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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 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 September 5, 2003, the registrant had 41,395,240 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, July 31, 2003 (unaudited)
and January 31, 2003 ...................................... 3
Consolidated Condensed Statements of Operations, Three Months Ended
July 31, 2003 (unaudited) and July 31, 2002 (unaudited) ............. 4
Consolidated Condensed Statements of Comprehensive Income (Loss),
Three Months Ended July 31, 2003 (unaudited) and July 31, 2002
(unaudited) ......................................................... 5
Consolidated Condensed Statements of Operations, Six Months Ended
July 31, 2003 (unaudited) and July 31, 2002 (unaudited).............. 6
Consolidated Condensed Statements of Comprehensive Income (Loss),
Six Months Ended July 31, 2003 (unaudited) and July 31, 2002
(unaudited) ......................................................... 7
Consolidated Condensed Statements of Cash Flows, Six Months Ended
July 31, 2003 (unaudited) and July 31, 2002 (unaudited) ............. 8
Consolidated Condensed Statement of Changes in Stockholders' Equity,
Six Months Ended July 31, 2003 (unaudited) and
July 31, 2002 (unaudited) ............................................ 9
Notes to Consolidated Condensed Financial Statements (unaudited) .... 11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................... 20
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 ....... 33
Item 5. Other Information ......................................... 33
Item 6. Exhibits and Reports on Form 8-K .......................... 33
SIGNATURES .......................................................... 34
EXHIBIT INDEX ....................................................... 35
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ALLOY, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
January 31, July 31,
2003 2003
--------- ----------
ASSETS
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 35,187 $ 92,567
Available-for-sale marketable securities 23,169 4,782
Accounts receivable, net 30,022 30,237
Inventories 23,466 21,573
Prepaid catalog costs 2,100 3,132
Other current assets 10,130 12,409
--------- ---------
TOTAL CURRENT ASSETS 124,074 164,700
Property and equipment, net 10,081 10,044
Deferred tax assets 5,621 5,621
Goodwill, net 270,353 286,335
Intangible and other assets, net 24,471 29,718
--------- ---------
TOTAL ASSETS $ 434,600 $ 496,418
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 28,032 $ 21,333
Deferred revenues 15,106 17,320
Accrued expenses and other current liabilities 27,679 22,863
--------- ---------
TOTAL CURRENT LIABILITIES 70,817 61,516
Deferred tax liabilities 2,698 2,698
Long-term liabilities 93 852
Senior Convertible Debentures Due 2023 -- 65,000
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 1,340 shares issued and outstanding, respectively 15,550 13,646
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 1,340 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 42,003,515 shares issued, respectively 401 420
Additional paid-in capital 396,963 410,150
Deferred compensation -- (2,094)
Accumulated deficit (51,955) (52,662)
Accumulated other comprehensive income 164 7
Less common stock held in treasury, at cost; 8,275 and 608,275 shares, respectively (131) (3,115)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 345,442 352,706
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 434,600 $ 496,418
========= =========
The accompanying Notes are an integral part of these financial statements
3
ALLOY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(unaudited)
For the three months
ended July 31,
2002 2003
------------ ------------
REVENUES:
NET MERCHANDISE REVENUES $ 31,530 $ 30,028
SPONSORSHIP AND OTHER REVENUES 20,443 50,473
------------ ------------
TOTAL REVENUES 51,973 80,501
COST OF REVENUES:
COST OF GOODS SOLD 15,025 15,659
COST OF SPONSORSHIP AND OTHER REVENUES 9,138 25,466
------------ ------------
TOTAL COST OF REVENUES 24,163 41,125
GROSS PROFIT 27,810 39,376
------------ ------------
OPERATING EXPENSES:
Selling and marketing 22,498 31,780
General and administrative 3,985 6,266
Amortization of intangible assets 1,189 1,896
------------ ------------
TOTAL OPERATING EXPENSES 27,672 39,942
------------ ------------
INCOME (LOSS) FROM OPERATIONS 138 (566)
INTEREST INCOME 597 105
INTEREST EXPENSE -- (108)
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 735 (569)
PROVISION FOR INCOME TAX EXPENSE (BENEFIT) 197 (248)
------------ ------------
NET INCOME (LOSS) 538 (321)
============ ============
PREFERRED STOCK DIVIDEND AND ACCRETION 479 702
------------ ------------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS $ 59 $ (1,023)
============ ============
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE OF
COMMON STOCK:
Basic earnings (loss) attributable to common
stockholders per share $ 0.00 $ (0.02)
============ ============
Diluted earnings (loss) attributable to common
stockholders per share $ 0.00 $ (0.02)
============ ============
WEIGHTED AVERAGE BASIC COMMON SHARES OUTSTANDING 38,204,132 41,135,614
============ ============
WEIGHTED AVERAGE DILUTED COMMON SHARES OUTSTANDING 39,941,514 41,135,614
============ ============
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 July 31,
2002 2003
----- ------
Net income (loss) $ 538 $(321)
Other comprehensive income (loss), net of tax:
Net unrealized gain (loss) on available-for-sale securities 195 (18)
----- -----
Comprehensive income (loss) $ 733 $(339)
===== =====
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 six months
ended July 31,
2002 2003
------------ ------------
REVENUES:
NET MERCHANDISE REVENUES $ 62,597 $ 59,999
SPONSORSHIP AND OTHER REVENUES 39,809 89,946
------------ ------------
TOTAL REVENUES 102,406 149,945
COST OF REVENUES:
COST OF GOODS SOLD 30,866 30,491
COST OF SPONSORSHIP AND OTHER REVENUES 14,857 48,609
------------ ------------
TOTAL COST OF REVENUES 45,723 79,100
GROSS PROFIT 56,683 70,845
------------ ------------
OPERATING EXPENSES:
Selling and marketing 43,939 57,158
General and administrative 8,100 11,224
Amortization of intangible assets 1,724 3,680
Restructuring charge -- 380
------------ ------------
TOTAL OPERATING EXPENSES 53,763 72,442
------------ ------------
INCOME (LOSS) FROM OPERATIONS 2,920 (1,597)
INTEREST INCOME 1,132 396
INTEREST EXPENSE -- (112)
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 4,052 (1,313)
PROVISION FOR INCOME TAX EXPENSE (BENEFIT) 444 (606)
------------ ------------
NET INCOME (LOSS) 3,608 (707)
============ ============
PREFERRED STOCK DIVIDENDS AND ACCRETION 1,037 1,155
------------ ------------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS $ 2,571 $ (1,862)
============ ============
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE OF
COMMON STOCK:
Basic earnings (loss) attributable to common
stockholders per share $ 0.07 $ (0.05)
============ ============
Diluted earnings (loss) attributable to common
stockholders per share $ 0.06 $ (0.05)
============ ============
WEIGHTED AVERAGE BASIC SHARES OUTSTANDING 37,573,097 40,650,532
============ ============
WEIGHTED AVERAGE DILUTED COMMON SHARES OUTSTANDING 39,649,757 40,650,532
============ ============
The accompanying Notes are an integral part of these financial statements.
6
ALLOY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(AMOUNTS IN THOUSANDS)
(unaudited)
For the six months
ended July 31,
2002 2003
----------- -----------
Net income (loss) $ 3,608 $ (707)
Other comprehensive income (loss), net of tax:
Net unrealized gain (loss) on available-for-sale securities 137 (157)
----------- -----------
Comprehensive income (loss) $ 3,745 $ (864)
=========== ===========
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 six months
ended July 31,
2002 2003
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 3,608 $ (707)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 3,674 5,929
Amortization of debt issuance costs -- 12
Compensation charge for restricted stock -- 291
Compensation charge for issuance of stock options 15 --
Changes in operating assets and liabilities - net of effect of
business acquisitions:
Accounts receivable, net 1,797 (13)
Inventories (6,666) 4,635
Prepaid catalog costs (1,046) (1,032)
Other current assets (712) (690)
Other assets 161 50
Accounts payable, accrued expenses and other 4,647 (6,382)
-------- --------
Net cash provided by operating activities 5,478 2,093
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (68,523) (7,130)
Proceeds from the sales and maturities of marketable securities 50,657 25,360
Capital expenditures (1,964) (2,112)
Sale of capital assets 372 40
Cash paid in connection with acquisitions of businesses,
net of cash acquired (67,351) (16,025)
Purchase of mailing list, domain names and marketing rights (4,850) --
-------- --------
Net cash (used in) provided by investing activities (91,659) 133
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock 55,012 --
Gross proceeds from issuance of convertible debentures -- 65,000
Debt issuance costs -- (2,159)
Exercise of stock options and warrants -- --
and common stock purchases under the employee stock purchase plan 741 498
Repurchase of common stock -- (2,984)
Payment of credit facility -- (5,000)
Payments of capitalized lease obligations (183) (201)
-------- --------
Net cash provided by financing activities 55,570 55,154
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (30,611) 57,380
CASH AND CASH EQUIVALENTS, beginning of period 61,618 35,187
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 31,007 $ 92,567
======== ========
Supplemental disclosure of non-cash investing and financing activity:
Issuance of common stock and warrants in connection
with acquisitions $ 4,467 $ 8,317
Conversion of Series B Redeemable Convertible Preferred
Stock into common stock $ 514 $ 3,059
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 six months ended July 31, 2002
Accumulated
Other
Common Stock Additional Comprehensive Treasury Stock
---------------- Paid-in Accumulated Deferred Income ---------------
Shares Amount Capital Deficit Compensation (Loss) 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 and private stock
offerings -- -- 102 -- -- -- -- -- 102
Issuance of common stock pursuant
to the exercise of options and
common stock purchases under the
employee stock purchase plan 114,039 1 497 -- -- -- -- -- 498
Issuance of common stock for
conversion of Series B
Convertible Preferred Stock 261,505 3 3,056 -- -- -- -- -- 3,059
Net loss -- -- -- (707) -- -- -- -- (707)
Issuance of restricted stock -- -- 2,385 -- (2,385) -- -- -- --
Amortization of restricted stock -- -- -- -- 291 -- -- -- 291
Accretion of discount and
dividends on Series B
Convertible Preferred Stock -- -- (1,155) -- -- -- -- -- (1,155)
Unrealized loss on available-
for-sale marketable securities -- -- -- -- -- (157) -- -- (157)
---------- ------ --------- --------- -------- ------ --------- ------- ---------
Balance, July 31, 2003 42,003,515 $ 420 $410,150 $ (52,662) $ (2,094) $ 7 (608,275) $(3,115) $ 352,706
========== ====== ========= ========= ======== ====== ========= ======= =========
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 six months ended July 31, 2002
Accumulated
Other
Common Stock Additional Comprehensive Treasury Stock
------------------ Paid-in Accumulated Deferred Income ---------------
Shares Amount Capital Deficit Compensation (Loss) Shares Amount Total
---------- ------ --------- ----------- ------------ ------------- ------- ------ --------
Balance, February 1, 2002 34,916,877 $349 $324,719 $(75,250) $ (31) $ (53) -- -- $249,734
Issuance of common stock
and warrants for acquisition
of business 215,206 2 4,465 -- -- -- -- -- 4,467
Shares returned from escrow -- -- -- -- -- -- (8,275) (131) (131)
Amortization of deferred
compensation -- -- -- -- 15 -- -- -- 15
Issuance of common stock
in connection with public
offering, net of issuance costs 4,000,000 40 56,607 -- -- -- -- -- 56,647
Issuance of common stock
for conversion of Series B
Convertible
Preferred Stock 43,913 1 513 -- -- -- -- -- 514
Issuance of common stock pursuant
to the exercise of options and
warrants and the common stock
purchase under employee stock
purchase plan 88,560 1 740 -- -- -- -- -- 741
Net income -- -- -- 3,608 -- -- -- -- 3,608
Accretion of discount and
dividends on Series B
Convertible Preferred Stock -- -- (1,037) -- -- -- -- -- (1,037)
Unrealized gain on available-for
sale marketable securities -- -- -- -- -- 137 -- -- 137
---------- ------ --------- ----------- ------------ ------------- ------- ------ --------
Balance, July 31, 2002 39,264,556 $393 $386,007 $(71,642) $ (16) $ 84 (8,275) $ (131) $314,695
========== ====== ========= =========== ============ ============= ======= ====== ========
The accompanying Notes are an integral part of these financial statements
10
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 July 31, 2003 and for all periods presented have been made. The
results of operations for the periods ended July 31, 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.
11
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 for stock options 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.
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 Six months
ended July 31, ended July 31,
--------------- ---------------
2002 2003 2002 2003
-------- -------- -------- --------
(unaudited)(unaudited) (unaudited) (unaudited)
Net income (loss) attributable to common stockholders:
As reported $ 59 $ (1,023) $ 2,571 $ (1,862)
Add: Total stock-based employee compensation costs 7 291 15 291
included in reported net income, net of taxes
Less: Total stock-based employee compensation costs
determined under fair value based method for
all awards, net of taxes (4,009) (2,546) (7,808) (5,578)
-------- ---------- -------- ----------
Pro forma $ (3,943) $ (3,278) $ (5,222) $ (7,149)
======== ========== ======== ==========
Basic earnings (loss) attributable to common stockholders per share:
As reported $ 0.00 $ (0.02) $ 0.07 $ (0.05)
Pro forma $ (0.10) $ (0.08) $ (0.14) $ (0.18)
Diluted earnings (loss) attributable to common stockholders per share:
As reported $ 0.00 $ (0.02) $ 0.06 $ (0.05)
Pro forma $ (0.10) $ (0.08) $ (0.13) $ (0.18)
12
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 Six months
ended July 31, ended July 31,
2002 2003 2002 2003
------------ ------------ ------------ ------------
(unaudited) (unaudited ) (unaudited) (unaudited)
Numerator:
Net income (loss) $ 538 $ (321) $ 3,608 $ (707)
Dividend and accretion on preferred stock 479 702 1,037 1,155
------------ ------------ ------------ ------------
Net income (loss) attributable to common stockholders $ 59 $ (1,023) $ 2,571 $ (1,862)
============ ============ ============ ============
Denominator:
Weighted average basic common shares outstanding 38,204,132 41,135,614 37,573,097 40,650,532
============ ============ ============ ============
Contingently issuable common stock pursuant to acquisitions 1,015,856 -- 1,102,617 --
Options to purchase common stock 765,696 -- 929,616 --
Warrants to purchase common stock 6,063 -- 44,427 --
------------ ------------ ------------ ------------
Weighted average diluted common shares outstanding 39,941,514 41,135,614 39,649,757 40,650,532
============ ============ ============ ============
Basic earnings (loss) attributable to common stockholders per share $ 0.00 $ (0.02) $ 0.07 $ (0.05)
============ ============ ============ ============
Diluted earnings (loss) attributable to common stockholders per share $ 0.00 $ (0.02) $ 0.06 $ (0.05)
============ ============ ============ ============
The calculation of fully diluted loss per share for the three months and six
months ended July 31, 2002 and 2003 excludes the securities listed below because
to include them in the calculation would be antidilutive:
Three months Six months
ended July 31, ended July 31,
2002 2003 2002 2003
------------ ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
Options to purchase common stock 5,556,402 7,199,361 5,213,255 7,053,236
Warrants to purchase common stock 1,797,441 1,881,486 1,740,418 1,847,513
Conversion of Series A and Series B
Convertible Preferred Stock 1,576,108 1,303,527 1,565,456 1,424,129
Conversion of 5.375% Convertible Debentures -- 7,761,195 -- 7,761,195
Restricted stock -- 300,000 -- 300,000
------------ ------------ ------------ ------------
8,929,951 18,445,569 8,519,128 18,386,073
============ ============ ============ ============
13
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 July 31, 2003 were as
follows (amounts in thousands):
January 31, 2003 July 31, 2003
(unaudited)
----------- ------------ ---------- ------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
---------- ------------ ---------- ------------
Amortized intangible
assets:
Mailing Lists $ 4,553 $ 1,314 4,553 1,861
Noncompete Agreements 3,695 1,074 4,145 1,701
Marketing Rights 5,650 3,052 5,650 4,364
Websites 841 331 1,341 534
Client Relationships 4,000 378 8,300 1,369
------- ------- ------- -------
$18,739 $ 6,149 $23,989 $ 9,829
======= ======= ======= =======
Nonamortized intangible
assets:
Trademarks $ 9,625 -- $10,735 --
======= ======= ======= =======
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 $3.4
million, and for each of the next four fiscal years through the fiscal year
ending January 31, 2008 is $4.9 million, $2.6 million, $569,000 and $310,000,
respectively.
Alloy is continuing the review and determination of the fair value of certain
assets acquired and liabilities assumed for acquisitions completed during the
second half of fiscal 2002 and the first half of fiscal 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 six months ended July
31, 2003 are as follows (amounts 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 year 15,982
---------
Net balance as of July 31, 2003 286,335
=========
Goodwill adjustments during the first six months of fiscal 2003 primarily relate
to an approximate $15.0 million increase in goodwill for the acquisition of
substantially all of the assets of OCM Direct, Inc. ("OCM"), Collegiate Carpets,
Inc. and Carepackages, Inc. in May 2003. Other goodwill adjustments during the
first half of fiscal 2003 relate to an approximate $1.3 million of
re-allocations of net excess purchase price to identified specific intangible
assets acquired in connection with the Career Recruitment Media and YouthStream
Media Networks fiscal 2002 acquisitions. Additional increases in goodwill
include changes to acquisition costs of approximately $533,000, adjustments to
the fair value of the assets acquired and liabilities assumed of approximately
$735,000 and additional consideration for earnouts of approximately $1.1
million.
14
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 second 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.
Statement No. 150 is to be implemented by reporting the cumulative effect of a
change in accounting principle for financial instruments created before the
issuance of Statement No. 150 and still existing at the beginning of the interim
period of adoption. The Company will adopt the provisions of Statement No. 150
effective August 1, 2003. The adoption of Statement No. 150 is not expected to
have an impact on the financial statements as the Company's Series B Convertible
Preferred Stock, which is the only applicable financial instrument of the
Company, is outside the scope of Statement No. 150.
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.
15
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):
Three months Six months
ended July 31, ended July 31,
2002 2003 2002 2003
--------- --------- --------- ---------
Revenues:
Merchandise $ 31,530 $ 30,028 $ 62,597 $ 59,999
Sponsorship and other 20,443 50,473 39,809 89,946
--------- --------- --------- ---------
Total Revenues $ 51,973 $ 80,501 $ 102,406 $ 149,945
========= ========= ========= =========
Three months Six months
ended July 31, ended July 31,
2002 2003 2002 2003
--------- --------- --------- ---------
Operating Income (Loss):
Merchandise $ 14 $ (3,214) $ (728) $ (4,801)
Sponsorship and other 3,452 9,180 10,191 15,071
Corporate (3,328) (6,532) (6,543) (11,867)
--------- --------- --------- ---------
Total Operating Income (Loss) 138 (566) 2,920 (1,597)
Interest and other income, net 597 (3) 1,132 284
--------- --------- --------- ---------
Income (loss) before income taxes $ 735 $ (569) $ 4,052 $ (1,313)
========= ========= ========= =========
16
Included in operating income (loss) in the six months ended July 31, 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 relating to the closing of
one of its facilities. 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.
Three months Six months
ended July 31, ended July 31,
2002 2003 2002 2003
--------- --------- --------- ---------
Depreciation and Amortization:
Merchandise $ 770 $ 708 $ 1,552 $ 1,505
Sponsorship and other 1,290 2,092 1,905 4,046
Corporate 115 302 217 378
--------- --------- --------- ---------
Total Depreciation and
Amortization $ 2,175 $ 3,102 $ 3,674 $ 5,929
========= ========= ========= =========
Three months Six months
ended July 31, ended July 31,
2002 2003 2002 2003
--------- --------- --------- ---------
Capital Expenditures:
Merchandise $ 39 $ 390 $ 99 $ 792
Sponsorship and other 155 223 1,619 406
Corporate 138 564 246 914
--------- --------- --------- ---------
Total Capital Expenditures $ 332 $ 1,177 $ 1,964 $ 2,112
========= ========= ========= =========
January 31, 2003 July 31, 2003
---------------- -------------
Total Assets:
Merchandise $ 116,275 $ 111,269
Sponsorship and other 248,313 269,116
Corporate 70,012 116,033
---------------- -------------
Total Assets $ 434,600 $ 496,418
================ =============
The carrying amount of goodwill by reportable segment as of July 31, 2003 and
January 31, 2003 was as follows (amounts in thousands):
January 31, 2003 July 31, 2003
----------------- ----------------
Merchandise $ 78,751 $ 78,450
Sponsorship and other 191,602 207,885
----------------- ----------------
Total $ 270,353 $ 286,335
================= ================
17
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) (284) (44) (359)
------- ------- ------- -------
Balance at July 31, 2003 $ -- $ 1,617 $ -- $ 1,617
======= ======= ======= =======
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 July 31, 2003 is as follows (in thousands):
January 31, July 31,
2003 2003
---------- -----------
CCS facility, San Luis Obispo, California $ 1,596 $ 1,382
GFLA facility, Valencia, California -- 235
---------- -----------
Total Lease and Exit Cost Liability $ 1,596 $ 1,617
========== ===========
The Company anticipates that the remaining restructuring accruals will be
settled by January 31, 2006. As of July 31, 2003, the restructuring accruals are
classified as a current liability and a long term liability of $865,000 and
$752,000, respectively.
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 through July 31, 2003. All 600,000 shares were repurchased during the first
quarter of fiscal 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.
18
10. RESTRICTED STOCK PLAN
In May 2003, the Company issued 300,000 shares of Common Stock as restricted
stock under the Company's Amended and Restated 1997 Employee, Director and
Consultant Stock Option and Stock Incentive Plan (the "1997 Plan"). The shares
issued pursuant to the 1997 Plan are subject to restrictions on transfer and
certain other conditions. During the restriction period, plan participants are
entitled to vote and receive dividends on such shares. Upon issuance of the
300,000 shares pursuant to the 1997 Plan, a deferred compensation expense
equivalent to the market value of the shares on the date of grant was charged to
stockholders' equity and is being amortized over the approximate twenty-month
vesting period. The compensation expense amortized with respect to the
restricted shares during the quarter ended July 31, 2003 was approximately
$291,000.
11. RECENT ACQUISITIONS
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 and assumed a $5.0 million credit facility to complete
the acquisition. Alloy paid off the $5.0 million credit facility during the
second quarter. Alloy has recorded approximately $15.0 million of goodwill
representing the excess of purchase price over the fair value of the net assets
acquired. In addition, Alloy has initially identified specific intangible assets
consisting of $900,000 representing trademarks, $3.4 million representing
customer relationships, $300,000 representing a non-competition agreement and
$425,000 representing the website.
The operations of this acquisition have been included in Alloy's financial
statements since the date of the acquisition. The assets acquired and
liabilities assumed were recorded at estimated fair values as determined by
Alloy's management based on available information and on assumptions as to
future operations. For this acquisition, Alloy is completing the review and
determination of the fair values of the assets acquired and liabilities assumed.
Accordingly, the allocations of the purchase price are subject to revision based
on the final determination of appraised and other fair values.
12. ISSUANCE OF CONVERTIBLE DEBT
On July 23, 2003, Alloy issued and sold $65.0 million aggregate principal amount
of 20-Year Convertible Senior Debentures (the "Debentures") due August 1, 2023
in the 144A private placement market. Lehman Brothers, Inc., CIBC World Market
Corp., J.P. Morgan Securities Inc., and S.G. Cowen Securities Corporation were
the initial purchasers (the "Initial Purchasers") of the Debentures. The
Debentures have an annual coupon rate of 5.375%, payable in cash semi-annually.
The Debentures are convertible at any time prior to maturity, unless previously
redeemed, at the option of the holders into shares of Alloy's common stock at a
conversion price of approximately $8.375 per share, subject to certain
adjustments. The Debentures are Alloy's general unsecured obligations and will
be equal in right of payment to its existing and future senior unsecured
indebtedness; and are senior in right of payment to all of its future
subordinated debt. Alloy may not redeem the Debentures until August 1, 2008.
Alloy intends to use a significant portion of the net proceeds from this
offering for future acquisitions, potentially in both its merchandising and
sponsorship businesses, and the remaining portion for working capital, capital
expenditures and general corporate purposes.
On August 20, 2003, Alloy issued and sold an additional $4.3 million aggregate
principal amount of the Debentures to the Initial Purchasers pursuant to the
exercise of an over-allotment option granted to the Initial Purchasers in the
original purchase agreement.
13. SUBSEQUENT EVENT
On July 30, 2003, Alloy entered into an Acquisition Agreement (the "Acquisition
Agreement") with dELiA*s Corp., ("dELiA*s"), pursuant to which Alloy, through
its wholly owned subsidiary, Dodger Acquisition Corp. ("Dodger"), will acquire
dELiA*s for $0.928 per share of dELiA*s Class A common stock, in cash. Pursuant
to the Acquisition Agreement Dodger commenced a tender offer (the "Offer") to
purchase all outstanding shares of dELiA*s Class A common stock at a price of
$0.928 per share, net to the seller in cash, without interest, subject to
certain conditions, including the receipt of all necessary government approvals
and the tender, without withdrawal prior to the expiration of the Offer, of at
least a majority of dELiA*s's outstanding shares of Class A common stock on a
fully-diluted basis. The offer was closed on September 3, 2003, and Alloy
purchased approximately 88.15% of dELiA*s' Class A common stock which was
tendered prior to such date. Upon the satisfaction or waiver of certain
conditions, Dodger will be merged with and into dELiA*s with dELiA*s surviving
the acquisition as a wholly owned subsidiary of Alloy, whereby all of the
remaining outstanding shares of dELiA*s common stock will be converted into the
right to receive $0.928 per share in cash.
19
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 14.5 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.
20
RESULTS OF OPERATIONS
THREE MONTHS ENDED JULY 31, 2002 COMPARED WITH THREE MONTHS ENDED JULY 31, 2003
CONSOLIDATED RESULTS OF OPERATIONS
The following table sets forth the statement of operations data for the periods
indicated as a percentage of revenues:
Three months
ended July 31,
2002 2003
-------- --------
Net merchandise revenues 60.7% 37.3%
Sponsorship and other revenues 39.3 62.7
-------- --------
Total revenues 100.0 100.0
Cost of revenues 46.5 51.1
-------- --------
Gross profit 53.5 48.9
Operating expenses:
Selling and marketing 43.3 39.5
General and administrative 7.7 7.8
Amortization of intangible assets 2.2 2.3
-------- --------
Total operating expenses 53.2 49.6
Income (loss) from operations 0.3 (0.7)
Interest and other income, net 1.1 0.0
Provision for income tax (expense) benefit (0.4) 0.3
-------- --------
Net income(loss) 1.0% (0.4)%
======== ========
SEGMENT RESULTS OF OPERATIONS
The tables below present our revenues and operating income (loss) by segment for
each of the three months ended July 31, 2002 and 2003 (dollars in thousands):
Three months
ended July 31, Percent change
2002 2003 2002 vs 2003
--------- --------- --------------
Revenues:
Merchandise $ 31,530 $ 30,028 (4.8)%
Sponsorship and other 20,443 50,473 146.9
--------- --------- ---------
Total Revenues $ 51,973 $ 80,501 54.9 %
========= ========= =========
Three months
ended July 31, Percent change
2002 2003 2002 vs 2003
--------- --------- --------------
Operating Income (Loss):
Merchandise $ 14 $ (3,214) NM
Sponsorship and other 3,452 9,180 165.9%
Corporate (3,328) (6,532) 96.3
--------- --------- ---------
Total Operating Income (Loss) $ 138 $ (566) NM
========= ========= =========
NM - Not meaningful
21
REVENUES
Total Revenues. Total revenues increased 55% to $80.5 million in the three
months ended July 31, 2003 from $52.0 million in the three months ended July 31,
2002.
Merchandise Revenues. Net merchandise revenues decreased 5% from $31.5 million
in the three months ended July 31, 2002 to $30.0 million in the three months
ended July 31, 2003. The decrease in merchandise revenues for the second quarter
of the fiscal year ending January 31, 2004 ("fiscal 2003") versus the second
quarter of the fiscal year ended January 31, 2003 ("fiscal 2002") resulted
primarily from a slight decline in retail catalog circulation as we reduced the
number of retail catalogs circulated to prospects outside our database and to
non-buyers inside our database.
Sponsorship and Other Revenues. Sponsorship and other revenues increased 147%
from $20.4 million in the second quarter of fiscal 2002 to $50.5 million in the
second quarter of fiscal 2003. The increase in sponsorship and other revenues in
the second quarter of fiscal 2003 as compared with the second quarter of fiscal
2002 is due to the selling efforts of our enlarged in-house advertising sales
force, a broader client base, a wider range of offered media services resulting
from a combination of internal development and strategic acquisitions, and the
addition of revenues from the operations of OCM that we acquired in May 2003.
COST OF REVENUES
Cost of revenues consists of the cost of the merchandise sold plus the freight
cost to deliver the merchandise to the warehouse, together with the direct costs
attributable to the sponsorship and advertising programs we provide, the
marketing publications we develop, and the magazines we produce. Our cost of
goods sold increased 70% from $24.2 million in the three months ended July 31,
2002 to $41.1 million in the three months ended July 31, 2003. The increase in
cost of goods sold in the second quarter of fiscal 2003 as compared with the
second quarter of fiscal 2002 was due primarily to our expanded advertising
placement activities and location-based event and promotional marketing services
programs.
Our gross profit as a percentage of total revenues decreased from 53.5% in the
three months ended July 31, 2002 to 48.9% in the three months ended July 31,
2003 due primarily to the lower gross margin profile of sponsorship business as
newspaper and radio advertising placement and event marketing activities
expanded relative to our print and interactive advertising programs, which
generally have higher relative gross margins. In addition, the gross margin for
our merchandise sales decreased in the three months ended July 31, 2003 as
compared to the three months ended July 31, 2002 due to increased sale catalog
circulation in the second quarter of fiscal 2003.
TOTAL 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 information technology expenses
related to the maintenance and marketing of our websites and support for our
advertising sales activities. These expenses increased from $22.5 million in the
three months ended July 31, 2002 to $31.8 million in the three months ended July
31, 2003 due to the hiring of additional sales and marketing personnel;
increased information technology spending to support our expanded advertising
sales force; the impact of OCM's selling and marketing expenses and the
inclusion of a full quarter of Market Place Media's selling and marketing
expenses. As a percentage of total revenues, our selling and marketing expenses
decreased from 43.3% in the second quarter of fiscal 2002 to 39.5% in the second
quarter of fiscal 2003 primarily due to increased productivity of our media and
advertising sales force.
General and Administrative. General and administrative expenses consist
primarily of salaries and related costs for our executive, administrative,
finance and management personnel, as well as support services and professional
service fees. These expenses increased from $4.0 million in the three months
ended July 31, 2002 to $6.3 million in the three months ended July 31, 2003. As
a percentage of total revenues, our general and administrative expenses
increased slightly from 7.7% in the second quarter of fiscal 2002 to 7.8% in the
second quarter of fiscal 2003. The increase in general and administrative
expenses was driven by the inclusion of OCM's expenses in the three months ended
July 31, 2003; the inclusion of a full quarter of Market Place Media's expenses;
an increase in compensation expense for additional personnel to handle our
growing business, and increased expenses associated with growing a public
company such as professional fees, insurance premiums and telecommunications
costs.
Amortization of Intangible Assets. Amortization of intangible assets was
approximately $1.9 million in the three months ended July 31, 2003 as compared
with $1.2 million in the three months ended July 31, 2002. The increase in
expenses resulted from our acquisition activities in the last twelve months, and
the associated allocation of purchase price to identified intangible assets. All
of our acquisitions have been accounted for under the purchase method of
accounting.
22
INCOME (LOSS) FROM OPERATIONS
Total Income (Loss) from Operations. Our loss from operations was $566,000 in
the second quarter of fiscal 2003 while our income from operations was $138,000
in the second quarter of fiscal 2002. The transition from operating income to
operating loss is primarily due to the operating loss from our merchandise
business, increased corporate expenses, and increased depreciation and
amortization expenses, offset by increased operating income from our sponsorship
and other business.
Merchandise Income (Loss) from Operations. Our loss from merchandise operations
was $3.2 million in the second quarter of fiscal 2003 while our income from
operations was $14,000 in the second quarter of fiscal 2002. The transition from
merchandise operating income to merchandise operating loss is primarily a result
of lower revenues and lower gross margins on merchandise sold.
Sponsorship and Other Income (Loss) from Operations. Our income from sponsorship
and other operations increased 165.9% to $9.2 million in the second quarter of
fiscal 2003 from $3.5 million in the second quarter of fiscal 2002. This
increase resulted primarily from our expanded advertising placement and field
marketing activities together with the acquisition of OCM at the beginning of
the second quarter of fiscal 2003, offset partially by greater amortization of
acquired intangible assets.
INTEREST AND OTHER INCOME, NET
Interest and other income, net of expense, includes income from our cash
equivalents and from available-for-sale marketable securities and expenses
related to our financing obligations. In the three months ended July 31, 2003,
we generated interest income of $105,000 and interest expense primarily related
to the Convertible Debentures of $108,000 as compared with interest income of
$597,000 in the three months ended July 31, 2002. The decrease in interest
income resulted primarily from lower interest rates and the lower cash and cash
equivalents and available-for-sale marketable securities during the quarter
ended July 31, 2003 as compared with the quarter ended July 31, 2002.
INCOME TAX (EXPENSE) BENEFIT
In the three months ended July 31, 2003 we recorded an income tax benefit of
$248,000 due to the taxable loss generated in the quarter. Included in the tax
benefit is a refund of approximately $36,000 for an amended prior year tax
return. We expect the loss generated in the second quarter to be offset by
taxable income during the second half of fiscal 2003. In the three months ended
July 31, 2002, we were subject to income tax expense of $197,000 due to taxable
operating income generated at the state level.
23
RESULTS OF OPERATIONS
SIX MONTHS ENDED JULY 31, 2002 COMPARED WITH SIX MONTHS ENDED JULY 31, 2003
CONSOLIDATED RESULTS OF OPERATIONS
The following table sets forth the statement of operations for the periods
indicated as a percentage of revenues:
Six months
ended July 31,
2002 2003
-------- --------
Net merchandise revenues 61.1% 40.0 %
Sponsorship and other revenues 38.9 60.0
-------- --------
Total revenues 100.0 100.0
Cost of revenues 44.6 52.8
-------- --------
Gross profit 55.4 47.2
Operating expenses:
Selling and marketing 42.9 38.1
General and administrative 7.9 7.5
Amortization of intangible assets 1.7 2.4
Restructuring charge -- 0.3
-------- --------
Total operating expenses 52.5 48.3
Income (loss) from operations 2.9 (1.1)
Interest and other income, net 1.1 0.2
Provision for income tax (expense) benefit (0.5) 0.4
-------- --------
Net income (loss) 3.5% (0.5)%
======== ========
SEGMENT RESULTS OF OPERATIONS
The tables below present our revenues and operating income (loss) by segment for
each of the six months ended July 31, 2002 and 2003 (dollars in thousands):
Six months
ended July 31, Percent change
2002 2003 2002 vs 2003
--------- --------- --------------
Revenues:
Merchandise $ 62,597 $ 59,999 (4.2)%
Sponsorship and other 39,809 89,946 125.9
--------- --------- ---------
Total revenues $ 102,406 $ 149,945 46.4 %
========= ========= =========
Six months
ended July 31, Percent change
2002 2003 2002 vs 2003
--------- --------- --------------
Operating Income:
Merchandise $ (728) $ (4,801) 559.5 %
Sponsorship and other 10,191 15,071 47.9
Corporate (6,543) (11,867) 81.4
--------- --------- ------------
Total operating income (loss) $ 2,920 $ (1,597) NM
========= ========= ============
NM - Not meaningful
24
REVENUES
Total Revenues. Total revenues increased from $102.4 million in the six months
ended July 31, 2002 to $149.9 million in the six months ended July 31, 2003.
Merchandise Revenues. Net merchandise revenues decreased 4% from $62.6 million
in the six months ended July 31, 2002 to $60.0 million in the six months ended
July 31, 2003. The decrease in merchandise revenues for the first half of fiscal
2003 versus the first half of fiscal 2002 was due primarily to a slight decline
in overall catalog circulation as we reduced the number of catalogs circulated
to prospects outside our database and to non-buyers inside our database.
Sponsorship and Other Revenues. Sponsorship and other revenues increased to
$89.9 million in the first half of fiscal 2003 from $39.8 million in the first
half of fiscal 2002, an increase of 126% due primarily to the selling efforts of
our enlarged in-house advertising sales force, a broader client base, and a
wider range of offered media services resulting from a combination of internal
development and strategic acquisitions. Our sales force, client base and
services were significantly augmented by the acquisitions of Market Place Media
in July 2002 and OCM in May 2003.
COST OF REVENUES
Our cost of revenues increased from $45.7 million in the six months ended July
31, 2002 to $79.1 million in the six months ended July 31, 2003, a 73% increase.
The increase in cost of goods sold in the first half of fiscal 2003 as compared
with the first half of fiscal 2002 was due primarily to our expanded advertising
placement activities and location-based event and promotional marketing services
programs.
Our gross profit as a percentage of total revenues decreased from 55.4% in the
six months ended July 31, 2002 to 47.2% in the six months ended July 31, 2003
due primarily to the lower gross margin profile of our sponsorship activities
resulting from our expanded advertising placement and event marketing business,
together with a moderate decline in merchandise gross profit margin.
TOTAL OPERATING EXPENSES
Selling and Marketing. Selling and marketing expenses increased from $43.9
million in the six months ended July 31, 2002 to $57.2 million in the six months
ended July 31, 2003 primarily due to the hiring of additional sales and
marketing personnel; increased information technology spending to support our
expanded advertising sales force; the impact of OCM's selling and marketing
expenses from May 2003 and the inclusion of a full six months of Market Place
Media's selling and marketing expenses. As a percentage of total revenues, our
selling and marketing expenses decreased from 42.9% in the first half of fiscal
2002 to 38.1% in the first half of fiscal 2003 primarily due to increased
productivity of our media and advertising sales force.
General and Administrative. General and administrative expenses increased 39%
from $8.1 million in the six months ended July 31, 2002 to $11.2 million in the
six months ended July 31, 2003. As a percentage of total revenues, our general
and administrative expenses decreased from 7.9% in the first half of fiscal 2002
to 7.5% in the first half of fiscal 2003 as we spread fixed costs over an
expanded revenue base. The increase in general and administrative expenses was
attributable primarily to the inclusion of OCM's expenses in the six months
ended July 31, 2003; together with a full six months of Market Place Media's
expenses; an increase in compensation expense for additional personnel to handle
our growing business; and increased expenses associated with growing a public
company such as professional fees, insurance premiums and telecommunications
costs.
Amortization of Intangible Assets. Amortization of intangible assets was
approximately $3.7 million in the six months ended July 31, 2003 as compared
with $1.7 million in the six months ended July 31, 2002 due to our acquisition
activity over the past 12 months. We expect our amortization expense to increase
as we acquire additional businesses.
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
Our loss from operations was $1.6 million in the first half of fiscal 2003
versus income of $2.9 million in the first half of fiscal 2002. The transition
from operating income to operating loss is primarily due to the operating loss
from our merchandise business, increased corporate expenses and increased
depreciation and amortization expenses, offset by increased operating income
from our sponsorship and other business.
Merchandise Income (Loss) from Operations. Our loss from merchandise operations
increased 560% to $4.8 million in the first half of fiscal 2003 from $728,000 in
the first half of fiscal 2002. The increased operating loss resulted primarily
from lower revenues and lower gross margins on merchandise sold.
Sponsorship and Other Income (Loss) from Operations. Our income from sponsorship
and other operations increased 47.9% to $15.1 million in the first half of
fiscal 2003 from $10.2 million in the first half of fiscal 2002. This increase
resulted primarily from our expanded advertising placement and field-marketing
activities, together with the acquisition of OCM in May 2003, offset partially
by greater amortization of acquired intangible assets.
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 six months ended July 31, 2003, we generated interest income
of $396,000 and interest expense of $112,000 primarily related to the
Convertible Debentures. In the three months ended July 31, 2002, we generated
interest income of $1.1 million. The decrease in interest income resulted
primarily from lower interest rates and the lower cash and cash equivalents and
available-for-sale marketable securities during the six months ended July 31,
2003 as compared with the six months ended July 31, 2002.
25
INCOME TAX EXPENSE (BENEFIT)
In the six months ended July 31, 2003 we recorded an income tax benefit of
$606,000 due to the taxable loss generated in the first half of fiscal 2003.
Included in the tax benefit is a refund of approximately $36,000 for an amended
prior year tax return. We expect the loss generated in the first half of the
year to be offset by taxable income during the second half of fiscal 2003. In
the six months ended July 31, 2002, we were subject to income tax expense of
$444,000 due to 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 and
debt securities as we generated negative cash flow from operations prior to
fiscal 2002. At July 31, 2003, we had approximately $97.3 million of cash, cash
equivalents and short-term investments. Our principal commitments at July 31,
2003 consisted of the Convertible Debentures, accounts payable, accrued
expenses, obligations under operating and capital leases, and our tender offer
to acquire dELiA*s.
Net cash provided by operating activities was $2.1 million in the first half of
fiscal 2003 compared with $5.5 million in the first half of fiscal 2002. The
decline was primarily due to the net loss, partially offset by a higher level of
depreciation and amortization and other working capital changes.
Cash provided by investing activities was approximately $133,000 in the first
half of fiscal 2003 compared with $91.7 million of cash used in investing
activities in the first half of fiscal 2002. The primary reason for the
difference is a result of greater acquisition activity in the first six months
of fiscal 2002 compared with fiscal 2003.
Net cash provided by financing activities was $55.2 million in the six months
ended July 31, 2003 compared with $55.6 million of cash provided by financing
activities in the six months ended July 31, 2002. The cash provided by financing
activities in the six months ended July 31, 2003 was due primarily to net
proceeds of $62.8 million received from the issuance of the Convertible
Debentures in the private placement market offset primarily by the repurchase of
600,000 shares of our common stock and the payment of a $5.0 million credit
facility assumed in the OCM acquisition. In the six months ended July 31, 2002,
net cash provided by financing activities of $55.6 million resulted primarily
from the net proceeds from our public offering of common stock in February 2002.
Our liquidity position as of July 31, 2003 consisted of $97.3 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,
for at least the next 24 months, excluding the impact of any potential, as yet
unannounced acquisitions. If cash generated from our operations is insufficient
to satisfy our cash needs, we may be required to raise additional capital. If we
raise additional funds through the issuance of equity securities, our
stockholders may experience significant dilution. Furthermore, additional
financing may not be available when we need it or, if available, financing may
not be on terms favorable to us or to our stockholders. If financing is not
available when required or is not available on acceptable terms, we may be
unable to develop or enhance our products or services. In addition, we may be
unable to take advantage of business opportunities or respond to competitive
pressures. Any of these events could have a material and adverse effect on our
business, results of operations and financial condition.
On January 29, 2003, we adopted a stock repurchase program authorizing the
repurchase of up to $10.0 million of our common stock from time to time in the
open market at prevailing market prices or in privately negotiated transactions.
We have repurchased 600,000 shares for approximately $3.0 million under this
plan through July 31, 2003. All 600,000 shares were repurchased during the three
months ended April 30, 2003.
26
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
During the first half of fiscal 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 July 31, 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.
SFAS No. 150 is to be implemented by reporting the cumulative effect of a change
in accounting principle for financial instruments created before the issuance of
SFAS No. 150 and still existing at the beginning of the interim period of
adoption. We will adopt the provisions of SFAS No. 150 effective August 1, 2003.
The adoption of SFAS No. 150 is not expected to have an impact on the financial
statements as our Series B Convertible Preferred Stock, which is our only
applicable financial instrument, is outside the scope of SFAS No. 150.
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.
27
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.
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 July 31, 2003, we had an accumulated deficit
of approximately $52.7 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.
28
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.
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.
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 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.
30
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 which actions have been consolidated by the court. The
alligations include, without limitation, misrepresentation of our business and
financial condition and results of operations during the period March 16, 2001
through January 23, 2003. For more information see Part II, Item 1, Legal
Proceedings of this Form 10-Q. 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 July 31, 2003, we held a portfolio of $4.8 million in fixed income
marketable securities for which, due to the conservative nature of our
investments and relatively short duration, interest rate risk is mitigated. We
do not own any derivative financial instruments in our portfolio. Accordingly,
we do not believe there is any material market risk exposure with respect to
derivatives or other financial instruments that would require disclosure under
this item.
ITEM 4. CONTROLS AND PROCEDURES.
(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.
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 Wessel and Ladenburg
Thalmann & Co., Inc. The complaint purportedly was filed on behalf of persons
purchasing our common stock between May 14, 1999 and December 6, 2000 and
alleges violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933
(the "Securities Act") and Section 10(b) of the Securities Exchange Act of 1934
(the "'34 Act") and Rule 10b-5 promulgated thereunder. On or about April 19,
2002, plaintiff filed an amended complaint against us, the individual defendants
and the underwriters of our initial public offering. The amended complaint
asserts violations of Section 10(b) of the `34 Act and mirrors allegations
asserted against scores of other issuers sued by plaintiffs' counsel. Pursuant
to an omnibus agreement negotiated with representatives of the plaintiffs'
counsel, Messrs. Diamond and Johnson have been dismissed from the litigation
without prejudice. In accordance with the Court's case management instructions,
we joined in a global motion to dismiss the amended complaints, which were filed
by the issuers' liaison counsel. By opinion and order dated February 19, 2003,
the District Court denied in part and granted in part the global motion to
dismiss. With respect to us, the Court dismissed the Section 10(b) claim and let
the plaintiffs proceed on the Section 11 claim. Accordingly, the remaining claim
against us will focus solely on whether the registration statement filed in
connection with our initial public offering contained an untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statement therein not misleading. Although we have not
retained a damages expert at this time, the dismissal of the Section 10(b) claim
likely will reduce the potential damages that plaintiffs can claim. Management
believes that the remaining allegations against us are without merit. The
Company has retained Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, PC in
connection with this matter. We participated in the Court-ordered mediation with
the other issuer defendants, the issuers' insurers and plaintiffs to explore
whether a global resolution of the claims against the issuers could be reached.
To this end, a memorandum of understanding setting forth the proposed terms of a
settlement was signed by counsel to several issuers, including our counsel,
which is not binding upon us. In a press release dated June 26, 2003,
plaintiffs' counsel announced that the memorandum of understanding had been
signed, and that the process of obtaining the approval of all parties to the
settlement was underway. We are participating in that process. Any definitive
settlement, however, will require final approval by the Court after notice to
all class members and a fairness hearing.
On or about March 8, 2003, several putative class action complaints were filed
in the United States District Court for the Southern District of New York naming
as defendants us, James K. Johnson, Jr., Matthew C. Diamond and Samuel A.
Gradess. The complaints purportedly were filed on behalf of persons who
purchased our common stock between August 1, 2002 and January 23, 2003, and,
among other things, allege violations of Section 10(b) and Section 20(a) of the
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. On August 5, 2003, Plaintiffs
filed a consolidated class action complaint (the "Consolidated Complaint")
naming the same defendants, which supersedes the initial complaint. Relying in
part on information allegedly obtained from former employees, the Consolidated
Complaint alleges, among other things, misrepresentations of our business and
financial condition and the results of operations during the period from March
16, 2001 through January 23, 2003 (the "class period"), which artificially
inflated the price of our stock, including without limitation, improper
acceleration of revenue, misrepresentation of expense treatment, failure to
properly account for and disclose consignment transactions, and improper
deferral of the expense recognition. The Consolidated Complaint further alleges
that during the class period the individual defendants and the Company sold
stock and completed acquisitions using Company stock. The defendants must answer
or move to dismiss the Consolidated Complaint by September 26, 2003. We have
retained the law firm of Cahill, Gordon & Reindel in connection with this
matter. Management believes that the allegations against the Company and Messrs.
Diamond, Gradess and Johnson are without merit and intends to vigorously defend
the action.
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) On July 24, 2003 Alloy completed a private offering of $65.0 million
aggregate principal amount of its 5.375% Convertible Debentures due August 1,
2023, the ("Debentures") for aggregate net proceeds of approximately $62.4
million (the "Debenture Offering"). The Debentures have an annual coupon rate of
5.375%, payable in cash semi-annually. Lehman Brothers Inc., CIBC World Market
Corp., J.P. Morgan Securities Inc., and S.G. Cowen Securities Corporation were
the initial purchasers of the Debentures. The Debentures are convertible into
shares of Alloy common stock at a price of approximately $8.375 per share,
subject to certain adjustments. This transaction was completed without
registration in reliance upon section 4(2) of the Securities Act.
(d) The net proceeds of the Debenture Offering will be used for future
acquisitions, in both merchandising and sponsorship businesses, and the
remaining portion will be used for working capital, capital expenditures and
general corporate purposes.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
32
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Company held its Annual Meeting of Stockholders on July 24, 2003.
(b) Our stockholders voted in favor of the proposal to re-elect Peter Graham
and David Yarnell as directors, with 37,144,916 votes cast for and
1,360,859 votes withheld for each of them. Each of Samuel A. Gradess, Matthew C.
Diamond, James K. Johnson, Jr. and Edward A. Monnier is a director whose term as
a director continued after the annual meeting.
(c) Our stockholders voted to approve an amendment to our Amended and Restated
1997 Employee, Director and Consultant Stock Option and Stock Incentive Plan
(the "Plan") to increase from 8,000,000 shares to 10,000,000 Shares the
aggregate number of shares that may be issued from time to time pursuant to the
Plan, with 31,861,586 votes cast for, 6,592,712 votes cast against, 21,477
abstentions and broker non-votes and 0 unvoted on the proposal.
(d) Our stockholders voted to ratify and confirm the selection of KPMG LLP as
our independent auditors for the fiscal year ending January 31, 2004, with
38,035,222 votes for, 428,480 votes against and 12,073 abstentions and broker
non-votes on the proposal.
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).
31.1 Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer
- furnished
31.2 Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer
- furnished
32.1 Certification by the Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - furnished
(b) Reports on Form 8-K.
The following Reports on Form 8-K and Form 8-K/A and were filed during the
quarter ended July 31, 2003:
1) Current Report, filed June 5, 2003. Item 9 (Regulation FD Disclosure),
Exhibit 99.1 Press Release (announcing first quarter financial results).
2) Current Report, filed July 15, 2003. Item 5 (Other Items), Item 7 (Exhibits),
Exhibit 99.1 Press Release (announcing proposed $60 million convertible senior
debenture offering) and Item 9 (Regulation FD Disclosure), Exhibit 99.2 Press
Release (reaffirming second quarter and full year financial guidance).
3) Current Report, filed July 18, 2003. Item 5 (Other Items) and Item 7
(Exhibits), Exhibit 99.1 Press Release (announcing pricing of $65 million
convertible senior debenture offering).
4) Current Report, filed July 25, 2003. Item 5 (Other Items) and Item 7
(Exhibits), Exhibit 99.1 Press Release (announcing closing of $65 million
convertible senior debenture offering).
5) Current Report, filed July 31, 2003. Item 5 (Other Items) and Item 7
(Exhibits), Exhibit 2.1 Acquisition Agreement by and among Alloy, Inc., Dodger
Acquisition Corp. and dELiA*s Corp and Exhibit 99.1 Press Release (announcing
definitive agreement to acquire dELiA*s).
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: September 15, 2003
By: /s/ Samuel A. Gradess
---------------------
Samuel A. Gradess
Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer)
34
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).
31.1 Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer
- furnished
31.2 Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer
- furnished
32.1 Certification by the Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - furnished
35