative cash flow from operations prior to fiscal 2002. At April
30, 2003, we had approximately $43.8 million of cash, cash equivalents and
short-term investments. Our principal commitments at April 30, 2003 consisted of
accounts payable, accrued expenses and obligations under operating and capital
leases.
Net cash used in operating activities was $10.5 million in the three months
ended April 30, 2003 due to an increase in accounts receivable, a decrease in
accounts payable and accrued expenses for payments related to inventory and an
increase in other current assets as a result of prepaid income taxes. Net cash
provided by operating activities was $3.6 million in the three months ended
April 30, 2002 as a result of our net income in the period offset in part by a
reduction in accounts payable and accrued expenses.
Cash provided by investing activities was $16.5 million in the three months
ended April 30, 2003 primarily due to cash proceeds from the sales and
maturities of available-for-sale marketable securities offset by $1.0 million
for capital expenditures. Cash used in investing activities was $45.1 million in
the three months ended April 30, 2002 due to the application of $30.6 million of
cash to acquire marketable securities, $9.3 million to acquire businesses, $1.6
million for capital expenditures and $3.5 million to acquire databases and
marketing rights.
Net cash used in financing activities was $2.8 million in the three months ended
April 30, 2003 due primarily to the repurchase of 600,000 shares of our common
stock. Net cash provided by financing activities was $55.4 million in the three
months ended April 30, 2002 due primarily to the proceeds from our equity
offering in February 2002.
Our liquidity position as of April 30, 2003 consisted of $43.8 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.
On January 29, 2003, we adopted a stock repurchase program authorizing the
repurchase of up to $10.0 million of our common stock from time to time in the
open market at prevailing market prices or in privately negotiated transactions.
We have repurchased 600,000 shares for approximately $3.0 million under this
plan to date. All 600,000 shares were repurchased during the three months ended
April 30, 2003.
18
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
During the first quarter ended April 30, 2003, there were no changes in the
Company's policies regarding the use of estimates and other critical accounting
policies. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations," found in the Company's Annual Report on Form 10-K for
the fiscal year ended January 31, 2003, for additional information relating to
the Company's use of estimates and other critical accounting policies.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation
- - Transition and Disclosure, an Amendment of SFAS No. 123" ("SFAS No. 148").
SFAS No. 148 provides alternative methods of transition for a voluntary change
to the fair value method of accounting for stock-based employee compensation as
originally provided by SFAS No. 123 "Accounting for Stock-Based Compensation"
("SFAS No. 123"). Additionally, SFAS No. 148 amends the disclosure requirements
of SFAS No. 123 to require prominent disclosure in both the annual and interim
financial statements about the method of accounting for stock-based compensation
and the effect of the method used on reported results. The transitional
requirements of SFAS No. 148 are effective for all financial statements for
fiscal years ended after December 15, 2002. We adopted the disclosure portion of
this statement for the current fiscal quarter ended April 30, 2003. The
application of the disclosure portion of this standard will have no impact on
our consolidated financial position or results of operations. The Financial
Accounting Standards Board recently indicated that it will require stock-based
employee compensation to be recorded as a charge to earnings beginning in 2004.
We will continue to monitor its progress on the issuance of this standard as
well as evaluate our position with respect to current guidance.
In May 2003, the Financial Accounting Standards Board issued SFAS No. 150,
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity" ("SFAS No. 150"). SFAS No. 150 establishes standards for
how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances), whereby many of those instruments were previously
classified as equity. SFAS No. 150 is effective for all freestanding financial
instruments entered into or modified after May 31, 2003 otherwise it will become
effective at the beginning of the first interim period beginning after June 15,
2003. We are currently evaluating the impact of the provisions of this standard.
In January 2003, the Securities and Exchange Commission issued a new disclosure
regulation, "Conditions for Use of Non-GAAP Financial Measures" ("Regulation
G"), which is effective for all public disclosures and filings made after March
28, 2003. Regulation G requires public companies that disclose or release
information containing financial measures that are not in accordance with GAAP
to include in the disclosure or release a presentation of the most directly
comparable GAAP financial measure and a reconciliation of the disclosed non-GAAP
financial measure to the most directly comparable GAAP financial measure. We
became subject to Regulation G in fiscal 2003 and believe that we are in
compliance with the new disclosure requirements.
19
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 "Risk Factors That May Affect Future
Results."
Although we believe the expectations reflected in the forward-looking statements
are reasonable, they relate only to events as of the date on which the
statements are made, and we cannot assure you that our future results, levels of
activity, performance or achievements will meet these expectations. Moreover,
neither we nor any other person assumes responsibility for the accuracy and
completeness of the forward-looking statements. We do not intend to update any
of the forward-looking statements after the date of this report to conform these
statements to actual results or to changes in our expectations, except as may be
required by law.
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.
20
RISKS RELATED TO OUR BUSINESS
WE MAY NOT BE ABLE TO ACHIEVE OR MAINTAIN PROFITABILITY.
Since our inception in January 1996, we have incurred significant net losses. We
have reported positive net income for only one full fiscal year (fiscal 2002).
Although we expect to generate positive net income in fiscal 2003, there is no
assurance that we will do so. As of April 30, 2003, we had an accumulated
deficit of approximately $52.3 million.
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 $299.3 million for 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 (i) the
continuing appeal of our media and marketing properties to Generation Y
consumers, (ii) the continued perception by participating advertisers and
sponsors that we offer an effective marketing channel for their products and
services, (iii) our ability to select products that appeal to our customer base
and to market such products effectively to our target audience, (iv) our ability
to attract, train and retain qualified employees and management and (v) 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.
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 Girlfriends LA catalogs and
websites and our related consumer magazines among our Generation Y target
market, and the prominence of our MarketPlace Media, CASS Communications, 360
Youth and Private Colleges & Universities 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.
21
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 our 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.
OUR INABILITY TO ACQUIRE SUITABLE BUSINESSES OR TO MANAGE THEIR INTEGRATION
COULD HARM OUR BUSINESS.
We expect to expand our reach by acquiring 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 in connection with acquisitions, potentially on
terms which could be dilutive to our existing stockholders.
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, 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 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 most
of our 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.
22
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. If this proposed legislation were
to become law, it could have a material 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 dependant 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.
23
RISKS RELATING TO OUR COMMON STOCK
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 CLASS ACTION SUITS AND DEFENDING THESE LITIGATIONS 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.
We also have been named as a defendant in several purported securities class
action lawsuits stemming from a series of allegedly false and misleading
statements made by us to the market between August 1, 2002 and January 23, 2003.
Defending against these litigations 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 either or both of these litigations, or settle
either or both on adverse terms, or on terms outside of our insurance policy
limits, our stock price may be adversely affected.
TERRORIST ATTACKS AND OTHER ACTS OF WIDER ARMED CONFLICT MAY HAVE AN ADVERSE
EFFECT ON THE U.S. AND WORLD ECONOMIES AND MAY ADVERSELY AFFECT OUR BUSINESS.
Terrorist attacks and other acts of violence or war, such as those that took
place on September 11, 2001, could have an adverse effect on our business,
results of operations or financial condition. There can be no assurance that
there will not be further terrorist attacks against the United States or its
businesses or interests. Attacks or armed conflicts that directly impact the
Internet or our physical facilities could significantly affect our business and
thereby impair our ability to achieve our expected results. Further, the adverse
effects that such violent acts and threats of future attacks could have on the
U.S. and world economies could similarly have a material adverse effect on our
business, results of operations and financial condition. Finally, further
terrorist acts could cause the United States to enter into a wider armed
conflict which could further disrupt our operations and result in a material
adverse effect on our business, results of operations and overall financial
condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As of April 30, 2003, we held a portfolio of $5.4 million in fixed income
marketable securities for which, due to the conservative nature of our
investments and relatively short duration, interest rate risk is mitigated. We
do not own any derivative financial instruments in our portfolio. Accordingly,
we do not believe there is any material market risk exposure with respect to
derivatives or other financial instruments that would require disclosure under
this item.
ITEM 4. CONTROLS AND PROCEDURES.
(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 Exchange Act Rules
13a-14(c) and 15d-14(c)) within 90 days prior to the date of this Quarterly
Report on Form 10-Q, 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.
24
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 (the
"District Court") naming as defendants us, James K. Johnson, Jr., Matthew C.
Diamond, BancBoston Robertson Stephens, Volpe Brown Whelan and Company, Dain
Rauscher Wessel and Ladenburg Thalmann & Co., Inc. The complaint purportedly was
filed on behalf of persons purchasing our common stock between May 14, 1999 and
December 6, 2000 and alleges violations of Sections 11, 12(a)(2) and 15 of the
Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 promulgated
thereunder. On or about April 19, 2002, the plaintiffs filed an amended
complaint against us, the individual defendants and the underwriters of our
initial public offering. The amended complaint asserts violations of Section
10(b) of the Exchange Act and mirrors allegations asserted against scores of
other issuers sued by plaintiffs' counsel. Pursuant to an omnibus agreement
negotiated with representatives of the plaintiffs' counsel, Messrs. Diamond and
Johnson have been dismissed from the litigation without prejudice. In accordance
with the District Court's case management instructions, we joined in a global
motion to dismiss the amended complaint, which was filed by the issuers' liaison
counsel. By opinion and order dated February 19, 2003, the District Court denied
in part and granted in part the global motion to dismiss. With respect to us,
the Court dismissed the Section 10(b) claim and allowed the plaintiffs to
proceed on the Section 11 claim. Accordingly, the remaining claim against us
will focus solely on whether the registration statement filed in connection with
our initial public offering contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading. Although we have not retained a
damages expert at this time, the dismissal of the Section 10(b) claim likely
will reduce the potential damages that the plaintiffs can claim. Management
believes that the remaining allegations against us are without merit and intends
to vigorously defend the claim.
On or about March 8, 2003, several putative class action complaints were filed
in the United States District Court for the Southern District of New York naming
as defendants us, James K. Johnson, Jr., Matthew C. Diamond and Samuel A.
Gradess. The complaints purportedly are filed on behalf of persons who purchased
our common stock between August 1, 2002 and January 23, 2003, and, among other
things, allege violations of Section 10(b) and Section 20(a) of Exchange Act and
Rule 10b-5 promulgated thereunder stemming from a series of allegedly false and
misleading statements made by us to the market between August 1, 2002 and
January 23, 2003. At a conference held on May 30, 2003, the Court consolidated
the actions described above, appointed lead plaintiffs, approved the selection
of lead counsel to represent the purported class, and set a schedule for
briefing and arguing a motion to dismiss the complaint in the consolidated
action. We have retained the law firm of Cahill, Gordon & Reindel in connection
with this matter. Management believes that the allegations against us and
Messrs. Diamond, Gradess and Johnson are without merit and intends to vigorously
defend the action.
We are involved in additional legal proceedings that have arisen in the ordinary
course of business. We believe that there is no claim or litigation pending, the
outcome of which could have a material adverse effect on our financial condition
or operating results.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a) Not applicable.
(b) Not applicable.
(c) None.
(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.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
3.1 Restated Certificate of Incorporation (filed as Exhibit 3.1 to Registration
Statement on Form S-1, No. 333-74159, and incorporated herein by reference).
3.2 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 Form 8-K, filed with the SEC on August 13, 2001
and incorporated herein by reference).
3.4 Certificate of Designations, Preferences, and Rights of the Series B
Convertible Preferred Stock of Alloy Online, Inc. (filed as Exhibit 3.1 to
Current Report on Form 8-K, filed with the SEC on June 21, 2001 and incorporated
herein by reference).
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.
Alloy filed an Item 5 Form 8-K, dated April 9, 2003, for the purpose of
announcing the declaration of a dividend to our stockholders of a stock purchase
right exercisable in certain circumstances, as set forth in a Rights Agreement
attached as an exhibit to that Form 8-K.
25
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: June 16, 2003
By: /s/ Samuel A. Gradess
---------------------
Samuel A. Gradess
Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer)
26
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: June 16, 2003 By: /s/ Samuel A. Gradess
-------------------------
Samuel A. Gradess
Chief Financial Officer
(Principal Financial Officer)
27
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: June 16, 2003 By: /s/ Matthew C. Diamond
-------------------------------
Matthew C. Diamond
Chief Executive Officer
(Principal Executive Officer)
28
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).
3.4 Certificate of Designations, Preferences, and Rights of the Series B
Convertible Preferred Stock of Alloy Online, Inc. (filed as Exhibit 3.1 to
Current Report on Form 8-K, filed with the SEC on June 21, 2001 and incorporated
herein by reference).
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).
29