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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 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 (x) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicated by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of December 8, 2003, the registrant had 42,035,841 shares of common stock,
$.01 par value per share, outstanding.
ALLOY, INC.
CONTENTS
PAGE NO.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets, October 31, 2003 (unaudited)
and January 31, 2003 ............................................... 3
Consolidated Condensed Statements of Operations, Three Months Ended
October 31, 2003 (unaudited) and October 31, 2002 (unaudited) ....... 4
Consolidated Condensed Statements of Comprehensive Income (Loss),
Three Months Ended October 31, 2003 (unaudited) and October 31, 2002
(unaudited) ......................................................... 5
Consolidated Condensed Statements of Operations, Nine Months Ended
October 31, 2003 (unaudited) and October 31, 2002 (unaudited)........ 6
Consolidated Condensed Statements of Comprehensive Income (Loss),
Nine Months Ended October 31, 2003 (unaudited) and October 31, 2002
(unaudited) ......................................................... 7
Consolidated Condensed Statements of Cash Flows, Nine Months Ended
October 31, 2003 (unaudited) and October 31, 2002 (unaudited) ....... 8
Consolidated Condensed Statement of Changes in Stockholders' Equity,
Nine Months Ended October 31, 2003 (unaudited) and
October 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 ........................................... 24
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 36
Item 4. Controls and Procedures.................................... 36
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ......................................... 37
Item 2. Changes in Securities and Use of Proceeds ................. 38
Item 3. Defaults Upon Senior Securities ........................... 38
Item 4. Submission of Matters to a Vote of Security Holders ....... 39
Item 5. Other Information ......................................... 39
Item 6. Exhibits and Reports on Form 8-K .......................... 39
SIGNATURES .......................................................... 41
EXHIBIT INDEX ....................................................... 42
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ALLOY, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
January 31, October 31,
2003 2003
--------- ----------
ASSETS
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 35,187 $ 24,434
Restricted cash -- 3,270
Available-for-sale marketable securities 23,169 24,894
Accounts receivable, net 30,022 33,752
Inventories 23,466 43,251
Prepaid catalog costs 2,100 3,927
Other current assets 10,130 5,513
--------- ---------
TOTAL CURRENT ASSETS 124,074 139,041
Property and equipment, net 10,081 31,581
Deferred tax assets 5,621 --
Goodwill, net 270,353 324,045
Intangible and other assets, net 24,471 33,118
--------- ---------
TOTAL ASSETS $ 434,600 $ 527,785
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 28,032 $ 33,689
Bank loan payable -- 12,818
Deferred revenues 15,106 20,958
Accrued expenses and other current liabilities 27,679 29,078
--------- ---------
TOTAL CURRENT LIABILITIES 70,817 96,543
Deferred tax liabilities 2,698 --
Long-term liabilities 93 1,988
Senior Convertible Debentures Due 2023 -- 69,300
Series B Redeemable Convertible Preferred Stock, $10,000 per share liquidation
preference; $.01 par value; 3,000 shares designated; mandatorily redeemable
on June 19, 2005; 1,613 and 1,340 shares issued and outstanding, respectively 15,550 14,038
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 42,025,015 shares issued, respectively 401 420
Additional paid-in capital 396,963 409,891
Deferred compensation -- (1,771)
Accumulated deficit (51,955) (59,481)
Accumulated other comprehensive income (loss) 164 (28)
Less common stock held in treasury, at cost; 8,275 and 608,275 shares, respectively (131) (3,115)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 345,442 345,916
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 434,600 $ 527,785
========= =========
The accompanying Notes are an integral part of these financial statements.
3
ALLOY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(unaudited)
For the three months
ended October 31,
2002 2003
------------ ------------
NET REVENUES:
DIRECT MARKETING REVENUES $ 41,270 $ 38,585
RETAIL REVENUES -- 9,973
SPONSORSHIP AND OTHER REVENUES 51,956 57,193
------------ ------------
TOTAL NET REVENUES 93,226 105,751
COST OF REVENUES:
COST OF GOODS SOLD 19,287 25,868
COST OF SPONSORSHIP AND OTHER REVENUES 28,400 26,605
------------ ------------
TOTAL COST OF REVENUES 47,687 52,473
GROSS PROFIT 45,539 53,278
------------ ------------
OPERATING EXPENSES:
Selling and marketing 28,055 41,290
General and administrative 4,701 9,859
Amortization of intangible assets 1,180 2,083
Restructuring charge -- 351
------------ ------------
TOTAL OPERATING EXPENSES 33,936 53,583
------------ ------------
INCOME (LOSS) FROM OPERATIONS 11,603 (305)
INTEREST INCOME 331 215
INTEREST EXPENSE (1) (1,185)
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 11,933 (1,275)
PROVISION FOR INCOME TAX EXPENSE 336 5,543
------------ ------------
NET INCOME (LOSS) 11,597 (6,818)
============ ============
PREFERRED STOCK DIVIDENDS AND ACCRETION 605 393
------------ ------------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS $ 10,992 $ (7,211)
============ ============
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE OF
COMMON STOCK:
Basic earnings (loss) attributable to common
stockholders per share $ 0.28 $ (0.17)
============ ============
Diluted earnings (loss) attributable to common
stockholders per share $ 0.28 $ (0.17)
============ ============
WEIGHTED AVERAGE BASIC COMMON SHARES OUTSTANDING 38,856,057 41,405,485
============ ============
WEIGHTED AVERAGE DILUTED COMMON SHARES OUTSTANDING 39,684,118 41,405,485
============ ============
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 October 31,
2002 2003
----------- -----------
Net income (loss) $ 11,597 $ (6,818)
Other comprehensive income (loss) net of tax:
Net unrealized gain (loss) on available-for-sale securities 42 (35)
----------- -----------
Comprehensive income (loss) $ 11,639 $ (6,853)
=========== ===========
The accompanying Notes are an integral part of these financial statements.
5
ALLOY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(unaudited)
For the nine months
ended October 31,
2002 2003
------------ ------------
NET REVENUES:
DIRECT MARKETING REVENUES $ 103,866 $ 98,584
RETAIL REVENUES -- 9,973
SPONSORSHIP AND OTHER REVENUES 91,765 147,140
------------ ------------
TOTAL NET REVENUES 195,631 255,697
COST OF REVENUES:
COST OF GOODS SOLD 50,153 60,705
COST OF SPONSORSHIP AND OTHER REVENUES 43,257 70,869
------------ ------------
TOTAL COST OF REVENUES 93,410 131,574
GROSS PROFIT 102,221 124,123
------------ ------------
OPERATING EXPENSES:
Selling and marketing 71,978 98,157
General and administrative 12,818 21,374
Amortization of intangible assets 2,903 5,763
Restructuring charges -- 730
------------ ------------
TOTAL OPERATING EXPENSES 87,699 126,024
------------ ------------
INCOME (LOSS) FROM OPERATIONS 14,522 (1,901)
INTEREST INCOME 1,463 610
INTEREST EXPENSE (1) (1,297)
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 15,984 (2,588)
PROVISION FOR INCOME TAX EXPENSE 779 4,938
------------ ------------
NET INCOME (LOSS) 15,205 (7,526)
============ ============
PREFERRED STOCK DIVIDENDS AND ACCRETION 1,642 1,548
------------ ------------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS $ 13,563 $ (9,074)
============ ============
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE OF
COMMON STOCK:
Basic earnings (loss) attributable to common
stockholders per share $ 0.36 $ (0.22)
============ ============
Diluted earnings (loss) attributable to common
stockholders per share $ 0.34 $ (0.22)
============ ============
WEIGHTED AVERAGE BASIC COMMON SHARES OUTSTANDING 38,005,450 40,904,949
============ ============
WEIGHTED AVERAGE DILUTED COMMON SHARES OUTSTANDING 39,598,541 40,904,949
============ ============
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 nine months
ended October 31,
2002 2003
----------- -----------
Net income (loss) $ 15,205 $ (7,526)
Other comprehensive income (loss) net of tax:
Net unrealized gain (loss) on available-for-sale securities 179 (192)
----------- -----------
Comprehensive income (loss) $ 15,384 $ (7,718)
=========== ===========
The accompanying Notes are an integral part of these financial statements.
7
ALLOY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(unaudited)
For the nine months
ended October 31,
2002 2003
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 15,205 $ (7,526)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 6,081 10,121
Deferred tax expense -- 5,178
Amortization of debt issuance costs -- 145
Compensation charge for restricted stock -- 640
Compensation charge for issuance of stock options 23 9
Changes in operating assets and liabilities - net of effect of
business acquisitions:
Accounts receivable, net (10,961) (2,616)
Inventories (14,716) 1,803
Prepaid catalog costs (1,621) (1,413)
Other current assets (847) (141)
Other assets 149 (640)
Accounts payable, accrued expenses and other 10,130 (11,089)
-------- --------
Net cash provided by (used in) operating activities 3,443 (5,529)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (75,878) (41,993)
Proceeds from the sales and maturities of marketable securities 55,975 40,076
Capital expenditures (3,036) (3,050)
Sale of capital assets 372 44
Cash paid in connection with acquisitions of businesses,
net of cash acquired (77,294) (65,188)
Purchase of mailing list, domain names and marketing rights (4,850) (29)
-------- --------
Net cash used in investing activities (104,711) (70,140)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock 55,012 --
Gross proceeds from issuance of convertible debentures -- 69,300
Debt issuance costs -- (2,482)
Exercise of stock options and warrants
and common stock purchases under the employee stock purchase plan 1,103 596
Repurchase of common stock -- (2,984)
Payment of credit facility -- (5,000)
Net borrowings under line of credit agreements -- 5,908
Payment of bank-loan -- (50)
Payments of capitalized lease obligations (282) (372)
-------- --------
Net cash provided by financing activities 55,833 64,916
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (45,435) (10,753)
CASH AND CASH EQUIVALENTS, beginning of period 61,618 35,187
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 16,183 $ 24,434
======== ========
Supplemental disclosure of non-cash investing and financing activity:
Issuance of common stock and warrants in connection
with acquisitions $ 5,469 $ 8,317
Conversion of Series B Redeemable Convertible Preferred
Stock into common stock $ 1,596 $ 3,060
The accompanying Notes are an integral part of these financial statements.
8
ALLOY, INC.
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(unaudited)
For the nine months ended October 31, 2003
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 135,539 1 595 -- -- -- -- -- 596
Issuance of common stock for
conversion of Series B
Convertible Preferred Stock 261,505 3 3,057 -- -- -- -- -- 3,060
Net loss -- -- -- (7,526) -- -- -- -- (7,526)
Issuance of restricted stock -- -- 2,385 -- (2,385) -- -- -- --
Amortization of restricted stock -- -- -- -- 640 -- -- -- 640
Issuance of stock options to employees -- -- 35 -- (35) -- -- -- --
Amortization of deferred
compensation -- -- -- -- 9 -- -- -- 9
Accretion of discount and
dividends on Series B
Convertible Preferred Stock -- -- (1,548) -- -- -- -- -- (1,548)
Unrealized loss on available-
for-sale marketable securities -- -- -- -- -- (192) -- -- (192)
-------- ------ --------- ----------- ------------ ----------- -------- ------- --------
Balance, October 31, 2003 42,025,015 $ 420 $ 409,891 $ (59,481) $ (1,771) $ (28) (608,275)$(3,115) $345,916
======== ====== ========= =========== ============ =========== ======== ======= ========
The accompanying Notes are an integral part of these financial statements.
9
ALLOY, INC.
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(unaudited)
For the nine months ended October 31, 2002
Accumulated
Other
Common Stock Additional Comprehensive Treasury Shares
------------------ Paid-in Accumulated Deferred Income ---------------
Shares Amount Capital Deficit Compensation (Loss) Shares Amount Total
---------- ------ --------- ----------- ------------ ------------- ------- ------ --------
Balance, February 1, 2002 34,916,877 $349 $324,719 $(75,250) $(31) $(53) -- $ -- $249,734
Issuance of common stock
and warrants for acquisitions
of businesses 318,653 3 5,466 -- -- -- -- -- 5,469
Shares returned from escrow -- -- -- -- -- -- (8,275) (131) (131)
Amortization of deferred
compensation -- -- -- -- 23 -- -- -- 23
Issuance of common stock
in connection with public
offering, net of issuance costs 4,000,000 40 56,607 -- -- -- -- -- 56,647
Issuance of common stock
for conversion of Series B
Redeemable Convertible
Preferred Stock 136,469 2 1,594 -- -- -- -- -- 1,596
Issuance of common stock
pursuant to the exercise of
options and warrants and
common stock purchases
under the employee
stock purchase plan 121,835 1 1,102 -- -- -- -- -- 1,103
Net income -- -- -- 15,205 -- -- -- -- 15,205
Accretion of discount and
dividends on Series B
Convertible Preferred Stock -- -- (1,642) -- -- -- -- -- (1,642)
Unrealized gain on available-
for-sale marketable securities -- -- -- -- -- 179 -- -- 179
---------- ------ --------- ----------- ------------ ------------- ------- ------ --------
Balance, October 31, 2002 39,493,834 $ 395 $387,846 $ (60,045) $ (8) $ 126 (8,275) $ (131) $328,183
========== ====== ========= =========== ============ ============= ======= ====== ========
The accompanying Notes are an integral part of these financial statements.
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, direct
marketing and retail 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, retail stores, print media, display
media boards, websites, on-campus marketing programs and promotional events, and
features a portfolio of brands that are well known among Generation Y consumers
and advertisers. Alloy reaches a significant portion of Generation Y consumers
through its various media assets, marketing services programs, direct marketing
activities and retail stores and, as a result, Alloy is able to offer
advertisers targeted access to the youth market.
Alloy generates revenue from three principal sources - direct marketing, retail
stores, and sponsorship and other activities. Effective September 2003, Alloy
changed the name of its catalog and online commerce business to the
direct marketing segment from the merchandise segment. Through its
catalogs and merchandise related 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. In September
2003, Alloy, through Dodger Acquisition Corp., an indirect, wholly-owned
subsidiary of Alloy, acquired dELiA*s Corp. ("dELiA*s"), a multi-channel
retailer that markets apparel, accessories and home furnishings to teenage girls
and young women. As a result, the direct marketing segment also includes
merchandise revenues from the dELiA*s catalog and www.dELiAs.com. The retail
stores segment consists of the revenue generated from the operation of 63
dELiA*s retail stores. 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, 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.
dELiA*s reaches its customers through the dELiA*s catalog, www.dELiAs.com and 63
dELiA*s retail stores. In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 141, "Business Combinations" Alloy has included in its
results of operations for the three-month and nine-month periods ended October
31, 2003, the results of dELiA*s since September 4, 2003, the date of
acquisition.
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 October 31, 2003 and for all periods presented have been made. The
results of operations for the periods ended October 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:
o Consolidated 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;
o Consolidated financial statements and accompanying notes
included in dELiA*s Annual Report on Form 10K for the fiscal
year ended February 1, 2003 which was filed with the SEC on
May 16, 2003 and amended on May 30, 2003; and
o Unaudited consolidated financial statements and accompanying
notes of dELiA*s for the period ended August 2, 2003, included
in Alloy's Current Report on Form 8-K/A, dated November 18,
2003.
11
2. STOCK-BASED EMPLOYEE COMPENSATION COST
In December 2002, the Financial Accounting Standards Board ("FASB") issued 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 issued
to employees 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 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 Nine months
ended October 31, ended October 31,
------------------- -------------------
2002 2003 2002 2003
-------- -------- -------- --------
(unaudited)(unaudited) (unaudited)(unaudited)
Net income (loss) attributable to common stockholders:
As reported $ 10,992 $ (7,211) $ 13,563 $ (9,074)
Add: Total stock-based employee compensation costs
included in reported net income, net of taxes 8 358 23 649
Less: Total stock-based employee compensation costs
determined under fair value based method for
all awards, net of taxes (4,263) (3,151) (12,071) (10,023)
-------- -------- -------- --------
Pro forma $ 6,737 $(10,004) $ 1,515 $(18,448)
======== ======== ======== ========
Basic earnings (loss) attributable to common stockholders per share:
As reported $ 0.28 $ (0.17) $ 0.36 $ (0.22)
Pro forma $ 0.17 $ (0.24) $ 0.04 $ (0.45)
Diluted earnings (loss) attributable to common stockholders per share:
As reported $ 0.28 $ (0.17) $ 0.34 $ (0.22)
Pro forma $ 0.17 $ (0.24) $ 0.04 $ (0.45)
12
3. RESTRICTED CASH
Restricted cash represents the cash that backs our line of credit. Restricted
cash classified in Current Assets on the Consolidated Condensed Balance Sheets
totaled approximately $3.3 million as of October 31, 2003. Restricted cash
primarily represents collateral for standby letters of credit issued in
connection with the Company's merchandise sourcing activities. The restriction
will be removed after the letters of credit expire or are cancelled.
4. UNBILLED ACCOUNTS RECEIVABLE
At January 31, 2003 and October 31, 2003, accounts receivable included
approximately $4.0 million and $8.8 million, respectively, of unbilled
receivables, which are a normal part of the Company's sponsorship business, as
some receivables are normally invoiced in the month following the completion of
the earnings process.
5. 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 Nine months
ended October 31, ended October 31,
2002 2003 2002 2003
------------ ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
Numerator:
Net income (loss) $ 11,597 $ (6,818) $ 15,205 $ (7,526)
Dividend and accretion on preferred stock 605 393 1,642 1,548
------------ ------------ ------------ ------------
Net income (loss) attributable to common stockholders $ 10,992 $ (7,211) $ 13,563 $ (9,074)
============ ============ ============ ============
Denominator:
Weighted average basic common shares outstanding 38,856,057 41,405,485 38,005,450 40,904,949
============ ============ ============ ============
Contingently issuable common stock pursuant to acquisitions 577,771 -- 892,441 --
Options to purchase common stock 250,290 -- 700,650 --
------------ ------------ ------------ ------------
Weighted average diluted common shares outstanding 39,684,118 41,405,485 39,598,541 40,904,949
============ ============ ============ ============
Basic earnings (loss) attributable to common stockholders per share $ 0.28 $ (0.17) $ 0.36 $ (0.22)
============ ============ ============ ============
Diluted earnings (loss) attributable to common stockholders per share $ 0.28 $ (0.17) $ 0.34 $ (0.22)
============ ============ ============ ============
The calculation of fully diluted earnings (loss) per share for the three months
and nine months ended October 31, 2002 and 2003 excludes the securities listed
below because to include them in the calculation would be antidilutive:
Three months Nine months
ended October 31, ended October 31,
2002 2003 2002 2003
------------ ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
Options to purchase common stock 6,317,783 7,513,650 5,581,431 7,206,707
Warrants to purchase common stock 1,803,540 1,881,486 1,761,458 1,858,837
Conversion of Series A and Series B
Convertible Preferred Stock 1,503,936 1,321,346 1,544,949 1,389,868
Conversion of 5.375% Convertible Debentures -- 8,274,628 -- 8,017,912
Restricted stock -- 300,000 -- 300,000
------------ ------------ ------------ ------------
9,625,259 19,291,110 8,887,838 18,773,324
============ ============ ============ ============
13
6. GOODWILL AND INTANGIBLE ASSETS
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." Under SFAS No. 142, goodwill and intangible assets with indefinite
lives that were acquired after June 30, 2001, are no longer amortized but
instead evaluated for impairment at least annually. With respect to goodwill and
intangibles with indefinite lives that were acquired prior to July 1, 2001,
Alloy adopted the nonamortization provisions of SFAS No. 142 as of February 1,
2002. Alloy completed the required impairment testing of goodwill and other
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 the fourth
quarter of fiscal 2003.
The acquired intangible assets as of January 31, 2003 and October 31, 2003 were
as follows (amounts in thousands):
January 31, 2003 October 31, 2003
(unaudited)
------------ ------------ ------------ ------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------------ ------------ ------------ ------------
Amortized intangible
assets:
Mailing Lists $ 4,553 $ 1,314 $ 5,082 $ 2,149
Noncompete Agreements 3,695 1,074 5,381 2,118
Marketing Rights 5,650 3,052 5,650 5,021
Websites 841 331 2,641 725
Client Relationships 4,000 378 6,900 1,899
------------ ------------ ------------ ------------
$ 18,739 $ 6,149 $ 25,654 $ 11,912
============ ============ ============ ============
Nonamortized intangible
assets:
Trademarks $ 9,625 -- $ 13,435 --
============ ============ ============ ============
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 $1.7
million, and for each of the next four fiscal years through the fiscal year
ending January 31, 2008 is $5.7 million, $3.4 million, $1.1 million and
$551,000, respectively.
Alloy is continuing the review and determination of the fair value of certain
assets acquired and liabilities assumed for acquisitions completed during the
last three months of fiscal 2002 and the first nine months of fiscal 2003. The
Company has engaged a valuation expert to assist it in this evaluation. A final
report is expected during the fourth quarter of fiscal 2003. Accordingly, the
allocations of the purchase price are subject to revision based on the final
determination of appraised and other fair values.
GOODWILL
The changes in the carrying amount of goodwill for the nine months ended October
31, 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 53,692
---------
Net balance as of October 31, 2003 $ 324,045
=========
The goodwill associated with the acquisitions during the prior twelve months is
subject to revision based on the final determination of appraised and other fair
values. Goodwill adjustments during the first nine months of fiscal 2003
primarily relate to an approximate $36.3 million increase in goodwill for the
acquisition of dELiA*s in September 2003, and an approximate $16.3 million
increase in goodwill for the acquisition of substantially all of the assets of
OCM Direct, Inc., Collegiate Carpets, Inc. and Carepackages, Inc. (collectively,
"OCM")in May 2003. Other goodwill adjustments during the first nine months 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 $571,000, 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
7. 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 third quarter of the fiscal year ending January
31, 2004 ("fiscal 2003") in Note 2. 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 2005. The Company will continue to
monitor progress on the issuance of this standard as well as evaluate the
Company's position with respect to current guidance.
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 became 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 adopted the provisions of Statement No. 150
effective August 1, 2003. The adoption of Statement No. 150 did not 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 SEC 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. The Company became subject to
Regulation G in fiscal 2003 and believes that it is in compliance in all
material respects with the new disclosure requirements.
15
8. SEGMENT REPORTING
Alloy has three operating segments: direct marketing, retail stores, and
sponsorship and other. Effective September 2003, Alloy changed the name of its
catalog and online commerce business to the direct marketing segment from the
merchandise segment. The Company changed the composition of its reportable
segments in 2002 and as such, prior period information has been reclassified to
conform to the new presentation. Alloy's management reviews financial
information related to these operating segments and uses the measure of income
from operations to evaluate performance and allocated resources. Reportable data
for Alloy's operating segments were as follows (amounts in thousands):
Three months Nine months
ended October 31, ended October 31,
2002 2003 2002 2003
--------- --------- --------- ---------
Net Revenues:
Direct marketing $ 41,270 $ 38,585 $ 103,866 $ 98,584
Retail stores -- 9,973 -- 9,973
Sponsorship and other 51,956 57,193 91,765 147,140
--------- --------- --------- ---------
Total Net Revenues $ 93,226 $ 105,751 $ 195,631 $ 255,697
========= ========= ========= =========
Three months Nine months
ended October 31, ended October 31,
2002 2003 2002 2003
--------- --------- --------- ---------
Operating Income (Loss):
Direct marketing $ 2,242 $ (2,180) $ 1,514 $ (5,683)
Retail stores -- (1,650) -- (1,650)
Sponsorship and other 12,235 11,348 22,425 23,803
Corporate (2,874) (7,823) (9,417) (18,371)
--------- --------- --------- ---------
Total Operating Income (Loss) 11,603 (305) 14,522 (1,901)
Interest income (expense)
and other income net 330 (970) 1,462 (687)
--------- --------- --------- ---------
Income (loss) before income taxes $ 11,933 $ (1,275) $ 15,984 $ (2,588)
========= ========= ========= =========
16
Included in operating income (loss) in the three months and nine months ended
October 31, 2003 are expenses of $351,000 and $730,000, respectively, in the
direct marketing segment due to restructuring charges representing future
contractual lease payments, exit costs, severance and personnel costs, and the
write-off of related leasehold improvements relating to the closing of the
Company's GFLA facility and exiting from the New Roads fulfillment facilities.
In conjunction with the GFLA facility closure, the Company also wrote off
approximately $150,000 of inventory during the first quarter of fiscal 2003.
This charge is included in cost of goods sold as part of the direct marketing
segment for the nine-months ended October 31, 2003.
Cost of goods sold for the three-months and nine-months ended October 31, 2003
included costs related to sponsorship and other revenues of $2.4 million and
$6.8 million, respectively. Costs of goods sold for the three-months and
nine-months ended October 31, 2002, had no costs related to sponsorship and
other revenues.
Three months Nine months
ended October 31, ended October 31,
2002 2003 2002 2003
--------- --------- --------- ---------
Depreciation and Amortization:
Direct marketing $ 759 $ 931 $ 2,311 $ 2,436
Retail stores -- 615 -- 615
Sponsorship and other 1,517 2,202 3,423 6,248
Corporate 130 443 347 822
--------- --------- --------- ---------
Total Depreciation and
Amortization $ 2,406 $ 4,191 $ 6,081 $ 10,121
========= ========= ========= =========
Three months Nine months
ended October 31, ended October 31,
2002 2003 2002 2003
--------- --------- --------- ---------
Capital Expenditures:
Direct marketing $ 45 $ 77 $ 144 $ 869
Retail stores -- 34 -- 34
Sponsorship and other 182 468 1,801 874
Corporate 845 359 1,091 1,273
--------- --------- --------- ---------
Total Capital Expenditures $ 1,072 $ 938 $ 3,036 $ 3,050
========= ========= ========= =========
January 31, 2003 October 31, 2003
---------------- ----------------
Long-Lived Assets:
Direct marketing $ 89,104 $ 92,451
Retail stores -- 15,343
Sponsorship and other 211,212 230,182
Corporate 17,213 9,639
dELiA*s acquired intangible assets,
net of amortization (a) 4,800
Goodwill related to the
dELiA*s acquisition (b) -- 36,330
---------------- ----------------
Total Long-Lived Assets $ 317,529 $ 388,745
================ ================
The carrying amount of goodwill by reportable segment as of October 31, 2003 and
January 31, 2003 was as follows (amounts in thousands):
January 31, 2003 October 31, 2003
----------------- ----------------
Direct marketing $ 78,751 $ 78,451
Retail stores -- --
Sponsorship and other 191,602 209,264
dELiA*s (b) -- 36,330
----------------- ----------------
Total $ 270,353 $ 324,045
================= ================
(a) The preliminary estimate of the fair value of the acquired intangible assets
resulting from the dELiA*s acquisition totaled $4.9 million. For the three
months and nine months ended October 31, 2003, approximately $100,000 of
amortization was recorded related to the amortizable acquired intangible assets.
The preliminary estimate of the fair value of these acquired intangible assets
will be allocated accordingly between the retail and direct marketing segments
during the fourth quarter of fiscal 2003 upon completion of the valuation
analysis.
(b) The preliminary estimate of goodwill resulting from the dELiA*s acquisition
totaled $36.3 million. This goodwill will be allocated accordingly between the
retail and direct marketing segments during the fourth quarter of fiscal 2003
upon completion of the valuation analysis.
17
9. 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 of fiscal 2002 in its direct marketing 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 real estate market conditions. In
accordance with SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities"("Statement No. 146") and SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("Statement No. 144"), the Company
recognized a charge of approximately $380,000 in the first quarter of 2003 in
its direct marketing 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 this facility closure.
During the third quarter of fiscal 2003, the Company made the strategic decision
to transfer substantially all of its fulfillment activities for its Alloy, CCS,
GFLA and Old Glory units to its recently acquired distribution center in
Hanover, Pennsylvania. The Company notified New Roads that it would be exiting
the New Roads' facilities during the first half of fiscal 2004 and as a result
the Company is required to pay New Roads an exit fee. In accordance with
Statement No. 146, the Company recognized a charge of approximately $351,000 in
the third quarter of 2003 in its direct marketing segment, representing future
contractual exit payments. The Company does not expect to incur any significant
personnel termination obligations as a result of exiting the New Roads contract.
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 31 655 44 730
Payments and Write-offs Fiscal 2003 (31) (678) (44) (753)
----------- ------------ ---------------- -------
Balance at October 31, 2003 $ -- $ 1,573 $ -- $ 1,573
=========== ============ ================ =======
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 October 31, 2003 is as follows (in thousands):
January 31, October 31,
2003 2003
---------- ----------
CCS facility, San Luis Obispo, California $ 1,596 $ 1,222
NCC facility, Martinsville, Virginia and
Portland, Tennessee -- 351
---------- ----------
Total Lease and Exit Cost Liability $ 1,596 $ 1,573
========== ==========
The Company anticipates that the remaining restructuring accruals will be
settled by January 31, 2006. As of October 31, 2003, the restructuring accruals
are classified as a current liability and a long-term liability of $981,000 and
$592,000, respectively.
10. COMMON STOCK
On January 29, 2003, Alloy adopted a stock repurchase program authorizing the
repurchase of up to $10.0 million of its common stock from time to time in the
open market at prevailing market prices or in privately negotiated transactions.
Alloy has repurchased 600,000 shares for approximately $3.0 million under this
plan through October 31, 2003. All 600,000 shares were repurchased during the
first quarter of fiscal 2003.
18
11. 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.
12. 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 three months and nine months ended October 31, 2003
was approximately $349,000 and $640,000, respectively.
13. RECENT ACQUISITIONS
OCM Direct, Inc., Collegiate Carpets, Inc. and Carepackages, Inc.
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. As of October 31, 2003, the total cash paid including
acquisition costs, net of cash acquired, approximated $15.4 million. The total
cost of this acquisition, net of cash acquired and including acquisition costs,
is estimated to be $15.5 million. In addition, Alloy paid off the $5.0 million
credit facility during the second quarter. Alloy has recorded approximately
$16.3 million of goodwill representing the excess of purchase price over the
fair value of the net assets acquired. In addition, Alloy has identified
specific intangible assets consisting of $900,000 representing trademarks, $2.0
million representing customer relationships, $811,000 representing
non-competition agreements 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. The allocations of the purchase price are subject to revision
based on the final determination of appraised and other fair values.
19
dELiA*s
In September 2003, Alloy, through Dodger Acquisition Corp., an indirect,
wholly-owned subsidiary of Alloy, acquired 100% voting interest of dELiA*s
Corp., a multi-channel retailer that markets apparel, accessories and home
furnishings to teenage girls and young women. The Company reaches its customers
through the dELiA*s catalog, www.dELiAs.com and 63 dELiA*s retail stores.
Through the acquisition of dELiA*s, Alloy seeks to generate financial savings by
consolidating operations and eliminating duplicate functions, improve catalog
circulation productivity by combining name databases and establish a retail
store presence that may be expanded over time. Alloy paid approximately $50.1
million to complete the acquisition. As of October 31, 2003, the total cash paid
including acquisition costs, net of cash acquired, approximated $45.9 million.
The total cost of this acquisition, net of cash acquired and including
acquisition costs, is estimated to be $47.0 million. Estimated acquisition cost
is expected to consist of professional fees of approximately $2.8 million and
other costs of approximately $600,000.
The acquisition has been accounted for as a purchase business combination. Under
the purchase method of accounting, the assets acquired and liabilities assumed
from dELiA*s are recorded at the date of acquisition, at their respective fair
values. Financial statements and reported results of operations of Alloy issued
after completion of the acquisition will reflect these values, but will not be
restated retroactively to reflect the historical financial position or results
of operations of dELiA*s.
The following is an estimate of the purchase price for dELiA*s as of September
4, 2003 (in thousands):
Consideration $ 50,072
Estimated direct transaction costs 3,410
--------
Total purchase price $ 53,482
The above purchase price has been preliminarily allocated based on an estimate
of the fair value of assets acquired and liabilities assumed. The final
valuation of net liabilities is expected to be completed during the fourth
quarter of fiscal 2003. To the extent that the estimates need to be adjusted,
Alloy will do so.
Estimated book value of net liabilities acquired $ (764)
Adjusted for write-off of intangible assets 20
-----
Adjusted estimated book value of net liabilities acquired (784)
Remaining preliminary allocation:
Record amortizable intangible assets: (a)
Websites 1,300
Mailing Lists 500
Noncompete Agreements 400
Record intangible assets with indefinite lives: (b)
Trademarks 2,700
Goodwill (b), (c) 36,330
Restructuring costs (d) (6,523)
Reduction of deferred revenues related to a
licensing agreement that has no future legal
performance obligation 16,500
Increase in legal costs (114)
Reduction of deferred rent in conjunction with the
preliminary fair valuation of leases 3,173
--------
Total preliminary estimated purchase price allocation $ 53,482
20
(a) Adjustments to reflect the preliminary estimate of the fair value of
amortizable intangible assets and the resulting increase in amortization
expense, as follows (in thousands):
Preliminary Useful Life
Fair Value (Years)
---------- ----------
Websites $ 1,300 3
Mailing Lists 500 7
Noncompete
Agreements 400 2-5
----------
$ 2,200
(b) Adjustments to reflect the preliminary estimate of the fair value of
goodwill and intangible assets with indefinite lives, as follows (in thousands):
Preliminary
Fair Value
----------
Trademarks $ 2,700
Goodwill 36,330
----------
$ 39,030
(c) In accordance with the requirements of SFAS No. 142, "Goodwill and Other
Intangible Assets," the goodwill and the acquired indefinite-lived intangibles
associated with the acquisition will not be amortized. Goodwill resulting from
this acquisition will be allocated between the retail and direct marketing
segments during the fourth quarter of fiscal 2003 upon completion of the
valuation analysis.
(d) As of the completion of the acquisition, Alloy management began to assess
and formulate a plan to exit certain activities of dELiA*s. The plan, as
initially adopted, specifically identifies significant actions to be taken to
complete the plan and activities of dELiA*s that will not be continued,
including the method of disposition and location of those activities. At the
completion of the acquisition, Alloy was contractually obligated to pay certain
termination costs to three executives of dELiA*s. Management has estimated
liabilities related to the net present value of these termination costs to be
approximately $2.7 million, of which approximately $1.3 million has been paid.
The remaining costs have resulted in an increase to short-term and long-term
liabilities which is estimated to be approximately $100,000 and $1.3 million,
respectively. In addition, management has preliminarily estimated $3.8 million
of store exit and lease costs and severance related to the shutdown of seventeen
dELiA*s retail stores. These expenses are accrued as current liabilities as of
October 31, 2003. No other restructuring or exit costs have been accrued as
management is still in the process of finalizing its restructuring plan for
other dELiA*s activities. Additional liabilities likely will be recorded upon
adoption of the final plan. Management is expected to complete its assessment
and adopt the final plan during the fourth quarter of fiscal 2003.
The results of dELiA*s operations have been included in Alloy's financial
statements since September 4, 2003, 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.
Pro forma results
The following unaudited pro forma financial information presents the combined
results of operations of Alloy and dELiA*s as if the acquisition had occurred as
of the beginning of the periods presented.
The results for the three-month period ended October 31, 2003 combine the
results of Alloy for the three-month period ended October 31, 2003 and the
results of dELiA*s for the period of August 2, 2003 to September 3, 2003 and for
the period September 4, 2003 to October 31, 2003. The results for the nine-month
period ended October 31, 2003 combine the results of Alloy for the nine-month
period ended October 31, 2003 and the results of dELiA*s for the seven-month
period February 2, 2003 to September 3, 2003 and for the period September 4,
2003 to October 31, 2003. The results for the three-month period ended October
31, 2002 combine the results of Alloy for the three-month period ended October
31, 2002 and the results of dELiA*s for the three-month period ended November 2,
2002. The results for the nine-month period ended October 31, 2002 combine the
results of Alloy for the nine-month period ended October 31, 2002 and the
results of dELiA*s for the nine-month period ended November 2, 2002.
The following unaudited pro forma financial information presents the combined
results of operations of Alloy and dELiA*s as if the acquisition had occurred as
of the beginning of the periods presented. The unaudited pro forma financial
information is not necessarily indicative of what the consolidated results of
operations actually would have been had we completed the acquisition at the
dates indicated. In addition, the unaudited pro forma financial information does
not purport to project the future results of operations of the combined Company.
21
Three months Nine months
ended October 31, ended October 31,
2002 2003 2002 2003
--------- --------- --------- ---------
Net revenue $ 126,130 $ 116,958 $ 283,459 $ 323,209
Net income (loss) before extraordinary item and cumulative effect
of change in accounting principle 138 (13,126) (9,131) (32,962)
Net income (loss) 138 (13,126) 6,252 (32,962)
Preferred stock dividend and accretion 605 393 1,642 1,548
Net (loss) income available to common stockholders $ (467) $ (13,519) $ 4,610 $ (34,510)
Net income (loss) before extraordinary item and cumulative effect
of change in accounting principle per share:
Basic $ 0.00 $ (0.32) $ (0.23) $ (0.81)
Diluted $ 0.00 $ (0.32) $ (0.23) $ (0.81)
Net (loss) income available to common stockholders per share:
Basic $ (0.01) $ (0.33) $ 0.13 $ (0.84)
Diluted $ (0.01) $ (0.33) $ 0.12 $ (0.84)
The unaudited pro forma financial information above reflects the following pro
forma adjustments:
1. Elimination of historical amortization expense recorded by legacy dELiA*s
related to definite-lived intangible assets.
2. Recording of:
o amortization expense related to the estimated fair value of
identifiable intangible assets from the purchase price
allocation, which are being amortized over their estimated
useful lives which range from 2 to 7 years, of approximately
$50,000 and $349,000 in the third quarter and first nine
months of 2003, respectively and $150,000 and $449,000 in the
third quarter and first nine months of 2002, respectively;
o the adjustment to increase interest expense from borrowings to
finance the dELiA*s acquisition by $240,000 and $1.7 million
in the third quarter and first nine months of 2003,
respectively and $719,000 and $2.2 million in the third
quarter and first nine months of 2002, respectively;
o the adjustment to decrease deferred rent expense by $27,000
and $266,000 in the third quarter and first nine months of
2003, respectively and $92,000 and $226,000 in the third
quarter and first nine months of 2002, respectively.
14. ISSUANCE OF CONVERTIBLE DEBT
On July 23, 2003, Alloy issued and sold $65.0 million aggregate principal amount
of its Convertible Senior Debentures (the "Debentures") due August 1, 2023 in
the 144A private placement market. Lehman Brothers, Inc., CIBC World Markets
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 and conditions. 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. The holders of the debentures may put the Debentures back to Alloy at par
plus accrued but unpaid interest on each of August 1, 2008, 2013 and 2018,
subject to certain conditions. Alloy used a significant portion of the net
proceeds from this offering for the acquisition of dELiA*s, and intends to use
the remaining portion for future acquisitions, working capital, capital
expenditures and general corporate purposes.
On 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.
15. INCOME TAXES
SFAS No. 109, "Accounting for Income Taxes," requires that the future tax
benefit of the Company's net operating losses ("NOLs") be recorded as an asset
to the extent that management assesses the utilization of such NOLs to be
"more-likely-than-not." Due to a number of factors, including the acquisition of
dELiA*s, management has lowered its projections of future taxable income,
particularly in the next 18 months. As a result of these lower projections of
future taxable income, and the resultant increased uncertainty, management
believes the future utilization of the Company's NOLs is no longer
"more-likely-than-not." The Company has made a decision to fully reserve the
remaining net deferred tax asset by increasing the valuation allowance via a
$5.2 million income tax provision during the third quarter ended October 31,
2003.
22
16. DEBT AND CREDIT FACILITY
dELiA*s is subject to certain covenants under a mortgage loan agreement relating
to dELiA*s' fiscal 1999 purchase of a distribution facility in Hanover,
Pennsylvania, including a covenant to maintain a fixed charge coverage ratio,
which the bank has agreed to waive for the duration of the loan. During fiscal
2003, the agreement was amended such that the outstanding principal balance of
$3.0 million as of August 2, 2003 was scheduled to be paid in full by September
30, 2003. Rather than paying off the loan, a non-binding agreement has been
reached with the bank to modify the existing loan agreement, extending the term
for five years with a fifteen-year amortization. The modified loan will bear
interest at the LIBOR Rate plus 225 basis points. We expect to finalize the
agreement during the fourth quarter of fiscal 2003. As of October 31, 2003, the
outstanding principal balance, included in accrued expenses and other current
liabilities, was $2.9 million.
dELiA*s has a credit agreement with Wells Fargo Retail Finance LLC. The credit
agreement consists of a revolving line of credit that permits dELiA*s to borrow
up to $20 million. Until October 29, 2004, dELiA*s retains the right to increase
the limit to $25 million at its option. The credit line is secured by dELiA*s'
assets and borrowing availability fluctuates depending on dELiA*s' levels of
inventory and certain receivables. The agreement contains certain covenants and
default provisions, including a limitation on dELiA*s' capital expenditures. At
dELiA*s' option, borrowings under this facility bear interest at Wells Fargo
Bank's prime rate plus 25 basis points or at the LIBOR Rate plus 250 basis
points. A fee of 0.375% per year is assessed monthly on the unused portion of
the line of credit as defined in the agreement. The facility matures in April
2006. The credit facility is considered a current liability because the bank has
access to dELiA*s lockbox facility and the agreement contains a subjective
acceleration clause. In addition, the agreement contains a change of control
event which was triggered when Alloy purchased dELiA*s, which allows the bank to
call the loan at any time. The bank has agreed to waive any default caused in
connection with Alloy's acquisition of dELiA*s. As of October 31, 2003, the
outstanding balance, which is classified as a bank loan payable under current
liabilities, was $12.8 million, outstanding letters of credit were $3.3 million,
included in accrued expenses and other current liabilities, and unused available
credit was $733,000.
23
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, direct marketing and retail 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, retail stores, print media, display media boards, websites, on-campus
marketing programs and promotional events, and features a portfolio of brands
that are well known among Generation Y consumers and advertisers. We reach a
significant portion of Generation Y consumers through our various media assets,
marketing service programs, direct marketing activities, and retail stores and,
as a result, we are able to offer advertisers targeted access to the youth
market. We sell third-party branded and private label products in key Generation
Y spending categories, including apparel, action sports equipment and
accessories, directly to the youth market. Additionally, our assets have enabled
us to build a comprehensive database that includes information about more than
25 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 three principal sources - direct marketing, retail stores, and
sponsorship and other activities.
Our direct marketing segment derives revenues from sales of youth-focused
merchandise including apparel, accessories and action-sports equipment to
consumers through our catalogs and websites.
Our retail segment derives revenues and from sales of youth-focused merchandise
including apparel and accessories to consumers through dELiA*s 63 retail stores.
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, 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.
24
RESULTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 31, 2002 COMPARED WITH THREE MONTHS ENDED OCTOBER 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 October 31,
2002 2003
-------- --------
Direct marketing revenues 44.3% 36.5%
Retail store revenues -- 9.4
Sponsorship and other revenues 55.7 54.1
-------- --------
Total revenues 100.0 100.0
Cost of revenues 51.2 49.6
-------- --------
Gross profit 48.8 50.4
Operating expenses:
Selling and marketing 30.1 39.1
General and administrative 5.0 9.3
Amortization of intangible assets 1.3 2.0
Restructuring charge -- 0.3
-------- --------
Total operating expenses 36.4 50.7
Income (loss) from operations 12.4 (0.3)
Interest and other income (expense), net 0.4 (0.9)
Provision for income tax expense (0.4) (5.2)
-------- --------
Net income (loss) 12.4% (6.4)%
======== ========
SEGMENT RESULTS OF OPERATIONS
The tables below present our revenues and operating income (loss) by segment for
each of the three months ended October 31, 2002 and 2003 (dollars in thousands):
Three months
ended October 31, Percent change
2002 2003 2002 vs 2003
--------- --------- --------------
Revenues:
Direct marketing $ 41,270 $ 38,585 (6.5)%
Retail stores -- 9,973 NM
Sponsorship and other 51,956 57,193 10.1
--------- --------- --------------
Total Revenues $ 93,226 $ 105,751 13.4 %
========= ========= ==============
Three months
ended October 31, Percent change
2002 2003 2002 vs 2003
--------- --------- --------------
Operating Income (Loss):
Direct marketing $ 2,242 $ (2,180) (197.2)%
Retail stores -- (1,650) NM
Sponsorship and other 12,235 11,348 (7.2)%
Corporate (2,874) (7,823) 172.2 %
--------- --------- --------------
Total Operating Income (Loss) $ 11,603 $ (305) (102.6)%
========= ========= ==============
NM - Not meaningful
25
NET REVENUES
Total Revenues. Total revenues increased 13.4% to $105.8 million in the three
months ended October 31, 2003 from $93.2 million in the three months ended
October 31, 2002.
Direct Marketing Revenues. Direct marketing revenues decreased 6.5% from $41.3
million in the three months ended October 31, 2002 to $38.6 million in the three
months ended October 31, 2003. The decrease in direct marketing revenues for the
third quarter of the fiscal year ending January 31, 2004 ("fiscal 2003") versus
the third quarter of the fiscal year ended January 31, 2003 ("fiscal 2002")
resulted primarily from a modest decline in catalog circulation as we reduced
the number of catalogs circulated to prospects outside our database and to
non-buyers inside our database, together with lower customer response to our
catalogs circulated. This decline was partially offset by the direct marketing
revenues from dELiA*s.
Retail Store Revenues. Retail store revenues totaled $10.0 million for the three
months ended October 31, 2003. The retail revenue was generated from dELiA*s 63
retail stores. We acquired dELiA*s on September 4, 2003.
Sponsorship and Other Revenues. Sponsorship and other revenues increased 10.1%
from $52.0 million in the third quarter of fiscal 2002 to $57.2 million in the
third quarter of fiscal 2003. The increase in sponsorship and other revenues in
the third quarter of fiscal 2003 as compared with the third quarter of fiscal
2002 is due primarily to the addition of revenues from the operations of OCM
that we acquired in May 2003, partially offset by lower revenues in our
advertising placement business.
COST OF REVENUES
Cost of revenues consists of the cost of the merchandise sold plus the freight
cost to deliver the merchandise to the warehouse and retail stores, together
with the direct costs attributable to the sponsorship and advertising programs
we provide, and the marketing publications we develop. Our total cost of
revenues increased 10.0% from $47.7 million in the three months ended October
31, 2002 to $52.5 million in the three months ended October 31, 2003. The
increase in cost of revenues in the third quarter of fiscal 2003 as compared
with the third quarter of fiscal 2002 was due primarily to the additional costs
of revenues from OCM and cost of goods sold from dELiA*s, which were acquired in
May 2003 and September 2003 respectively.
Our gross profit as a percentage of total revenues increased from 48.8% in the
three months ended October 31, 2002 to 50.4% in the three months ended October
31, 2003 due primarily to the slight increased proportion of higher gross margin
merchandise in our overall revenue mix, along with a higher sponsorship gross
margin.
TOTAL OPERATING EXPENSES
Selling and Marketing. Selling and marketing expenses consist primarily of
Alloy, dELiA*s, CCS and Dan's Comp catalog production and mailing costs; Alloy,
dELiA*s, CCS and Dan's Comp call centers and fulfillment operations expenses;
dELiA*s retail store costs; freight costs to deliver goods to our merchandise
customers; compensation of our sales and marketing personnel; marketing costs;
and information technology expenses related to the maintenance and marketing of
our websites and support for our advertising sales activities. These expenses
increased from $28.1 million in the three months ended October 31, 2002 to $41.3
million in the three months ended October 31, 2003 due to the inclusion of
dELiA*s selling and marketing expenses since the acquisition date; the impact of
OCM's selling and marketing expenses; increased information technology spending
to support our expanded advertising sales force; increased occupancy expenses;
and the hiring of additional sales and marketing personnel. As a percentage of
total revenues, our selling and marketing expenses increased from 30.1% in the
third quarter of fiscal 2002 to 39.1% in the third quarter of fiscal 2003, due
primarily to the addition of dELiA*s loss generating operations.
General and Administrative. General and administrative expenses consist
primarily of salaries and related costs for our executive, administrative,
finance and management personnel, as well as support services and professional
service fees. These expenses increased from $4.7 million in the three months
ended October 31, 2002 to $9.9 million in the three months ended October 31,
2003. As a percentage of total revenues, our general and administrative expenses
increased from 5.0% in the third quarter of fiscal 2002 to 9.3% in the third
quarter of fiscal 2003, due primarily to the addition of dELiA*s loss generating
operations. The increase in general and administrative expenses was driven by
the addition of OCM's expenses; the inclusion of dELiA*s expenses since the
acquisition date; 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, occupancy costs
due to office expansions, and telecommunications costs.
Amortization of Intangible Assets. Amortization of intangible assets was
approximately $2.1 million in the three months ended October 31, 2003 as
compared with $1.2 million in the three months ended October 31, 2002. The
increase in expenses resulted from our acquisition activities during the last
twelve months, and the associated allocation of purchase price to identified
intangible assets. All of our acquisitions have been accounted for under the
purchase method of accounting.
Restructuring Charge. During the third quarter of fiscal 2003, we made the
strategic decision to transfer substantially all of our fulfillment activities
for our Alloy, CCS, GFLA, and Old Glory units from New Roads, a third party
service provider, to our recently acquired distribution center in Hanover,
Pennsylvania. We notified New Roads that we would be exiting the New Roads'
facilities during the first half of fiscal 2004 and as a result we are required
to pay New Roads an exit fee. We recognized a charge of $351,000 in the third
quarter of 2003 in our direct marketing segment, representing the future
contractual exit payment. We will continue to review our operations to determine
the necessity of our facilities, equipment, and personnel.
26
INCOME (LOSS) FROM OPERATIONS
Total Income (Loss) from Operations. Our loss from operations was $305,000 in
the third quarter of fiscal 2003 while our income from operations was $11.6
million in the third quarter of fiscal 2002. The transition from operating
income to operating loss is primarily due to the operating loss from our direct
marketing business, the loss from dELiA*s retail operations that we acquired,
increased corporate expenses, and increased depreciation and amortization
expenses.
Direct Marketing Income (Loss) from Operations. Our loss from direct marketing
operations was $2.2 million in the third quarter of fiscal 2003 while our direct
marketing income from operations was $2.2 million in the third quarter of fiscal
2002. The transition from direct marketing operating income to direct marketing
operating loss is primarily a result of lower revenues, lower gross margins on
merchandise sold and reduced catalog circulation productivity.
Retail Income from Operations. Our loss from retail operations was $1.7 million
in the third quarter of fiscal 2003. The loss was generated from the dELiA*s
retail stores acquired on September 4, 2003.
Sponsorship and Other Income from Operations. Our income from sponsorship and
other operations decreased 7.2% to $11.3 million in the third quarter of fiscal
2003 from $12.2 million in the third quarter of fiscal 2002. This decrease
resulted primarily from the increased amortization of acquired intangible
assets.
INTEREST AND OTHER INCOME (EXPENSE), NET
Interest and other income, net of expense, includes income from our cash
equivalents and from available-for-sale marketable securities and expenses
related to our financing obligations. In the three months ended October 31,
2003, we generated interest income of $215,000 and interest expense primarily
related to the Convertible Debentures of $1.2 million, as compared with interest
income of $331,000 and interest expense of $1,000 in the three months ended
October 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 balances during the quarter ended October 31, 2003 as
compared with the quarter ended October 31, 2002.
INCOME TAX EXPENSE
In the three months ended October 31, 2003 we recorded an income tax expense of
$5.5 million due to a decision to establish a valuation allowance for Alloy's
net deferred tax asset of $5.2 million and a $366,000 income tax payment. The
valuation allowance was established as a result of increased uncertainty over
the realization of the deferred tax asset, in part as a result of the
acquisition of dELiA*s. In the three months ended October 31, 2002, we were
subject to income tax expense of $336,000 due to taxable operating income
generated at the state level.
27
RESULTS OF OPERATIONS
NINE MONTHS ENDED OCTOBER 31, 2002 COMPARED WITH NINE MONTHS ENDED OCTOBER 31,
2003
CONSOLIDATED RESULTS OF OPERATIONS
The following table sets forth the statement of operations for the periods
indicated as a percentage of revenues:
Nine months
ended October 31,
2002 2003
-------- --------
Direct marketing revenues 53.1% 38.6%
Retail store revenues -- 3.9
Sponsorship and other revenues 46.9 57.5
-------- --------
Total revenues 100.0 100.0
Cost of revenues 47.7 51.5
-------- --------
Gross profit 52.3 48.5
Operating expenses:
Selling and marketing 36.8 38.4
General and administrative 6.6 8.3
Amortization of intangible assets 1.5 2.2
Restructuring charges -- 0.3
-------- --------
Total operating expenses 44.9 49.2
Income (loss) from operations 7.4 (0.7)
Interest and other income (expense), net 0.8 (0.3)
Provision for income tax expense (0.4) (1.9)
-------- --------
Net income (loss) 7.8% (2.9)%
======== ========
SEGMENT RESULTS OF OPERATIONS
The tables below present our revenues and operating income (loss) by segment for
each of the nine months ended October 31, 2002 and 2003 (dollars in thousands):
Nine months
ended October 31, Percent change
2002 2003 2002 vs 2003
--------- --------- --------------
Revenues:
Direct marketing $ 103,866 $ 98,584 (5.1)%
Retail stores -- 9,973 NM
Sponsorship and other 91,765 147,140 60.3
--------- --------- --------------
Total Revenues $ 195,631 $ 255,697 30.7 %
========= ========= ==============
Nine months
ended October 31, Percent change
2002 2003 2002 vs 2003
--------- --------- --------------
Operating Income (Loss):
Direct Marketing $ 1,514 $ (5,683) (475.4)%
Retail stores -- (1,650) NM
Sponsorship and other 22,426 23,803 6.1%
Corporate (9,418) (18,371) 95.1%
--------- --------- --------------
Total Operating Income (Loss) $ 14,522 $ (1,901) (113.1)%
========= ========= ==============
NM - Not meaningful
28
NET REVENUES
Total Revenues. Total revenues increased 30.7% from $195.6 million in the nine
months ended October 31, 2002 to $255.7 million in the nine months ended October
31, 2003.
Direct Marketing Revenues. Direct marketing revenues decreased 5.1% from $103.9
million in the nine months ended October 31, 2002 to $98.6 million in the nine
months ended October 31, 2003. The decrease in direct marketing revenues for the
first nine months of fiscal 2003 versus the first nine months of fiscal 2002 was
due primarily to a reduction in overall catalog circulation and lower revenues
per catalog circulated, partially offset by the addition of dELiA*s direct
marketing sales.
Retail Store Revenues. Retail store revenues totaled $10.0 million for the nine
months ended October 31, 2003. The retail revenue was generated from dELiA*s
retail stores. We acquired dELiA*s on September 4, 2003.
Sponsorship and Other Revenues. Sponsorship and other revenues increased to
$147.1 million in the first nine months of fiscal 2003 from $91.8 million in the
first nine months of fiscal 2002, an increase of 60.3% 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 $93.4 million in the nine months ended
October 31, 2002 to $131.6 million in the nine months ended October 31, 2003, a
40.9% increase. The increase in cost of goods sold in the first nine months of
fiscal 2003 as compared with the first nine months 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 52.3% in the
nine months ended October 31, 2002 to 48.5% in the nine months ended October 31,
2003 due primarily to the lower gross margin profile of our sponsorship
activities resulting from our expanded advertising placement and event marketing
businesses, together with a moderate decline in direct marketing gross profit
margin.
TOTAL OPERATING EXPENSES
Selling and Marketing. Selling and marketing expenses increased 36.4% from $72.0
million in the nine months ended October 31, 2002 to $98.2 million in the nine
months ended October 31, 2003 primarily due to the hiring and acquisition of
additional sales and marketing personnel; increased information technology
spending to support our expanded advertising sales force and the inclusion of
dELiA*s selling and marketing expenses. As a percentage of total revenues, our
selling and marketing expenses increased slightly from 36.8% in the first nine
months of fiscal 2002 to 38.4% in the first nine months of fiscal 2003.
General and Administrative. General and administrative expenses increased 66.7%
from $12.8 million in the nine months ended October 31, 2002 to $21.4 million in
the nine months ended October 31, 2003. As a percentage of total revenues, our
general and administrative expenses increased from 6.6% in the first nine months
of fiscal 2002 to 8.3% in the first nine months of fiscal 2003. The increase in
general and administrative expenses was attributable primarily to the inclusion
of dELiA*s and OCM expenses in the nine months ended October 31, 2003; 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, occupancy costs due to office
expansions, and telecommunications costs.
Amortization of Intangible Assets. Amortization of intangible assets was
approximately $5.8 million in the nine months ended October 31, 2003 as compared
with $2.9 million in the nine months ended October 31, 2002 due to our
acquisition activity during the last twelve months.
Restructuring Charges. During the first quarter of fiscal 2003, we made the
strategic decision to outsource substantially all of our fulfillment activities
for our GFLA unit to New Roads. We determined that we would not be able to
sublease our existing fulfillment facilities due to real estate market
conditions. As a result, and in accordance with SFAS No. 146 and SFAS No. 144,
we recognized a first quarter charge of approximately $380,000 in our direct
marketing segment, representing the future contractual lease payments, severance
and personnel costs, and the write-off of related leasehold improvements. During
the third quarter of fiscal 2003, we made the strategic decision to transfer
substantially all of our fulfillment activities for our Alloy, CCS, GFLA and Old
Glory units from New Roads, a third party service provider, to our recently
acquired distribution center in Hanover, Pennsylvania. As a result, we are
required to pay New Roads an exit fee. We recognized a charge of approximately
$351,000 in the third quarter of 2003 in our direct marketing segment,
representing the future contractual exit payment. We will continue to review our
operations to determine the necessity of our facilities, equipment, and
personnel.
INCOME (LOSS) FROM OPERATIONS
Total Income (Loss) from Operations. Our loss from operations was $1.9 million
in the first nine months of fiscal 2003 versus income of $14.5 million in the
first nine months of fiscal 2002. The transition from operating income to
operating loss is primarily due to the operating loss from our direct marketing
business and retail stores, increased corporate expenses, and increased
depreciation and amortization expenses, offset by increased operating income
from our sponsorship and other business segment.
Direct Marketing Income (Loss) from Operations. Our loss from direct marketing
operations was $5.7 million in the first nine months of fiscal 2003 while our
direct marketing income from operations was $1.5 million in the first nine
months of fiscal 2002. The transition from direct marketing operating income to
direct marketing operating loss is primarily a result of lower revenues, lower
gross margins on merchandise sold and reduced catalog circulation productivity.
Retail Store Income from Operations. Our loss from retail operations was $1.7
million in the first nine months of fiscal 2003. The loss was generated from the
dELiA*s retail stores acquired on September 4, 2003.
Sponsorship and Other Income from Operations. Our income from sponsorship and
other operations increased 6.1% to $23.8 million in the first nine months of
fiscal 2003 from $22.4 million in the first nine months 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 increased amortization of acquired intangible assets.
29
INTEREST AND OTHER INCOME (EXPENSE), NET
In the nine months ended October 31, 2003, we generated interest income of
$610,000 and interest expense of $1.3 million primarily related to the
Convertible Debentures. In the nine months ended October 31, 2002, we generated
interest income of $1.5 million and interest expense of $1,000. The decrease in
interest income resulted primarily from lower interest rates and the lower cash
and cash equivalents and available-for-sale marketable securities balances
during the nine months ended October 31, 2003 as compared with the nine months
ended October 31, 2002.
INCOME TAX EXPENSE
In the nine months ended October 31, 2003 we recorded income tax expense of $4.9
million. We made a decision to establish a valuation allowance for Alloy's net
deferred tax asset of $5.2 million and a $366,000 income tax payment during the
third quarter ended October 31, 2003 offset by the income tax benefit of
$606,000 during the first half of fiscal 2003. In the nine months ended October
31, 2002, we were subject to income tax expense of $779,000 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 and for the nine months ended October 31, 2003. At October 31, 2003,
we had approximately $49.3 million of unrestricted cash, cash equivalents and
short-term investments. Our principal commitments at October 31, 2003 consisted
of the Convertible Debentures, our working capital credit facility, accounts
payable, bank loans, accrued expenses, and obligations under operating and
capital leases.
Net cash used in operating activities was $5.5 million in the first nine months
of fiscal 2003 compared with net cash provided by operating activities of $3.4
million in the first nine months of fiscal 2002. The decline was primarily due
to the transition to a net loss in fiscal 2003 from net income in fiscal 2002,
partially offset by a higher level of depreciation and amortization and a
smaller increase in operating assets net of operating liabilities.
Cash used in investing activities was approximately $70.1 million in the first
nine months of fiscal 2003, due primarily to the dELiA*s and OCM acquisitions,
compared with $104.7 million of cash used in investing activities in the first
nine months of fiscal 2002, due primarily to the acquisition of Market Place
Media and investments in marketable securities with a portion of the proceeds
raised in our February 2002 common stock offering.
Net cash provided by financing activities was $64.9 million in the nine months
ended October 31, 2003 compared with $55.8 million of cash provided by financing
activities in the nine months ended October 31, 2002. The cash provided by
financing activities in the nine months ended October 31, 2003 was due primarily
to net proceeds of $66.8 million received from the issuance of the Convertible
Debentures in the private placement market and $5.9 of net borrowings under line
of credit agreements 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 nine months ended October 31, 2002, net cash provided by
financing activities of $55.8 million resulted primarily from the net proceeds
from our public offering of common stock in February 2002.
Our liquidity position as of October 31, 2003 consisted of $49.3 million of
unrestricted cash, cash equivalents and short-term investments. We expect our
liquidity position to meet our anticipated cash needs for working capital and
capital expenditures, for at least the next 24 months, excluding the impact of
any potential, as yet unannounced acquisitions. If cash generated from our
operations is insufficient to satisfy our cash needs, we may be required to
raise additional capital. If we raise additional funds through the issuance of
equity securities, our stockholders may experience significant dilution.
Furthermore, additional financing may not be available when we need it or, if
available, financing may not be on terms favorable to us or to our stockholders.
If financing is not available when required or is not available on acceptable
terms, we may be unable to develop or enhance our products or services. In
addition, we may be unable to take advantage of business opportunities or
respond to competitive pressures. Any of these events could have a material and
adverse effect on our business, results of operations and financial condition.
On January 29, 2003, we adopted a stock repurchase program authorizing the
repurchase of up to $10.0 million of our common stock from time to time in the
open market at prevailing market prices or in privately negotiated transactions.
We have repurchased 600,000 shares for approximately $3.0 million under this
plan through October 31, 2003. All 600,000 shares were repurchased during the
three months ended April 30, 2003.
30
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
During the first nine months 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 October 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 2005.
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 became
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 adopted the provisions of SFAS No. 150 effective August 1, 2003.
The adoption of SFAS No. 150 did not 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 in all material respects with the new disclosure requirements.
31
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).
We do not expect to generate positive net income in fiscal 2003. As of October
31, 2003, we had an accumulated deficit of approximately $59.5 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, dELiA*s, 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 that could 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.
32
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.
WE MAY BE REQUIRED TO RECOGNIZE IMPAIRMENT CHARGES.
Pursuant to generally accepted accounting principles, we are required to perform
impairment tests on our long-lived assets, identifiable intangible assets,
including goodwill, annually or at any time when certain events occur, which
could impact the value of our business segments. Our determination of whether an
impairment has occurred is based on a comparison of the assets' fair market
value with the assets' carrying value. Significant and unanticipated changes
could require a provision for impairment in a future period that could
substantially affect our reported earnings in a period of such change.
Additionally pursuant to generally accepted accounting principles, we are
required to recognize an impairment loss when circumstances indicate that the
carrying value of long-lived tangible and intangible assets with finite lives
may not be recoverable. Management's policy in determining whether an impairment
indicator exists, a triggering event, comprises measurable operating performance
criteria as well as qualitative measures. if a determination is made that a
long-lived asset's carrying value is not recoverable over its estimated useful
life, the asset is written down to estimated fair value, if lower. The
determination of fair value of long-lived assets is generally based on estimated
expected discounted future cash flows, which is generally measured by
discounting expected future cash flows identifiable with the long-lived asset at
the Company's weighted-average cost of capital.
OUR STRATEGY CONTEMPLATES STRATEGIC ACQUISITIONS. OUR INABILITY TO ACQUIRE
SUITABLE BUSINESSES OR TO MANAGE THEIR INTEGRATION COULD HARM OUR BUSINESS.
A key component of our business strategy is 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.
OUR CATALOG RESPONSE RATES MAY DECLINE.
Catalog response rates usually decline when we mail additional catalog editions
within the same fiscal period. In addition, as we continue to increase the
number of catalogs distributed or mail our catalogs to a broader group of new
potential customers, we have observed that these new potential customers respond
at lower rates than existing customers have historically responded. We
contemplate that we will be cross-mailing our Alloy catalogs to dELiA*s' catalog
customers, and dELiA*s catalogs to Alloy catalog customers, which may result in
lower response rates for each. Additionally, response rates for dELiA*s catalogs
historically have declined in geographic regions where it opens new stores. If
and when we open additional new dELiA*s stores, we expect aggregate catalog
response rates to decline further. These trends in response rates have had and
are likely to continue to have a material adverse effect on our rate of sales
growth and on our profitability and could have a material adverse effect on our
business.
WE RELY ON THIRD-PARTY VENDORS FOR MERCHANDISE.
Our business depends on the ability of third-party vendors and their
subcontractors or suppliers to provide us with current-season, brand-name
apparel and merchandise at competitive prices, in sufficient quantities,
manufactured in compliance with all applicable laws and of acceptable quality.
We do not have long-term contracts with any supplier and are not likely to enter
into these contracts in the foreseeable future. In addition, many of the smaller
vendors that we use have limited resources, production capacities and operating
histories. As a result, we are subject to the following risks, which could have
a material adverse effect on our business:
o our key vendors may fail or be unable to expand with us;
o we may lose or cease doing business with one or more key vendors;
o our current vendor terms may be changed to require increased payments
in advance of delivery, and we may not be able to fund such payments
through our current credit facility; or
o our ability to procure products may be limited.
A portion of dELiA*s merchandise is sourced from factories in the Far East and
Latin America. These goods will be subject to existing or potential duties,
tariffs or quotas that may limit the quantity of some types of goods which may
be imported into the United States from countries in those regions. We will
increasingly compete with other companies for production facilities and import
quota capacity. Sourcing more merchandise abroad will also subject our business
to a variety of other risks generally associated with doing business abroad,
such as political instability, currency and exchange risks and local political
issues. Our future performance will be subject to these factors, which are
beyond our control. Although a diverse domestic and international market exists
for the kinds of merchandise sourced by us, there can be no assurance that these
factors would not have a material adverse effect on our results of operations.
We believe that alternative sources of supply would be available in the event of
a supply disruption in one or more regions of the world. However, we do not
believe that, under current circumstances, entering into committed alternative
supply arrangements is warranted, and there can be no assurance that alternative
sources would in fact be available at any particular time.
33
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 MAY BE REQUIRED TO COLLECT SALES TAX.
At present, we do not collect sales or other similar taxes in respect of direct
shipments of goods to consumers into most states. have sought to impose state
sales tax collection obligations on out-of-state direct mail companies.
Additionally, dELiA*s recently was named as a defendant in an action by the
Attorney General of the State of Illinois for failure to collect sales tax on
purchases made on-line. We can give no assurance that other states in which
dELiA*s maintains a retails store will not take similar action, and can give no
assurance regarding the results of any such action. A successful assertion by
one or more states that we or one or more of our subsidiaries should have
collected or be collecting sales taxes on the direct sale of our merchandise
would have a material adverse effect on our business
34
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.
35
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
allegations 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.
Additionally, dELiA*s currently is party to a purported class action litigation,
which originally was filed in two separate complaints in Federal District Court
for the Southern District of New York in 1999 against dELiA*s Inc. and certain
of its officers and directors. These complaints were consolidated. The
consolidated complaint alleges, among other things, that the defendants violated
Rule 10b-5 under the Securities Exchange Act of 1934 by making material
misstatements and by failing to disclose certain allegedly material information
regarding trends in the business during part of 1998. The parties have reached
an agreement in principle on a settlement of the action. That agreement has not
yet been memorialized and will not become effective until a stipulation of
settlement is executed by all parties and finally approved by the Court, after
notice is given and an opportunity to object and a hearing has been accorded to
all interested parties. On December 9, 2002, the Court entered an Order
discontinuing the action ("Order of Discontinuance"), without prejudice to any
party to apply to the Court on five days' notice to restore the action to the
trial calendar if the settlement is not consummated within 45 days. By Order
dated March 19, 2003, the Court extended the Order of Discontinuance until 30
days following the date on which the pending settlement is approved by the
Court. The parties are continuing to negotiate over certain terms and conditions
of the settlement, and the settlement papers have not been submitted for Court
approval. There can be no assurances that the settlement will be completed. The
claim and proposed settlement are covered under dELiA*s' insurance policy.
However, if the settlement is not completed, we cannot predict the outcome of
any litigation.
While we believe there is no merit to these lawsuits and intend to defend them
vigorously, defending against them 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 any of these lawsuits, or settle any of them
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 October 31, 2003, we held a portfolio of $24.9 million in fixed income
marketable securities for which, due to the conservative nature of our
investments and relatively short duration, interest rate risk is mitigated. We
do not own any derivative financial instruments in our portfolio. Accordingly,
we do not believe there is any material market risk exposure with respect to
derivatives or other financial instruments that would require disclosure under
this item.
ITEM 4. CONTROLS AND PROCEDURES.
The Registrant's Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of the Registrant's disclosure controls and
procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended, as of the end of the period covered
by this report. Based on that evaluation, the Chief Executive Officer and the
Chief Financial Officer concluded that the disclosure controls and procedures
are effective in ensuring that all material information required to be included
in this quarterly report has been made known to them in a timely fashion.
The Registrant's Chief Executive Officer and Chief Financial Officer also
conducted an evaluation of the Registrant's internal control over financial
reporting to determine whether any changes occurred during the quarter covered
by this report that have materially affected, or are reasonably likely to affect
the Registrant's internal control over financial reporting. Based on the
evaluation, there have been no such changes during the quarter covered by this
report.
There have been no material changes in the Registrant's internal controls, or in
the factors that could materially affect internal controls, subsequent to the
date the Chief Executive Officer and the Chief Financial Officer completed their
evaluation.
36
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 expense recognition. The Consolidated Complaint further alleges that
during the class period the individual defendants and the Company sold stock and
completed acquisitions using our stock. We and the individual defendants filed a
joint answer to the Consolidated Complaint on September 26, 2003. The individual
defendants have retained the law firm of Cahill, Gordon & Reindel in connection
with this matter. We have retained the law firm of Katten Muchin Zavis Rosenman
in connection with this matter. Management believes that the allegations against
the Company and Messrs. Diamond, Gradess and Johnson are without merit and
intends to vigorously defend the action.
Additionally, dELiA*s currently is party to a purported class action litigation,
which originally was filed in two separate complaints in Federal District Court
for the Southern District of New York in 1999 against dELiA*s Inc. and certain
of its officers and directors. These complaints were consolidated. The
consolidated complaint alleges, among other things, that the defendants violated
Rule 10b-5 under the Securities Exchange Act of 1934 by making material
misstatements and by failing to disclose certain allegedly material information
regarding trends in the business during part of 1998. The parties have reached
an agreement in principle on a settlement of the action. That agreement has not
yet been memorialized and will not become effective until a stipulation of
settlement is executed by all parties and finally approved by the Court, after
notice is given and an opportunity to object and a hearing has been accorded to
all interested parties. On December 9, 2002, the Court entered an Order
discontinuing the action ("Order of Discontinuance"), without prejudice to any
party to apply to the Court on five days' notice to restore the action to the
trial calendar if the settlement is not consummated within 45 days. By Order
dated March 19, 2003, the Court extended the Order of Discontinuance until 30
days following the date on which the pending settlement is approved by the
Court. The parties are continuing to negotiate over certain terms and conditions
of the settlement, and the settlement papers have not been submitted for Court
approval.
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.
37
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a) Not applicable.
(b) Not applicable.
(c) Sales of Unregistered Securities.
On August 20, 2003, we issued and sold an additional $4.3 million aggregate
principal amount of our Convertible Senior Debentures (the "Debentures") due
August 1, 2023 in the 144A private placement market to Lehman Brothers, Inc.,
CIBC World Markets Corp., J.P. Morgan Securities Inc., and S.G. Cowen Securities
Corporation, the initial purchasers (the "Initial Purchasers") of the
Debentures, pursuant to the exercise of an over-allotment option granted to the
Initial Purchasers in the purchase agreement relating to 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 and conditions. 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. The holders of the debentures may put the Debentures back to Alloy at par
plus accrued but unpaid interest on each of August 1, 2008, 2013 and 2018,
subject to certain conditions.
(d) A significant portion of the net proceeds from the Debenture Offering were
used for the acquisition of dELiA*s. The remaining portion will be used for
future acquisitions, working capital, capital expenditures and general corporate
purposes.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
38
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
3.1* Restated Certificate of Incorporation (filed as Exhibit 3.1 to
Registration Statement on Form S-1, No. 333- 74159, and incorporated
herein by reference).
3.2* Restated Bylaws (filed as Exhibit 3.2 to Registration Statement on Form
S-1, No. 333-74159, and incorporated herein by reference).
3.3* Certificate of Amendment to Restated Certificate of Incorporation
(filed as Exhibit 3.1 to Current Report on Form 8-K, filed with the SEC
on August 13, 2001 and incorporated herein by reference).
3.4* Certificate of Designations, Preferences, and Rights of the Series B
Convertible Preferred Stock of Alloy Online, Inc. (filed as Exhibit 3.1
to Current Report on Form 8-K, filed with the SEC on June 21, 2001 and
incorporated herein by reference).
3.5* Certificate of Designations of Series C Junior Participating Preferred
Stock of Alloy, Inc. (incorporated by reference to Exhibit 4.0 to the
Registrant's Current Report on Form 8-K filed April 14, 2003).
10.1* Amended and Restated 1996 Stock Incentive Plan of dELiA*s Inc.
(incorporated by reference to dELiA*s Inc. Schedule 14A filed on June
12, 1998).
10.2* 1998 Stock Incentive Plan of dELiA*s Inc. (incorporated by reference to
Exhibit 10.17 to dELiA*s Inc. Quarterly Report on Form 10-Q for the
fiscal quarter ended October 31, 1998).
10.3* iTurf Inc. 1999 Amended and Restated Stock Incentive Plan (incorporated
by reference to Annex E of the joint proxy/prospectus included with
iTurf Inc. registration statement on Form S-4 (Registration No.
333-44916)).
10.4* Lease Agreement dated May 3, 1995 between dELiA*s Inc. and The Rector,
Church Wardens and Vestrymen of Trinity Church in the City of New York
(the "Lease Agreement"); Modification and Extension of Lease Agreement,
dated September 26, 1996 (incorporated by reference to Exhibit 10.9 to
the dELiA*s Inc. Registration Statement on Form S-1 (Registration No.
333-15153)).
10.5* Agreement dated April 4, 1997 between dELiA*s Inc. and The Rector,
Church Wardens and Vestrymen of Trinity Church in the City of New York,
amending the Lease Agreement (incorporated by reference to Exhibit
10.13 to dELiA*s Inc. Annual Report on Form 10-K for the fiscal year
ended January 31, 1997).
10.6* Agreement dated October 7, 1997 between dELiA*s Inc. and The Rector,
Church Wardens and Vestrymen of Trinity Church in the City of New York,
amending the Lease Agreement (incorporated by reference to Exhibit
10.14 to dELiA*s Inc. Quarterly Report on Form 10-Q for the fiscal
quarter ended October 31, 1997).
10.7* Lease Agreement dated January 30, 2000 by and between iTurf Inc. and
the State-Whitehall Company (incorporated by reference to Exhibit 10.20
to iTurf Inc. Annual Report on Form 10-K for the fiscal year ended
January 29, 2000).
10.8* Loan and Security Agreement dated as of September 24, 2001 by and among
Wells Fargo Retail Finance LLC, dELiA*s Corp., dELiA*s Operating
Company, dELiA*s Distribution Company and dELiA*s Retail Company
(incorporated by reference to Exhibit 10.1 to dELiA*s Inc. Current
Report on Form 8-K dated October 5, 2001)
10.9* First Amendment to Loan and Security Agreement by and among Wells Fargo
Retail Finance LLC, dELiA*s Corp., dELiA*s Operating Company, dELiA*s
Distribution Company and dELiA*s Retail Company, dated October 29, 2001
(incorporated by reference to Exhibit 10.2 to dELiA*s Corp. Quarterly
Report on Form 10-Q for the fiscal quarter ended November 3, 2001)
10.10* Second Amendment to Loan and Security Agreement by and among Wells
Fargo Retail Finance LLC, dELiA*s Corp., dELiA*s Operating Company,
dELiA*s Distribution Company and dELiA*s Retail Company, dated October
21, 2002 (incorporated by reference to Exhibit 10.2 to dELiA*s Corp.
Current Report on Form 8-K dated October 30, 2002)
10.11* Third Amendment to Loan and Security Agreement by and among Wells Fargo
Retail Finance LLC, as lender, and dELiA*s Corp., as lead borrower and
agent for the other borrowers named within, dated December 18, 2002
(incorporated by reference to Exhibit 10.3 to dELiA*s Corp. Current
Report on Form 8-K dated February 24, 2003).
10.12* Fourth Amendment to Loan and Security Agreement by and among Wells
Fargo Retail Finance LLC, as lender, and dELiA*s Corp., as lead
borrower and agent for the other borrowers named within, dated February
10, 2003 (filed as Exhibit 10.4 to Current Report on Form 8-K, filed by
dELiA*s Corp. with the SEC on February 24, 2003, and incorporated
herein by reference).
39
10.13* Fifth Amendment to Loan and Security Agreement by and among Wells Fargo
Retail Finance LLC, as lender, and dELiA*s Corp., as lead borrower and
agent for the other borrowers named within, dated February 10, 2003
(filed as Exhibit 10.5 to Current Report on Form 8-K, filed by dELiA*s
Corp. with the SEC on February 24, 2003, and incorporated herein by
reference).
10.14* Sixth Amendment to Loan and Security Agreement by and among Wells Fargo
Retail Finance LLC, as lender, and dELiA*s Corp., as lead borrower and
agent for the other borrowers named within, dated April 29, 2003 (filed
as Exhibit 10.45 to Annual Report on Form 10-K, filed by dELiA*s Corp.
with the SEC on May 16, 2003, and incorporated herein by reference).
10.15* Master License Agreement, dated February 24, 2003, by and between
dELiA*s Brand LLC and JLP Daisy LLC (filed as Exhibit 10.1 to Current
Report on Form 8-K, filed by dELiA*s Corp. with the SEC on February 24,
2003, and incorporated herein by reference).
10.16* License Agreement, dated February 24, 2003, by and between dELiA*s
Corp. and dELiA*s Brand LLC (filed as Exhibit 10.2 to Current Report on
Form 8-K, filed by dELiA*s Corp. with the SEC on February 24, 2003, and
incorporated herein by reference).
10.17 Employment Letter, dated October 27, 2003, between Alloy, Inc. and
Robert Bernard.
31.1 Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer
32.1 Certification 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
* Previously filed
(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 October 31, 2003:
1) Current Report, filed September 4, 2003. Item 12 (Results of Operations and
Financial Condition), Exhibit 99.1 Press Release (announcing second quarter
financial results).
2) Current Report, filed September 18, 2003. Item 2 (Acquisition or Disposition
of Assets), Item 7 (Financial Statements, Pro Forma Financial Information and
Exhibits), Exhibit 2.1 Acquisition Agreement dated as of July 30, 2003, Exhibit
99.1 Press Release dated September 17, 2003.
40
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ALLOY, INC.
Date: December 22, 2003
By: /s/ Samuel A. Gradess
---------------------
Samuel A. Gradess
Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer)
41
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 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).
3.5* Certificate of Designations of Series C Junior Participating Preferred
Stock of Alloy, Inc., incorporated by reference to Exhibit 4.0 to the
Registrant's Current Report on Form 8-K filed April 14, 2003.
10.1* Amended and Restated 1996 Stock Incentive Plan of dELiA*s Inc.
(incorporated by reference to dELiA*s Inc. Schedule 14A filed on June
12, 1998).
10.2* 1998 Stock Incentive Plan of dELiA*s Inc. (incorporated by reference to
Exhibit 10.17 to dELiA*s Inc. Quarterly Report on Form 10-Q for the
fiscal quarter ended October 31, 1998).
10.3* iTurf Inc. 1999 Amended and Restated Stock Incentive Plan (incorporated
by reference to Annex E of the joint proxy/prospectus included with
iTurf Inc. registration statement on Form S-4 (Registration No.
333-44916)).
10.4* Lease Agreement dated May 3, 1995 between dELiA*s Inc. and The Rector,
Church Wardens and Vestrymen of Trinity Church in the City of New York
(the "Lease Agreement"); Modification and Extension of Lease Agreement,
dated September 26, 1996 (incorporated by reference to Exhibit 10.9 to
the dELiA*s Inc. Registration Statement on Form S-1 (Registration No.
333-15153)).
10.5* Agreement dated April 4, 1997 between dELiA*s Inc. and The Rector,
Church Wardens and Vestrymen of Trinity Church in the City of New York,
amending the Lease Agreement (incorporated by reference to Exhibit
10.13 to dELiA*s Inc. Annual Report on Form 10-K for the fiscal year
ended January 31, 1997).
10.6* Agreement dated October 7, 1997 between dELiA*s Inc. and The Rector,
Church Wardens and Vestrymen of Trinity Church in the City of New York,
amending the Lease Agreement (incorporated by reference to Exhibit
10.14 to dELiA*s Inc. Quarterly Report on Form 10-Q for the fiscal
quarter ended October 31, 1997).
10.7* Lease Agreement dated January 30, 2000 by and between iTurf Inc. and
the State-Whitehall Company (incorporated by reference to Exhibit 10.20
to iTurf Inc. Annual Report on Form 10-K for the fiscal year ended
January 29, 2000).
10.8* Loan and Security Agreement dated as of September 24, 2001 by and among
Wells Fargo Retail Finance LLC, dELiA*s Corp., dELiA*s Operating
Company, dELiA*s Distribution Company and dELiA*s Retail Company
(incorporated by reference to Exhibit 10.1 to dELiA*s Inc. Current
Report on Form 8-K dated October 5, 2001)
10.9* First Amendment to Loan and Security Agreement by and among Wells Fargo
Retail Finance LLC, dELiA*s Corp., dELiA*s Operating Company, dELiA*s
Distribution Company and dELiA*s Retail Company, dated October 29, 2001
(incorporated by reference to Exhibit 10.2 to dELiA*s Corp. Quarterly
Report on Form 10-Q for the fiscal quarter ended November 3, 2001)
10.10* Second Amendment to Loan and Security Agreement by and among Wells
Fargo Retail Finance LLC, dELiA*s Corp., dELiA*s Operating Company,
dELiA*s Distribution Company and dELiA*s Retail Company, dated October
21, 2002 (incorporated by reference to Exhibit 10.2 to dELiA*s Corp.
Current Report on Form 8-K dated October 30, 2002)
10.11* Third Amendment to Loan and Security Agreement by and among Wells Fargo
Retail Finance LLC, as lender, and dELiA*s Corp., as lead borrower and
agent for the other borrowers named within, dated December 18, 2002
(incorporated by reference to Exhibit 10.3 to dELiA*s Corp. Current
Report on Form 8-K dated February 24, 2003).
10.12* Fourth Amendment to Loan and Security Agreement by and among Wells
Fargo Retail Finance LLC, as lender, and dELiA*s Corp., as lead
borrower and agent for the other borrowers named within, dated February
10, 2003 (filed as Exhibit 10.4 to Current Report on Form 8-K, filed by
dELiA*s Corp. with the SEC on February 24, 2003, and incorporated
herein by reference).
42
10.13* Fifth Amendment to Loan and Security Agreement by and among Wells Fargo
Retail Finance LLC, as lender, and dELiA*s Corp., as lead borrower and
agent for the other borrowers named within, dated February 10, 2003
(filed as Exhibit 10.5 to Current Report on Form 8-K, filed by dELiA*s
Corp. with the SEC on February 24, 2003, and incorporated herein by
reference).
10.14* Sixth Amendment to Loan and Security Agreement by and among Wells Fargo
Retail Finance LLC, as lender, and dELiA*s Corp., as lead borrower and
agent for the other borrowers named within, dated April 29, 2003 (filed
as Exhibit 10.45 to Annual Report on Form 10-K, filed by dELiA*s Corp.
with the SEC on May 16, 2003, and incorporated herein by reference).
10.15* Master License Agreement, dated February 24, 2003, by and between
dELiA*s Brand LLC and JLP Daisy LLC (filed as Exhibit 10.1 to Current
Report on Form 8-K, filed by dELiA*s Corp. with the SEC on February 24,
2003, and incorporated herein by reference).
10.16* License Agreement, dated February 24, 2003, by and between dELiA*s
Corp. and dELiA*s Brand LLC (filed as Exhibit 10.2 to Current Report on
Form 8-K, filed by dELiA*s Corp. with the SEC on February 24, 2003, and
incorporated herein by reference).
10.17 Employment Letter, dated October 27, 2003, between Alloy, Inc. and
Robert Bernard.
31.1 Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer
32.1 Certification 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
* Previously filed
43