<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 7, 1999
REGISTRATION NO. 333-74159
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 3 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ALLOY ONLINE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 5961 04-3310676
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
115 WEST 30TH STREET, #201
NEW YORK, NY 10001
(212) 244-4307
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
MATTHEW C. DIAMOND
CHIEF EXECUTIVE OFFICER
ALLOY ONLINE, INC.
115 WEST 30TH STREET, #201
NEW YORK, NY 10001
(212) 244-4307
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
WITH COPIES TO:
<TABLE>
<S> <C>
JONATHAN L. KRAVETZ, ESQ. ALEXANDER D. LYNCH, ESQ.
MINTZ, LEVIN, COHN, FERRIS, KENNETH R. MCVAY, ESQ.
GLOVSKY AND POPEO, P.C. BROBECK, PHLEGER & HARRISON LLP
ONE FINANCIAL CENTER 1633 BROADWAY, 47TH FLOOR
BOSTON, MA 02111 NEW YORK, NY 10019
(617) 542-6000 (212) 581-1600
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TITLE OF SHARES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) REGISTRATION FEE(3)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value per 4,255,000 $12.00 $52,000,000 $14,456
share..............................
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 555,000 shares that the underwriters have the option to purchase to
cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(a) under the Securities Act.
(3) The registrant previously filed this registration statement on March 10,
1999, registering $52,000,000 of its common stock and paid a fee of $14,456.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN
ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED MAY 7, 1999
[ALLOY ONLINE CORPORATE LOGO]
3,700,000 SHARES
COMMON STOCK
Alloy Online, Inc. is offering 3,700,000 shares of our common stock. This
is our initial public offering and no public market currently exists for our
shares. We have applied to have the shares we are offering approved for
quotation on the Nasdaq National Market under the symbol "ALOY". We anticipate
that the initial public offering price will be between $10.00 and $12.00 per
share.
------------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
------------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public Offering Price....................................... $ $
Underwriting Discounts and Commissions...................... $ $
Proceeds to Alloy Online.................................... $ $
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Alloy Online, Inc. has granted the underwriters a 30-day option to purchase
up to an additional 555,000 shares of common stock to cover over-allotments.
BancBoston Robertson Stephens Inc. expects to deliver the shares of common stock
to purchasers on , 1999.
------------------------------
BANCBOSTON ROBERTSON STEPHENS
VOLPE BROWN WHELAN & COMPANY
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
LADENBURG THALMANN & CO. INC.
THE DATE OF THIS PROSPECTUS IS , 1999.
<PAGE> 3
[Pictures of Generation Y boys and girls]
[Alloy Online Logo]
Today in alloy/shop/get free e-mail/connect/do it yourself/music & movies/advice
& articles/fashion & beauty/sports/alloy e-zine
Providing community, content and commerce to Generation Y, the 56 million boys
and girls between the ages of 10 and 24.
[Alloy Online Logo]
1. today in alloy
2. shop
3. get free e-mail
4. connect
5. do it yourself
6. music
7. TV & movies
8. advice & articles
9. fashion & beauty
10. sports
11. alloy e-zine free
12. get a free catalog
13. win prizes
[Pictures of Generation Y boys and girls]
Generation Y is the first generation to grow up using the internet as a
primary medium for information, entertainment, communication and shopping.
I'm so psyched about the fresh gear i just got from you guys -- i can't find any
of this stylie stuff at my mall. [SIGNATURE]
Hey Alloy! You guys totally rock. You've got my surf gear, my fave lip gloss and
those butterfly clips i dig! [SIGNATURE]
<Dragongirl> hey SK8. Check out my homepage on alloyonline.
<Sk8guy> since when do you know html?
<Dragongirl> don't know it, don't have to! plus I get to host chats on my page!!
I'll email you bout it.
<Sk8guy> wait don't email me it goes to my dad's account.
<Dragongirl> that stinks, get free email at www.alloy.com
<Sk8guy> i'm on it.
<Dragongirl> kewl, look for me on the message boards too!
<PAGE> 4
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK.
UNTIL , 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS THAT BUY, SELL OR TRADE OUR COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
REQUIREMENT IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary..................................................... 4
Risk Factors................................................ 7
Forward-Looking Statements.................................. 15
Use of Proceeds............................................. 16
Dividend Policy............................................. 16
Capitalization.............................................. 17
Dilution.................................................... 18
Selected Financial Data..................................... 19
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 20
Business.................................................... 27
Management.................................................. 39
Certain Transactions........................................ 45
Principal Stockholders...................................... 48
Description of Capital Stock................................ 50
Shares Eligible for Future Sale............................. 53
Underwriting................................................ 55
Legal Matters............................................... 57
Experts..................................................... 57
Where You Can Find Additional Information................... 57
Index to Financial Statements............................... F-1
</TABLE>
------------------------------
"Alloy", "alloyonline.com" and "alloymail.com" are trademarks and service
marks of Alloy. All other trademarks, service marks or tradenames referred to in
this prospectus are the property of their owners.
3
<PAGE> 5
SUMMARY
Because this is only a summary, it does not contain all the information
that may be important to you. You should read the entire prospectus, including
"Risk Factors" and the Financial Statements and the related Notes, before
deciding to invest in our common stock.
ALLOY ONLINE
Alloy Online is a leading Web site providing community, content and
commerce to Generation Y, the 56 million boys and girls between the ages of 10
and 24. Alloy is a leading brand for this influential generation, which is
growing 19.5% faster than the overall U.S. population and accounts for more than
$250 billion of annual disposable income. Our Web site, www.alloy.com, is a
destination where Generation Y boys and girls can interact, share information,
explore compelling and relevant content and shop. We believe we have created one
of the largest and most vibrant Generation Y communities on the Internet. This
growing community drives merchandise sales, our principal source of revenues,
and positions us to be a leading channel for marketers that are increasingly
looking to the Internet to reach the boys and girls of Generation Y.
We created our Web site to meet the unique interests and tastes of
Generation Y. Features of our Web site include:
- Community -- we present an appealing environment for Generation Y boys
and girls to share their ideas, express their opinions and develop their
interests through a variety of free services such as e-mail accounts,
personal homepages, chat rooms, interactive advice forums and message
boards;
- Content -- we deliver continually refreshed and relevant Generation Y
content on subjects such as music, relationships, fashion, entertainment,
astrology, gossip and sports; and
- Commerce -- we market products and services in the major Generation Y
spending categories such as apparel, accessories, footwear, cosmetics,
music and magazines.
Since inception, we have experienced rapid growth. Our revenues, primarily
merchandise sales, have grown from $1.8 million in fiscal 1997 to $10.2 million
in fiscal 1998 and our net losses have increased from $1.9 million to $6.4
million for the same periods. Due to our unique blend of online services, our
Web site generated approximately 25 million page views in March 1999, up from
approximately 1.5 million in March 1998. Additionally, we have compiled
demographic information from approximately 480,000 users who have registered to
receive our bi-weekly electronic magazine, Alloy E-Zine. In August 1997, we
introduced our Alloy direct mail catalog to attract additional visitors to our
Web site, increase revenues and build recognition for the Alloy brand. During
1999, we expect to mail approximately 20 million catalogs to boys and girls of
Generation Y. Through our Web site and catalog distribution, we have developed a
database of approximately 2.2 million Generation Y boys and girls, enabling us
to effectively market to specific segments of our audience.
In addition to our sales of Generation Y-focused merchandise, our community
of Generation Y boys and girls presents an important opportunity for marketers.
Marketers are focusing on Generation Y because of their significant and growing
spending power and tendency to carry brand loyalties established at a young age
into adulthood. As a result, we intend to pursue sponsorship and other revenue
opportunities to connect these marketers and our Generation Y community.
Our objective is to become the leading Generation Y online destination. In
order to achieve this objective, we intend to pursue the following strategies:
- Maintain Single Brand Focus. We will continue to build Alloy as a
Generation Y lifestyle brand for both boys and girls known for compelling
community, content and commerce. By promoting our single, unified brand,
we maximize the impact of our marketing efforts.
- Pursue Additional Revenue Opportunities. We intend to generate
sponsorship and other revenues by capitalizing on our growing Generation
Y community.
4
<PAGE> 6
- Strengthen Co-ed Community. We will continue to foster dynamic boy-girl
interaction on our Web site. We believe that a strong co-ed focus is
critical to creating a successful Generation Y community and provides us
an important competitive advantage.
- Expand Internationally. We intend to pursue the significant
opportunities to serve the large and growing international Generation Y
population.
------------------------------
Our principal executive offices are located between New York's Silicon
Alley and the Garment District at 115 West 30th Street, Suite 201, New York, NY
10001. Our telephone number is (212) 244-4307.
------------------------------
Except as otherwise noted, all information in this prospectus:
- Reflects the automatic conversion of all of our outstanding shares of
convertible preferred stock into a total of 1,678,286 shares of common
stock upon the completion of this offering;
- Reflects a 1.128-for-1 stock split of all of our outstanding shares of
common stock to be effected immediately prior to the completion of this
offering; and
- Assumes no exercise of the underwriters' over-allotment option.
------------------------------
INFORMATION CONTAINED ON OUR WEB SITE SHOULD NOT BE CONSIDERED A PART OF THIS
PROSPECTUS.
5
<PAGE> 7
THE OFFERING
Common stock offered by Alloy...... 3,700,000 shares
Common stock to be outstanding
after the offering................. 14,231,774 shares
Use of proceeds.................... Marketing activities, capital
expenditures, expansion of our sales
force, repayment of debt and other
general corporate purposes, including
working capital. See "Use of Proceeds."
Proposed Nasdaq National Market
symbol............................. ALOY
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Set forth below are summary statements of operations data for the years
ended January 31, 1997, 1998 and 1999, and summary balance sheet data as of
January 31, 1999, on an actual basis and on a pro forma basis as adjusted to
give effect to:
- the sale by Alloy of 3,700,000 shares of common stock in this offering at
an assumed initial offering price of $11.00 per share, after deducting
the underwriting discounts and estimated offering expenses payable by
Alloy, and the application of the net proceeds from this offering;
- the repayment of promissory notes and the conversion of our convertible
preferred stock upon the completion of this offering; and
- the exercise of options to purchase 362,481 shares and warrants to
purchase 11,280 shares of common stock subsequent to January 31, 1999.
This information should be read in conjunction with the Financial
Statements and the corresponding Notes appearing elsewhere in this prospectus.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
--------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Total revenues......................................... $ 25 $ 1,800 $ 10,210
Gross profit........................................... 8 750 4,724
Loss from operations................................... (118) (1,899) (6,125)
Net loss............................................... $ (118) $ (1,865) $ (6,364)
Basic net loss per common share........................ $ (.03) $ (.33) $ (.75)
========== ========== ==========
Diluted net loss per common share...................... $ (.03) $ (.31) $ (.72)
========== ========== ==========
Weighted average common shares outstanding:
Basic............................................. 4,060,800 5,617,577 8,479,727
========== ========== ==========
Diluted........................................... 4,450,353 6,007,130 8,869,280
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31, 1999
-----------------------
PRO FORMA AS
ACTUAL ADJUSTED
------- ------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 2,983 $35,493
Working capital............................................. 5,266 37,776
Total assets................................................ 7,407 39,648
Promissory notes, net....................................... 3,945 --
Capital lease obligation, less current portion.............. 40 40
Convertible redeemable preferred stock, net................. 4,836 --
Total stockholders' (deficit) equity........................ (3,046) 38,119
</TABLE>
6
<PAGE> 8
RISK FACTORS
You should consider carefully the following risks before you decide to buy
our common stock. Our business, financial condition or results of operations
could be materially and adversely affected by any of the following risks.
RISKS RELATED TO OUR BUSINESS
WE HAVE A LIMITED OPERATING HISTORY ON WHICH TO EVALUATE OUR POTENTIAL FOR
FUTURE SUCCESS
We were incorporated in January 1996 and did not begin to generate
meaningful revenues until August 1997. Accordingly, we have only a limited
operating history upon which you can evaluate our business and prospects. You
must consider the risks and uncertainties frequently encountered by early stage
companies in new and rapidly evolving markets, such as electronic commerce. If
we are unsuccessful in addressing these risks and uncertainties, our business,
results of operations and financial condition will be materially and adversely
affected.
WE HAVE A HISTORY OF LOSSES, AND WE EXPECT LOSSES FOR THE FORESEEABLE FUTURE
Since our inception in January 1996, we have incurred significant net
losses, resulting primarily from costs related to developing our Web site and
database of Generation Y names, attracting users to our Web site and
establishing the Alloy brand. At January 31, 1999, we had an accumulated deficit
of $8.3 million. Because of our plans to invest heavily in marketing and
promotion, to hire additional employees, and to enhance our Web site and
operating infrastructure, we expect to incur significant net losses for the
foreseeable future. If our revenue growth is slower than we anticipate or our
operating expenses exceed our expectations, our losses will be significantly
greater. We may never achieve profitability.
OUR STOCK PRICE MAY BE ADVERSELY AFFECTED BY SIGNIFICANT FLUCTUATIONS IN OUR
QUARTERLY OPERATING RESULTS
Our revenues for the foreseeable future will remain primarily dependent on
sales of merchandise appearing in our catalogs and on our Web site, and
secondarily on sponsorship and advertising revenues. We cannot forecast with any
degree of certainty the number of visitors to our Web site, the extent of our
merchandise sales or the amount of sponsorship and advertising revenues.
We expect our operating results to fluctuate significantly from quarter to
quarter. We have already experienced the effects of seasonality on our
merchandise sales, which are generally lower in the first half of each year. We
believe that sponsorship and advertising sales in traditional media, such as
television and radio, generally are lower in the first and third calendar
quarters of each year. If similar seasonal and cyclical patterns emerge in
Internet sponsorship and advertising spending, these revenues may vary
significantly based on these patterns. See "Management's Discussion and Analysis
of Financial Condition and Operations."
Other factors which may cause our operating results to fluctuate
significantly from quarter to quarter include:
- our ability to attract new and repeat visitors to our Web site and
convert them into customers;
- price competition;
- the level of merchandise returns we experience;
- unanticipated cost increases or delays in shipping, transaction
processing and catalog production;
- unanticipated delays or cost increases with respect to product
introductions; and
- the costs, timing and impact of our sales and marketing initiatives.
7
<PAGE> 9
Because of these and other factors, we believe that quarter-to-quarter
comparisons of our results of operations are not good indicators of our future
performance. If our operating results fall below the expectations of securities
analysts and investors in some future periods, then our stock price may decline.
OUR BUSINESS WILL SUFFER IF WE FAIL TO KEEP CURRENT WITH GENERATION Y FASHION
AND LIFESTYLE TRENDS
Our continued success will depend on our ability to keep current with the
changing fashion tastes and interests of our Generation Y customers. If we fail
to anticipate, identify or respond to changes in styles, trends or brand
preferences of our customers, we are likely to experience reduced revenues from
merchandise sales. Moreover, the Alloy brand could be eroded by misjudgments in
merchandise selection or a failure to keep our community and content current
with the evolving preferences of our audience. These events would likely reduce
the number of visitors to our Web site and limit opportunities for sponsorship
and advertising sales. As a consequence of these developments, our business
would suffer.
OUR PLANNED ONLINE AND TRADITIONAL MARKETING CAMPAIGNS MAY NOT ATTRACT
SUFFICIENT ADDITIONAL VISITORS TO OUR WEB SITE OR MAY DETRACT FROM OUR IMAGE
With a portion of the proceeds of this offering, we plan to pursue
aggressive marketing campaigns online and in traditional media to promote the
Alloy brand and attract an increasing number of visitors to our Web site. We
believe that maintaining and strengthening the Alloy brand will be critical to
the success of our business. This investment in increased marketing carries with
it significant risks, including the following:
- Our advertisements may not properly convey the Alloy brand image, or may
even detract from our image. Unlike advertising on our Web site which
gives us immediate feedback and allows us promptly to adjust our
messages, advertising in print and broadcast media is less flexible.
These advertisements typically take longer and cost more to produce and
consequently have longer run times. If we fail to convey the optimal
message in these advertising campaigns, the impact may be more lasting
and more costly to correct.
- Even if we succeed in creating the right messages for our promotional
campaigns, these advertisements may fail to attract new visitors to our
Web site at levels commensurate with their costs. We may fail to choose
the optimal mix of television, radio, print and other media to cost-
effectively deliver our message. Moreover, if these efforts are
unsuccessful, we will face difficult and costly choices in deciding
whether and how to redirect our marketing dollars.
WE CURRENTLY LACK ADVERTISING SALES PERSONNEL AND WE MAY FAIL TO ESTABLISH AN
EFFECTIVE INTERNAL SALES ORGANIZATION TO ATTRACT SPONSORSHIP AND ADVERTISING
REVENUES
To date, we have relied principally on an outside advertising agency to
develop sponsorship and advertising opportunities. We believe that the growth of
sponsorship and advertising revenues will depend on our ability to establish an
aggressive and effective internal sales organization. In January 1999, we hired
a new Vice President, Business Development, and our internal sales team
currently has three members. We will need to substantially increase this sales
force in the coming year in order to execute our business plan. Our ability to
increase our sales force involves a number of risks and uncertainties, including
competition and the length of time for new sales employees to become productive.
If we do not develop an effective internal sales force, our business will be
materially and adversely affected.
WE RELY HEAVILY ON THIRD PARTIES FOR ESSENTIAL BUSINESS OPERATIONS AND
DISRUPTIONS OR FAILURES IN SERVICE MAY ADVERSELY AFFECT OUR ABILITY TO DELIVER
GOODS AND SERVICES TO OUR CUSTOMERS
General. We depend on third parties for important aspects of our business,
including:
- Internet access;
- development of software for new Web site features;
8
<PAGE> 10
- content; and
- telecommunications.
We have limited control over these third parties, and we are not their only
client. We may not be able to maintain satisfactory relationships with any of
them on acceptable commercial terms. Further, we cannot be certain that the
quality of products and services that they provide may remain at the levels
needed to enable us to conduct our business effectively. Many of our agreements
with technology and content providers are on very favorable terms that do not
include license fees, but instead provide for revenue sharing. We may not be
able to renew these agreements on similar terms.
Reliance on OneSoft Corporation. We rely heavily on OneSoft Corporation to
maintain and operate our Web site in its facilities in Annandale, Virginia. This
system's continuing and uninterrupted performance is critical to our success.
Growth in the number of users accessing our Web site may strain its capacity,
and we rely on OneSoft to upgrade our system's capacity in the face of this
growth. OneSoft also provides our connection to the Internet. Sustained or
repeated system failures or interruptions of our Web site connection services
would reduce the attractiveness of our Web site to customers and advertisers and
could therefore have a material and adverse effect on our business.
Reliance on Harrison Fulfillment Services. We rely heavily on Harrison
Fulfillment Services, with operations located in Georgia and Tennessee, for the
performance of order processing, order fulfillment, customer service and
shipping. While other companies provide similar services that we could access, a
transition from Harrison Fulfillment Services could cause delays in these
critical aspects of our business operations. Disruptions or delays in these
services could discourage customers from ordering from us in the future and
could therefore have a material and adverse effect on our business.
OUR MANAGEMENT IS NEW AND MAY HAVE DIFFICULTY MANAGING OUR EXPECTED GROWTH
In order to execute our business plan, we must continue to grow
significantly. This growth will strain our personnel, management systems and
resources. To manage our growth, we must implement operational and financial
systems and controls and recruit, train and manage new employees. Some key
members of our management have only recently been hired. These individuals have
had little experience working with our management team. We cannot be certain
that we will be able to integrate new executives and other employees into our
organization effectively. In addition, there will be significant administrative
burdens placed on our management team as a result of our status as a public
company. If we do not manage growth effectively, our business, results of
operations and financial condition will be materially and adversely affected.
WE DEPEND ON OUR KEY PERSONNEL TO OPERATE OUR BUSINESS, AND WE MAY NOT BE ABLE
TO HIRE ENOUGH ADDITIONAL MANAGEMENT AND OTHER PERSONNEL AS OUR BUSINESS GROWS
Our performance is substantially dependent on the continued services and on
the performance of our executive officers and other key employees, particularly
Matthew C. Diamond, our Chief Executive Officer, James K. Johnson, Jr., our
Chief Operating Officer and Samuel A. Gradess, our Chief Financial Officer. The
loss of the services of any of our executive officers could materially and
adversely affect our business. Additionally, we believe we will need to attract,
retain and motivate talented management and other highly skilled employees to be
successful. Competition for employees that possess knowledge of both the
Internet industry and the Generation Y market is intense. We may be unable to
retain our key employees or attract, assimilate and retain other highly
qualified employees in the future.
INTENSE COMPETITION FROM INTERNET- AND CATALOG-BASED BUSINESSES MAY DECREASE OUR
MARKET SHARE, REVENUES AND GROSS MARGINS AND CAUSE OUR STOCK PRICE TO DECLINE
We face intense competition in electronic commerce, catalog sales and
online services. Our Web site and Alloy catalog compete for Generation Y
customers with traditional department store retailers, catalog retailers, direct
marketers, specialty apparel and accessory retailers and discount retailers.
This competition
9
<PAGE> 11
is likely to increase because it is not difficult to enter the online commerce
market, and current and new competitors can launch Web sites at relatively low
cost. Competition could result in price reductions for our products and
services, reduced margins or loss of market share. Consolidation within the
online commerce industry may also increase competition.
The market for Internet users and community services is highly competitive
and rapidly evolving. Competition for users and advertisers is intense and is
expected to increase significantly. There are no substantial barriers to entry
in these markets. Competition could result in fewer visitors to our Web site and
reduced sponsorship and advertising revenues.
Many of our existing competitors, as well as potential new competitors,
have longer operating histories, greater brand recognition, larger customer user
bases and significantly greater financial, technical and marketing resources
than we do. If we fail to compete effectively, our business will be materially
and adversely affected and our stock price will decline. See
"Business -- Competition."
WE MAY FAIL TO SUCCESSFULLY MANAGE AND USE OUR DATABASES OF WEB SITE USERS AND
CUSTOMERS
An important component of our business model involves the use of our lists
of catalog requesters and Web site registrants to more effectively target direct
marketing messages. We depend upon personal information we collect from our Web
site users for data we need to create direct mailing and e-mailing lists, tailor
our Web site offerings to the tastes of our Generation Y users and attract
marketers to our Web site. We must continuously expand and update our lists to
identify new, prospective Generation Y customers. Names derived from purchased
or rented lists may generate lower response rates and, therefore, a lower return
on our investment in these lists. We must also continually develop and refine
our techniques for segmenting these lists to maximize their usefulness to us and
our marketing partners. If we fail to capitalize on these important business
assets, our business model will be less successful. In addition, laws or
regulations that could impair our ability to collect user names and other
information on our Web site may adversely affect our business. For example, a
recently enacted federal law limits our ability to collect personal information
from Web site visitors who may be under age 13. See "Business -- Government
Regulation."
WE MUST EFFECTIVELY MANAGE OUR VENDORS TO MINIMIZE INVENTORY RISK AND MAINTAIN
OUR MARGINS
In order to fulfill our orders, we depend upon our vendors to produce
sufficient quantities of products according to schedule. We may maintain high
inventory levels in some categories of merchandise in an effort to maintain
satisfactory fulfillment rates for our customers. This may expose us to risk of
excess inventories and outdated merchandise, which could have a material and
adverse effect on our business. If we underestimate quantities and vendors
cannot restock, then we may disappoint customers who may turn to our
competitors. We also negotiate with our vendors to get the best quality
available at the best prices and increase our profit margins. Our failure to be
able to manage our vendors effectively would adversely affect our operating
results.
WE MAY FAIL TO ESTABLISH AND MAINTAIN STRATEGIC RELATIONSHIPS WITH OTHER WEB
SITES TO INCREASE NUMBERS OF WEB SITE USERS AND INCREASE OUR REVENUES
We intend to establish numerous strategic alliances with popular Web sites
to increase the number of visitors to our Web site. There is intense competition
for placements on these sites, and we may not be able to enter into these
relationships on commercially reasonable terms or at all. Even if we enter into
strategic alliances with other Web sites, they themselves may not attract
significant numbers of users. Therefore, our site may not receive additional
users from these relationships. Moreover, we may have to pay significant fees to
establish these relationships. Our inability to enter into new distribution
relationships or strategic alliances and expand our existing ones could have a
material and adverse effect on our business.
10
<PAGE> 12
WE MAY NOT BE ABLE TO ADAPT AS INTERNET TECHNOLOGIES AND CUSTOMER DEMANDS
CONTINUE TO EVOLVE
To be successful, we must adapt to rapidly changing Internet technologies
and continually enhance the features and services provided on our Web site. We
could incur substantial, unanticipated costs if we need to modify our Web site,
software and infrastructure to incorporate new technologies demanded by our
audience. We may use new technologies ineffectively or we may fail to adapt our
Web site, transaction-processing systems and network infrastructure to user
requirements or emerging industry standards. If we fail to keep pace with the
technological demands of our Web-savvy audience for new services, products and
enhancements, our users may not use our Web site and instead use those of our
competitors.
WE MAY NOT BE ABLE TO PROTECT AND ENFORCE OUR TRADEMARKS, WEB ADDRESSES AND
INTELLECTUAL PROPERTY RIGHTS
Our Alloy brand and our Web address, www.alloy.com, are critical to our
success. We have filed a trademark application for "Alloy", among other
trademark applications. We cannot guarantee that any of these trademark
applications will be granted. In addition, we may not be able to prevent third
parties from acquiring Web addresses that are confusingly similar to our
addresses, which could harm our business. See "Business -- Intellectual
Property."
WE WOULD LOSE REVENUES AND INCUR SIGNIFICANT COSTS IF OUR SYSTEMS OR MATERIAL
THIRD-PARTY SYSTEMS ARE NOT YEAR 2000-COMPLIANT
We have not devised a Year 2000 contingency plan. The failure of our
internal systems, or any material third-party systems, to be Year 2000-compliant
could have a material and adverse effect on our business, results of operations
and financial condition. Harrison Fulfillment Services, our fulfillment services
provider, has informed us that it is in the process of migrating our fulfillment
operations to a Year 2000-compliant system and that this will be completed by
July 1999. OneSoft Corporation, which maintains and operates our Web site and
provides our connection to the Internet, has informed us that its systems are
Year 2000 compliant. We have reviewed Quad Graphics and the United States Postal
Service Year 2000 readiness disclosures. Based on these disclosures, we believe
that both will be Year 2000 compliant by September 1999.
To date, we have not incurred any material costs in identifying or
evaluating Year 2000 compliance issues. However, we may fail to discover Year
2000 compliance problems in our systems that will require substantial revisions
or replacements. In the event that the fulfillment and operational facilities
that support our business, or our Web-hosting facilities, are not Year 2000
compliant, portions of our Web site may become unavailable and we would be
unable to deliver services to our users. In addition, there can be no assurance
that third-party software, hardware or services incorporated into our material
systems will not need to be revised or replaced, which could be time-consuming
and expensive. Our inability to fix or replace third-party software, hardware or
services on a timely basis could result in lost revenues, increased operating
costs and other business interruptions, any of which could have a material and
adverse effect on our business, results of operations and financial condition.
Moreover, the failure to adequately address Year 2000 compliance issues in our
software, hardware or systems could result in claims of mismanagement,
misrepresentation or breach of contract and related litigation, which could be
costly and time-consuming to defend.
In addition, there can be no assurance that governmental agencies, utility
companies, Internet access companies, third-party service providers and others
outside our control will be Year 2000 compliant. The failure by these entities
to be Year 2000 compliant could result in a systemic failure beyond our control,
including, for example, a prolonged Internet, telecommunications or electrical
failure, which could also prevent us from delivering our services to our users,
decrease the use of the Internet or prevent users from accessing our services,
any of which would have a material and adverse effect on our business, results
of operations and financial condition. See "Management's Discussion and Analysis
of Financial Statements and Results of Operations."
11
<PAGE> 13
WE MAY EXPERIENCE FLUCTUATIONS IN POSTAGE AND PAPER EXPENSES
Catalog production and distribution expenses represented approximately 47%
of our total revenues in the fiscal years ended January 31, 1998 and 1999. A
substantial portion of these expenses have been attributable to paper and
postage costs. Paper costs have increased an average of 4% over the two-year
period ending December 31, 1999. From July 1997 to the present, postage costs
have increased overall approximately 2.9%. Material increases in paper or
catalog delivery costs could have a material and adverse effect on our business.
WE MAY BE UNABLE TO IDENTIFY AND SUCCESSFULLY INTEGRATE POTENTIAL ACQUISITIONS
AND INVESTMENTS
We may acquire or make investments in complementary businesses, products,
services or technologies on an opportunistic basis when we believe they will
assist us in carrying out our business strategy. We do not have any present
understanding, nor are we having any discussions relating to any acquisition or
investment. If we buy a company, then we could have difficulty in assimilating
that company's personnel and operations. In addition, the key personnel of the
acquired company may decide not to work for us. If we acquire products, services
or technologies, we could have difficulty in assimilating them into our
operations. These difficulties could disrupt our ongoing business, distract our
management and employees and increase our expenses. Furthermore, we may have to
incur debt or issue equity securities to pay for any future acquisitions, the
issuance of which could be dilutive to our existing shareholders.
WE ARE VULNERABLE TO NEW TAX OBLIGATIONS THAT COULD BE IMPOSED ON ONLINE
COMMERCE TRANSACTIONS
We do not expect to collect sales or other similar taxes in respect of
shipments of goods into most states. However, various states or foreign
countries may seek to impose sales tax obligations on us and other online
commerce and direct marketing companies. A number of proposals have been made at
the state and local levels that would impose additional taxes on the sale of
goods and services through the Internet. These proposals, if adopted, could
substantially impair the growth of online commerce and cause purchasing through
our Web site to be less attractive to customers as compared to traditional
retail purchasing. The United States Congress has passed legislation limiting
for three years the ability of the states to impose taxes on Internet-based
transactions. Failure to renew this legislation could result in the imposition
by various states of taxes on online commerce. Further, states have attempted to
impose sales taxes on catalog sales from businesses such as ours. A successful
assertion by one or more states that we should have collected or be collecting
sales taxes on the sale of products could have a material and adverse effect on
our business.
12
<PAGE> 14
RISKS RELATED TO THE INTERNET INDUSTRY
WE ARE DEPENDENT ON THE CONTINUED DEVELOPMENT OF THE INTERNET INFRASTRUCTURE
Our industry is new and rapidly evolving. Our business would be adversely
affected if Web usage and online commerce does not continue to grow. Web usage
may be inhibited for a number of reasons, including:
- inadequate Internet infrastructure;
- inconsistent quality of service; or
- unavailability of cost-effective, high-speed service.
If Web usage grows, the Internet infrastructure may not be able to support
the demands placed on it by this growth, or its performance and reliability may
decline. In addition, Web sites, including ours, have experienced a variety of
interruptions in their service as a result of outages and other delays occurring
throughout the Internet network infrastructure. If these outages or delays
frequently occur in the future, Web usage, including usage of our Web site,
could grow slowly or decline.
OUR LONG-TERM SUCCESS DEPENDS ON THE DEVELOPMENT OF THE ONLINE COMMERCE MARKET,
AND ON THE INCREASED ONLINE PURCHASING OF GENERATION Y, BOTH OF WHICH ARE
UNCERTAIN
Our future revenues and profits substantially depend upon the widespread
acceptance and use of the Web as an effective medium of commerce by consumers.
Demand for recently introduced services and products over the Web and online
services is subject to a high level of uncertainty. The development of the Web
and online services as a viable commercial marketplace is subject to a number of
factors, including the following:
- online commerce is at an early stage and buyers may be unwilling to shift
their purchasing from traditional vendors to online vendors;
- insufficient availability of telecommunications services or changes in
telecommunications services could result in slower response times; and
- the inability of our target demographic group to have regular access to a
credit card could cause a slower growth in online commerce for us than
for companies targeting consumers in general.
ADOPTION OF THE INTERNET AS AN ADVERTISING MEDIUM IS UNCERTAIN
The growth of Internet sponsorships and advertising requires validation of
the Internet as an effective advertising medium. This validation has yet to
fully occur. In order for us to generate sponsorship and advertising revenues,
marketers must direct a significant portion of their budgets to the Internet
and, specifically, to our Web site. To date, sales of Internet sponsorships and
advertising represent only a small percentage of total advertising sales. Also,
technological developments could slow the growth of sponsorships and advertising
on the Internet. For example, widespread use of filter software programs that
limit access to advertising on our Web site from the Internet user's browser
could reduce advertising on the Internet. Our business, financial condition and
operating results would be adversely affected if the market for Internet
advertising fails to develop or develops slower than expected.
BREACHES OF SECURITY ON THE INTERNET MAY SLOW THE GROWTH OF ONLINE COMMERCE AND
WEB ADVERTISING AND SUBJECT US TO LIABILITY
The need to securely transmit confidential information (such as credit card
and other personal information) over the Internet has been a significant barrier
to online commerce and communications over the Web. Any well-publicized
compromise of security could deter more people from using the Web or from using
it to conduct transactions that involve transmitting confidential information,
such as purchases of goods or services. Furthermore, decreased traffic and
online sales as a result of general security concerns could cause advertisers to
reduce their amount of online spending. 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
13
<PAGE> 15
credit card information, impersonation or other similar fraud claims. Claims
could also be based on other misuses of personal information, such as for
unauthorized marketing purposes. We may need to spend a great deal of money and
use other resources to protect against the threat of security breaches or to
alleviate problems caused by security breaches.
WE COULD FACE LIABILITY FOR INFORMATION DISPLAYED ON AND COMMUNICATIONS THROUGH
OUR WEB SITE
We may be subjected to claims for defamation, negligence, copyright or
trademark infringement or based on other theories relating to the information we
publish on our Web site. These types of claims have been brought, sometimes
successfully, against Internet companies as well as print publications in the
past. Based on links we provide to other Web sites, we could also be subjected
to claims based upon online content we do not control that is accessible from
our Web site. Claims may also be 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 at our Web site. We also offer e-mail services, which
may subject us to potential risks, such as:
- liabilities or claims resulting from unsolicited e-mail;
- lost or misdirected messages;
- illegal or fraudulent use of e-mail; or
- interruptions or delays in e-mail service.
These claims could result in substantial costs and a diversion of our
management's attention and resources.
EFFORTS TO REGULATE OR ELIMINATE THE USE OF MECHANISMS WHICH AUTOMATICALLY
COLLECT INFORMATION ON USERS OF OUR WEB SITE MAY INTERFERE WITH OUR ABILITY TO
TARGET OUR MARKETING EFFORTS AND TAILOR OUR WEB SITE OFFERINGS TO THE TASTES OF
OUR USERS
Web sites typically place a tracking program on a user's hard drive without
the user's knowledge or consent. These programs automatically collect data on
anyone visiting a Web site. Web site operators use these mechanisms for a
variety of purposes, including the collection of data derived from users'
Internet activity. Most currently available Web browsers allow users to elect to
remove these mechanisms at any time or to prevent this information from being
stored on their hard drive. In addition, some commentators, privacy advocates
and governmental bodies have suggested limiting or eliminating the use of these
tracking mechanisms. Any reduction or limitation in the use of this software
could limit the effectiveness of our sales and marketing efforts.
WE COULD FACE ADDITIONAL BURDENS ASSOCIATED WITH GOVERNMENT REGULATION OF AND
LEGAL UNCERTAINTIES SURROUNDING THE INTERNET
Any new law or regulation pertaining to the Internet, or the application or
interpretation of existing laws, could increase our cost of doing business or
otherwise have a material and adverse effect on our business, results of
operations and financial condition. Laws and regulations directly applicable to
Internet communications, commerce and advertising are becoming more prevalent.
The law governing the Internet, however, remains largely unsettled, even in
areas where there has been some legislative action. It may take years to
determine whether and how existing laws governing intellectual property,
copyright, privacy, obscenity, libel and taxation apply to the Internet. In
addition, the growth and development of online commerce may prompt calls for
more stringent consumer protection laws, both in the United States and abroad.
We also may be subject to future regulation not specifically related to the
Internet, including laws affecting direct marketers. See "Business -- Government
Regulation."
14
<PAGE> 16
RISKS RELATED TO THIS OFFERING
SHARES ELIGIBLE FOR FUTURE SALE BY OUR CURRENT STOCKHOLDERS MAY ADVERSELY AFFECT
OUR STOCK PRICE
If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options and warrants, in the
public market following the offering, then the market price of our common stock
could fall. Restrictions under the securities laws and lock-up agreements limit
the number of shares of common stock available for sale in the public market.
The holders of 10,372,442 shares of common stock and the holders of warrants and
options exercisable into a total of 1,310,060 shares of common stock have agreed
not to sell any of these securities for 180 days after the offering without the
prior written consent of BancBoston Robertson Stephens. However, BancBoston
Robertson Stephens may, in its sole discretion, release all or any portion of
the securities subject to these lock-up agreements.
We may shortly file a registration statement to register all shares of
common stock under our stock option plan. After this registration statement is
effective, shares issued upon exercise of stock options will be eligible for
resale in the public market without restriction.
ANTI-TAKEOVER PROVISIONS AND OUR RIGHT TO ISSUE PREFERRED STOCK COULD MAKE A
THIRD-PARTY ACQUISITION OF US DIFFICULT
Alloy is a Delaware corporation. Anti-takeover provisions of Delaware law
could make it more difficult for a third party to acquire control of us, even if
the change in control would be beneficial to stockholders. Our certificate of
incorporation provides that our board of directors may issue preferred stock
without stockholder approval. It also provides for a classified board, with each
board member serving a staggered three-year term. The issuance of preferred
stock and the existence of a classified board could make it more difficult for a
third party to acquire us.
OUR COMMON STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE AS IS TYPICAL OF INTERNET
COMPANIES
The market price of our common stock is likely to be highly volatile as the
stock market in general, and the market for Internet-related and technology
companies in particular, has been highly volatile. Investors may not be able to
resell their shares of our common stock following periods of volatility because
of the market's adverse reaction to volatility. The trading prices of many
technology and Internet-related companies' stocks have reached historical highs
within the last 52 weeks and have reflected valuations substantially above
historical levels. During the same period, these companies' stocks have also
been highly volatile and have recorded lows well below historical highs. We
cannot assure you that our stock will trade at the same levels of other Internet
stocks or that Internet stocks in general will sustain their current market
prices.
Factors that could cause volatility may include, among other things:
- announcements of technological innovations;
- changes in financial estimates by securities analysts;
- conditions or trends in the Internet industry; and
- changes in the market valuations of other Internet companies.
FORWARD-LOOKING STATEMENTS
This prospectus contains "forward-looking statements." These
forward-looking statements include, without limitation, statements about our
market opportunity, our strategies, competition, expected activities and
expenditures as we pursue our business plan, and the adequacy of our available
cash resources. Our actual results could differ materially from those expressed
or implied by these forward-looking statements as a result of various factors,
including the risk factors described above and elsewhere in this prospectus.
15
<PAGE> 17
USE OF PROCEEDS
The net proceeds we will receive from the sale of 3,700,000 shares of
common stock offered by us are estimated to be $36.5 million ($42.2 million if
the underwriters' over-allotment option is exercised in full) after deducting
the estimated underwriting discounts and commissions and offering expenses
payable by us and assuming a public offering price of $11.00 per share.
We currently intend to use the net proceeds of this offering as follows:
- to expand our national marketing campaigns in traditional and online
media;
- to continue to improve our Internet and systems infrastructure and
support;
- to further develop our online sales force;
- to repay in full approximately $4.2 million of 10% promissory notes due
upon completion of this offering, which indebtedness we incurred in May
1998 for working capital and general corporate purposes; and
- the balance for working capital and general corporate purposes, including
possible acquisitions of or investments in complementary businesses,
products or technologies.
Pending these uses, the net proceeds will be invested in short-term,
investment grade instruments, certificates of deposit or direct or guaranteed
obligations of the United States. There are no agreements or pending
negotiations with respect to any acquisitions, investments or similar
transactions.
DIVIDEND POLICY
We currently intend to retain earnings, if any, to fund the development and
growth of our business and do not anticipate paying cash dividends in the
foreseeable future. Payment of future dividends, if any, will be at the
discretion of our board of directors after taking into account various factors,
including our financial condition, operating results, current and anticipated
cash needs and plans for expansion.
16
<PAGE> 18
CAPITALIZATION
The following table sets forth, as of January 31, 1999, the capitalization
of Alloy on an actual basis, and on a pro forma as adjusted basis to give effect
to:
- the sale of 3,700,000 shares of common stock offered by us in this
offering at an assumed initial public offering price of $11.00 per
share, after deducting the underwriting discounts and commissions and
offering expenses payable by us, and the application of the net
proceeds from this offering;
- the conversion of our convertible preferred stock into a total of
1,678,286 shares of common stock upon the completion of this offering.
See "Use of Proceeds;" and
- the exercise of options to purchase 362,481 shares of common stock and
warrants to purchase 11,280 shares of common stock subsequent to
January 31, 1999, on a pro forma basis only.
This information should be read in conjunction with our Financial
Statements and the related Notes appearing elsewhere in this prospectus.
The following capitalization table excludes:
- 27,072 shares of common stock issuable upon the exercise of stock
options outstanding as of January 31, 1999 at a weighted average
exercise price of $.60 per share, which options have not been
exercised;
- 505,981 shares of common stock issuable upon the exercise of warrants
outstanding as of January 31, 1999 at a weighted average exercise
price of $5.04, which warrants have not yet been exercised;
- 780,160 shares of common stock issuable upon the exercise of stock
options granted after January 31, 1999 at a weighted average exercise
price of $9.87 per share; and
- 2,830,287 and 500,000 additional shares of common stock reserved for
issuance under our stock option plan and our employee stock purchase
plan, respectively.
<TABLE>
<CAPTION>
JANUARY 31, 1999
----------------------
PRO FORMA
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Promissory notes, net of unamortized discount............... $ 3,945 $ --
------- -------
Capital lease obligation, less current portion.............. 40 40
------- -------
Convertible redeemable preferred stock, $.01 par value,
1,487,843 shares authorized, issued and outstanding
actual; no shares authorized, issued and outstanding pro
forma as adjusted......................................... 4,836 --
------- -------
Stockholders' (deficit) equity:
Common stock, $.01 par value, 50,000,000 shares authorized
actual and pro forma as adjusted; 8,479,727 shares
issued and outstanding actual; 14,231,774 shares issued
and outstanding pro forma as adjusted.................. 85 142
Preferred stock, $.01 par value, 5,000,000 shares
authorized, actual and pro forma as adjusted; no shares
issued and outstanding actual and pro forma as
adjusted............................................... -- --
Additional paid-in capital.................................. 5,441 46,818
Accumulated deficit......................................... (8,347) (8,616)
Deferred compensation....................................... (225) (225)
------- -------
Total stockholders' (deficit) equity................... (3,046) 38,119
------- -------
Total capitalization................................ $ 5,775 $38,159
======= =======
</TABLE>
17
<PAGE> 19
DILUTION
The pro forma net tangible book value of Alloy as of January 31, 1999,
after giving effect to the conversion of our convertible preferred stock, was
$1.8 million, or $.18 per share of common stock. Pro forma net tangible book
value per share represents the amount of total tangible assets less total
liabilities, divided by the number of shares of common stock outstanding.
Assuming the sale by us of 3,700,000 shares of common stock offered in this
offering at an assumed public offering price of $11.00 per share, the
application of the estimated net proceeds from this offering and the exercise of
options to purchase 362,481 shares and warrants to purchase 11,280 shares of
common stock subsequent to January 31, 1999 our pro forma net tangible book
value as of January 31, 1999 would have been $38.1 million, or $2.68 per share
of common stock. This represents an immediate increase in pro forma net tangible
book value of $2.50 per share to our existing stockholders and an immediate
dilution in pro forma net tangible book value of $8.32 per share to new
investors. The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $11.00
Pro forma net tangible book value per share as of January
31, 1999............................................... $ .18
Pro forma increase attributable to new investors.......... 2.50
------
Pro forma net tangible book value per share after the
offering.................................................. 2.68
------
Pro forma dilution per share to new investors............... $ 8.32
======
</TABLE>
The following table summarizes, on a pro forma basis as of January 31,
1999, the total number of shares of common stock purchased from us, the total
consideration paid to us and the average consideration paid per share by
existing stockholders and by new investors:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders................ 10,531,774 74.0% $ 9,376,500 18.7% $ .89
New investors........................ 3,700,000 26.0 40,700,000 81.3 $11.00
---------- ---- ----------- ----
Total........................... 14,231,774 100% $50,076,500 100%
========== ==== =========== ====
</TABLE>
None of the foregoing tables or calculations assumes that any options or
warrants outstanding as of January 31, 1999 will be exercised other than the
362,481 options and 11,280 warrants referred to above. If all other outstanding
options and warrants were exercised on the date of the closing of this offering,
investors purchasing shares in this offering would suffer total dilution of
$7.95 per share.
18
<PAGE> 20
SELECTED FINANCIAL DATA
The following selected financial data for each of the years ended January
31, 1997, 1998 and 1999, and as of January 31, 1997, 1998 and 1999, were derived
from the financial statements of Alloy which have been audited by Arthur
Andersen LLP, independent accountants, whose report appears elsewhere herein.
Selected financial data should be read in conjunction with Alloy's Financial
Statements and the corresponding Notes, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and other financial information
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
--------------------------------------
1997 1998 1999
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA(2):
Net merchandise revenues.................................. $ 25 $ 1,800 $ 10,085
Sponsorship and other revenues............................ -- -- 125
--------- --------- ---------
Total revenues............................................ 25 1,800 10,210
Cost of goods sold........................................ 17 1,050 5,486
--------- --------- ---------
Gross profit.............................................. 8 750 4,724
Operating expenses:
Selling and marketing................................ 98 1,967 9,166
General and administrative........................... 28 682 1,683
--------- --------- ---------
Total operating expenses........................ 126 2,649 10,849
--------- --------- ---------
Loss from operations...................................... (118) (1,899) (6,125)
Interest income (expense), net............................ -- 34 (239)
--------- --------- ---------
Net loss.................................................. $ (118) $ (1,865) $ (6,364)
========= ========= =========
Basic net loss per common share(1)........................ $ (.03) $ (.33) $ (.75)
========= ========= =========
Diluted net loss per common share(1)...................... $ (.03) $ (.31) $ (.72)
========= ========= =========
Weighted average common shares outstanding:
Basic(1)............................................. 4,060,800 5,617,577 8,479,727
========= ========= =========
Diluted(1)........................................... 4,450,353 6,007,130 8,869,280
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31,
-----------------------------------
1997 1998 1999
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA(2):
Cash and cash equivalents................................. $ 19 $ 2,321 $ 2,983
Working capital........................................... 38 2,451 5,266
Total assets.............................................. 47 3,166 7,407
Promissory notes, net..................................... -- -- 3,945
Capital lease obligation, less current portion............ -- -- 40
Convertible redeemable preferred stock, net............... -- -- 4,836
Total stockholders' equity (deficit)...................... 42 2,479 (3,046)
</TABLE>
- ------------
(1) See Notes 2, 10 and 13 to the Financial Statements for an explanation of the
determination of the number of common shares used in computing the amount of
basic and diluted net loss per common share and net loss applicable to
common stockholders.
(2) There was no activity during the period from January 22, 1996 through
January 31, 1996. Accordingly, no Statement of Operations or Balance Sheet
Data have been presented.
19
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operation of Alloy should be read in conjunction with the Financial Statements
and the related Notes included elsewhere in this prospectus. 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" and elsewhere in this prospectus.
OVERVIEW
Alloy Online is a leading Web site serving the unique interests and tastes
of Generation Y. Through our Web site, www.alloy.com, Generation Y boys and
girls can interact, share information, explore compelling and relevant content
and shop. Through our Web site and our Alloy direct mail catalog, we offer
Generation Y boys and girls a variety of merchandise, including boys and girls
apparel, accessories, footwear, music, cosmetics and magazine subscriptions.
Our revenues consist of merchandise revenues and sponsorship and other
revenues. We generate merchandise revenues through both our catalog and our Web
site. We generate sponsorship and other revenues primarily through the sale of
sponsorships, banner advertisements, co-marketing programs and other revenue
sharing arrangements on our Web site and in our catalog. Revenues from sales of
merchandise are recognized at the time products are shipped to customers.
Revenues from sponsorships, advertising and other arrangements are recognized
during the period in which the sponsorship or advertisement is displayed,
provided that no significant performance obligations remain and the collection
of the related receivable is probable. Revenues from sales of Internet
advertisements are recognized net of commissions paid to advertising sales firms
and to technology and content providers.
We were incorporated in January 1996, launched our Web site in August 1996
and began recognizing meaningful revenues in August 1997 following the
distribution of our first Alloy catalog. To date, the majority of our revenues
have been generated through merchandise sales. Sponsorship and other revenues
have not been material, but we expect these revenues to increase in future
periods as a result of our plan to increase visitors to our Web site and further
develop our marketing and sales team to capitalize on our sponsorship,
advertising and other revenue opportunities.
We incurred net losses of approximately $118,000 for the year ended January
31, 1997, $1.9 million for the year ended January 31, 1998 and $6.4 million for
the year ended January 31, 1999. At January 31, 1999, we had an accumulated
deficit of $8.3 million. The net losses and accumulated deficit resulted
primarily from the costs associated with developing our Web site and database of
Generation Y boys and girls, attracting users to our Web site and establishing
the Alloy brand. Because of our plans to invest heavily in marketing and
promotion, to hire additional employees and to develop our Web site and
operating infrastructure, we expect to incur significant net losses for the
foreseeable future. Although we have experienced revenue growth in recent
periods, this growth may not be sustainable and, therefore, these recent periods
should not be considered indicative of future performance. We may never achieve
significant revenues or profitability, or if we achieve significant revenues
they may not be sustained in future periods.
For purposes of the discussion below, the fiscal year ended January 31,
1997 is referred to as fiscal 1996; the fiscal year ended January 31, 1998 is
referred to as fiscal 1997; and the fiscal year ended January 31, 1999 is
referred to as fiscal 1998.
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<PAGE> 22
RESULTS OF OPERATIONS
The following table sets forth the statement of operations data for the
periods indicated as a percentage of revenues:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-------------------------
1997 1998 1999
------ ------ -----
<S> <C> <C> <C>
Net merchandise revenues.................................... 100.0% 100.0% 98.8%
Sponsorship and other revenues.............................. -- -- 1.2
------ ------ -----
Total revenues......................................... 100.0 100.0 100.0
Cost of goods sold.......................................... 67.5 58.3 53.7
------ ------ -----
Gross profit................................................ 32.5 41.7 46.3
Operating expenses:
Selling and marketing.................................. 393.7 109.3 89.8
General and administrative............................. 111.7 37.9 16.5
------ ------ -----
Total operating expenses............................... 505.4 147.2 106.3
------ ------ -----
Loss from operations........................................ (472.9) (105.5) (60.0)
Interest income (expense), net.............................. -- 1.9 (2.3)
------ ------ -----
Net loss.................................................... (472.9)% (103.6)% (62.3)%
====== ====== =====
</TABLE>
FISCAL YEARS ENDED JANUARY 31, 1997, JANUARY 31, 1998 AND JANUARY 31, 1999
Revenues
Merchandise Revenues. Net merchandise revenues increased from $25,000 in
fiscal 1996 to $1.8 million in fiscal 1997 and 460.3% to $10.1 million in fiscal
1998. The increase in merchandise sales in fiscal 1998 was due primarily to the
significant increase in the circulation of our Alloy catalog. This growth in
circulation was due to operating for a full 12 months in fiscal 1998 as compared
to six months in fiscal 1997 and a substantially larger database of Generation Y
boys and girls. Merchandise returns as a percentage of gross merchandise sales
were 9.3% in fiscal 1997 and fiscal 1998. Our net merchandise revenues in fiscal
1996 reflected our start-up status and lack of significant operations.
We experienced a significant increase in online merchandise orders in
fiscal 1998, which was driven by our catalog's expanded circulation and our
marketing efforts to attract additional visitors to our Web site. Online
merchandise orders in fiscal 1998 were approximately $712,000 as compared to
approximately $40,000 in online orders in fiscal 1997.
Sponsorship and Other Revenues. In fiscal 1998, we initiated sponsorship
and advertising programs to take advantage of the increased number of visitors
to our Web site and our introduction of new online services. As a result,
sponsorship and other revenues amounted to $125,000 in fiscal 1998 as compared
to immaterial revenues in fiscal 1997.
Cost of Goods Sold
Cost of goods sold consists of the cost of the merchandise sold by Alloy
plus the freight cost to deliver the merchandise to the warehouse. Our cost of
goods sold increased from $17,000 in fiscal 1996 to $1.1 million in fiscal 1997
and 422.4% to $5.5 million in fiscal 1998. The increase in cost of goods sold in
fiscal 1998 as compared to fiscal 1997 was due primarily to the increase in
product sales volume. The increase in costs of goods sold in fiscal 1997 as
compared to fiscal 1996 was due to our start-up status and lack of significant
operations in fiscal 1996.
Alloy's gross profit as a percentage of total revenues increased from 32.5%
in fiscal 1996 to 41.7% in fiscal 1997 and to 46.3% in fiscal 1998 due to higher
merchandise markups, increased sales of products at full prices via our catalog
and our Web site and increased sponsorship revenues, which generally have higher
gross margins.
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<PAGE> 23
Operating Expenses
Selling and Marketing. Selling and marketing expenses consist primarily of
Alloy catalog production and mailing costs, our call center and fulfillment
operations expenses, salaries of our sales and marketing personnel, marketing
costs, telecommunications costs and expenses related to the development and
maintenance of our Web site. These expenses increased from $98,000 in fiscal
1996 to $2.0 million in fiscal 1997 and 366.0% to $9.2 million in fiscal 1998
due to the growth in our sales, catalog circulation and Web site development. As
a percentage of total revenues, our selling and marketing expenses declined from
109.3% in fiscal 1997 to 89.8% in fiscal 1998. The decrease resulted primarily
from reduced fulfillment expenses associated with our renegotiated fulfillment
contract effective in August 1998 and a lower proportion of catalog request
calls to merchandise orders. Fulfillment expenses rose from $778,000 in fiscal
1997 to $2.7 million in fiscal 1998, but as a percentage of total revenues fell
from 43.2% in fiscal 1997 to 26.9% in fiscal 1998. In fiscal 1996, our selling
and marketing expenses represented 394.0% of our total revenues due to
significant costs associated with starting up the business, which were expensed
in full in this period. Internet-related expenses increased from $19,000 in
fiscal 1997 to $662,000 in fiscal 1998, including $382,000 of costs we incurred
in establishing an Internet-based e-mail service which we replaced with a more
cost-efficient third-party product, together with increased Web site development
and maintenance costs and promotion expenses.
We expect selling and marketing expenses to increase significantly in
future periods. These increases will be principally related to hiring additional
sales and marketing personnel and increased spending on advertising in a variety
of media to increase brand awareness, attract additional visitors to our Web
site and grow online merchandise sales. There can be no assurance that these
increased expenditures will result in increased visitors to our Web site or
additional sales.
General and Administrative. General and administrative expenses consist
primarily of salaries and related costs for our executive, administrative,
finance and business development personnel, as well as support services and
professional service fees. These expenses increased from $28,000 in fiscal 1996
to $682,000 in fiscal 1997 and 146.7% to $1.7 million in fiscal 1998. As a
percentage of total revenues, our general and administrative expenses decreased
from 111.7% in fiscal 1996 to 37.9% in fiscal 1997 and to 16.5% in fiscal 1998.
The increase in general and administrative expenses in dollar terms in each
period was primarily due to the increased personnel required to support and grow
our business. Our general and administrative expenses in fiscal 1997 were
affected by the non-cash expense of $312,000 associated with stock option awards
to a consultant. Excluding this expense, our general and administrative expenses
in fiscal 1997 were 20.6% of total revenues for the period. Our general and
administrative expenses in fiscal 1996 were associated with starting up our
business in this period, which we expensed in full. We expect general and
administrative expenses to grow as we hire additional personnel and incur
additional expenses related to the growth of our business and our operations as
a public company.
Loss from Operations
As described above, we have invested heavily to build the Alloy brand, grow
our customer database, enhance and attract visitors to our Web site and increase
the number of our employees to support a growing operation. For the foregoing
reasons, our loss from operations increased from $118,000 in fiscal 1996 to $1.9
million in fiscal 1997 and 222.5% to $6.1 million in fiscal 1998.
Interest (Expense) Income, Net
Interest income net of expense includes income from our cash and cash
equivalents and from investments and expenses related to our financing
obligations. We generated net interest income of $34,000 in fiscal 1997 due to
our cash balances resulting from our common stock offerings in this period. In
fiscal 1998, we incurred net interest expense of $239,000 due to the interest
expense resulting from our issuance of promissory notes in May 1998, which
exceeded our interest earned on cash balances held. We did not generate interest
income or incur interest expense in fiscal 1996.
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<PAGE> 24
SELECTED UNAUDITED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly statement of operations
data for each of the six quarters ended January 31, 1999. In the opinion of
management, the unaudited financial results include all adjustments, consisting
only of normal recurring adjustments, necessary for the fair presentation of our
results of operations for those periods. The quarterly data should be read in
conjunction with the Financial Statements and the related Notes appearing
elsewhere in this prospectus. The results of operations for any quarter are not
necessarily indicative of the results of operations for any future period.
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED (UNAUDITED)
--------------------------------------------------------------------
OCT. 31, JAN. 31, APR. 30, JUL. 31, OCT. 31, JAN. 31,
1997 1998 1998 1998 1998 1999
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net merchandise revenues......... $ 401 $1,396 $ 1,353 $ 2,082 $ 3,215 $3,436
Sponsorship and other revenues... -- -- -- 5 46 73
------- ------ ------- ------- ------- ------
Total revenues................... 401 1,396 1,353 2,087 3,261 3,509
Cost of goods sold............... 263 783 906 1,200 1,665 1,715
------- ------ ------- ------- ------- ------
Gross profit..................... 138 613 447 887 1,596 1,794
Operating expenses:
Selling and marketing....... 567 1,193 1,517 2,483 2,879 2,287
General and
administrative............ 336 244 265 509 517 392
------- ------ ------- ------- ------- ------
Total operating
expenses............. 903 1,437 1,782 2,992 3,396 2,679
------- ------ ------- ------- ------- ------
Loss from operations............. (765) (824) (1,335) (2,105) (1,800) (885)
Interest income (expense), net... 16 18 22 (60) (101) (100)
------- ------ ------- ------- ------- ------
Net loss......................... $ (749) $ (806) $(1,313) $(2,165) $(1,901) $ (985)
======= ====== ======= ======= ======= ======
PERCENTAGE OF TOTAL REVENUES
--------------------------------------------------------------------
Net merchandise revenues......... 100.0% 100.0% 99.9% 99.8% 98.6% 97.9%
Sponsorship and other revenues... -- -- 0.1 0.2 1.4 2.1
------- ------ ------- ------- ------- ------
Total revenues................... 100.0 100.0 100.0 100.0 100.0 100.0
Cost of goods sold............... 65.6 56.1 66.9 57.5 51.0 48.9
------- ------ ------- ------- ------- ------
Gross profit..................... 34.4 43.9 33.1 42.5 49.0 51.1
Operating expenses:
Selling and marketing....... 141.5 85.5 112.1 118.9 88.3 65.2
General and
administrative............ 84.0 17.5 19.6 24.4 15.8 11.2
------- ------ ------- ------- ------- ------
Total operating
expenses............. 225.5 103.0 131.7 143.3 104.1 76.4
------- ------ ------- ------- ------- ------
Loss from operations............. (191.1) (59.0) (98.6) (100.8) (55.1) (25.3)
Interest income (expense), net... 4.1 1.3 1.6 (2.9) (3.1) (2.8)
------- ------ ------- ------- ------- ------
Net loss......................... (187.1)% (57.7)% (97.0)% (103.7)% (58.2)% (28.1)%
======= ====== ======= ======= ======= ======
</TABLE>
Our revenues have been increasing as a result of increased catalog
circulation and visitors to our Web site supported by our growing database of
customers, Alloy E-Zine subscribers and catalog requesters. The improvement in
our gross margins reflects more efficient merchandise sourcing, increased
merchandise markups and improved merchandise sell-through. Operating expenses
have generally increased in dollar terms during the quarters presented. Selling
and marketing expenses have increased as revenues, advertising and catalog
production and circulation have increased. Selling and marketing expenses peaked
in the fiscal quarter ended October 31, 1998 due to high catalog circulation
during the period. General and administrative expenses have risen as a result of
increased personnel and the increased operating costs of our growing business.
General and administrative costs increased in the fiscal quarters ended October
31, 1997, July 31, 1998 and October 31, 1998 due to stock option awards to a
consultant.
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<PAGE> 25
We expect our quarterly revenues, margins and results of operations to
fluctuate significantly in the future. In addition, the results of any quarter
do not indicate results that should be expected for a full fiscal year. If our
revenues, margins or operating results fall below the expectations of securities
analysts and investors in some future periods, then the price of our common
stock could decline.
SEASONALITY
Our historical revenues and operating results have varied significantly
from quarter to quarter due to seasonal fluctuations in consumer purchasing
patterns. Sales of apparel, accessories and footwear through our Alloy catalog
have been higher in our third and fourth fiscal quarters, containing the key
back-to-school and holiday selling seasons, than our first and second quarters.
It is difficult to ascertain the effects of seasonality with respect to our
online merchandise sales, but we expect that similar seasonal trends will
develop in our online sales to those we have experienced in our catalog sales.
We believe that advertising sales in traditional media, such as television and
radio, generally are lower in the first and third calendar quarters of each
year. If similar seasonal and cyclical patterns emerge in Internet advertising,
our revenues and operating results also may vary significantly based upon these
patterns.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily through the sale of equity and
debt securities as we have generated negative cash flow from operations since
our inception. To date, we have received approximately $13 million in net
proceeds from the sale of common stock, convertible preferred stock and
promissory notes. At January 31, 1999, we had approximately $3.0 million in cash
and cash equivalents and a $2.5 million cash receivable from the sale of
convertible preferred stock, which was paid in full on February 1, 1999. Our
principal commitments consist of obligations under our promissory notes and our
capital and operating leases.
We manage our working capital position to increase liquidity and reduce
risk. All merchandise sales are made against an authorized credit card or check.
We manage our merchandise inventory with a view to fast re-order flexibility
with our vendors. This approach allows us to reduce the amount of inventory on
hand and limit our exposure to overstock positions.
Net cash used in operating activities was $5.3 million in fiscal 1998, $1.7
million in fiscal 1997 and $138,000 in fiscal 1996. The principal use of cash
for all periods was to fund our losses from operations.
Cash used in investing activities has consisted of capital expenditures for
computers, office furniture and equipment. A significant portion of our computer
equipment is leased. Lease terms range from 24 to 30 months with monthly
payments. In lieu of interest under the lease, we issued a stock purchase
warrant to the lessor. As of January 31, 1999, the remaining aggregate
obligation under the capital lease was $113,000.
Net cash provided by financing activities was $5.9 million in fiscal 1998,
$4.1 million in fiscal 1997 and $160,000 in fiscal 1996. Cash provided by
financing activities has consisted of sales of our common stock, convertible
preferred stock and promissory notes, offset by payments of our capitalized
lease obligation.
We currently anticipate that we will continue to experience significant
growth in our operating expenses for the foreseeable future and that our
operating expenses will be a material use of our cash resources. We believe that
our existing working capital and cash flows from operations will be sufficient
to meet our anticipated cash needs for working capital and capital expenditures
through the quarter ending April 30, 2000. If cash generated from operations is
insufficient to satisfy our cash needs, we may be required to raise additional
funds. If we raise additional funds through the issuance of equity securities,
our existing shareholders may experience significant dilution. Furthermore,
additional financing may not be available when needed or, if available,
financing may not be on terms favorable to us or 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.
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<PAGE> 26
IMPACT OF THE YEAR 2000
Many currently installed computer systems and software products are coded
to accept or recognize only two digit entries in the date code field. These
systems may recognize a date using "00" as the year 1900 rather than the year
2000. As a result, computer systems and/or software used by many companies and
governmental agencies may need to be upgraded to comply with Year 2000
requirements or risk system failure or miscalculations causing disruptions of
normal business activities.
State of Readiness. The four third-party vendors upon whom we materially
rely are Harrison Fulfillment Services, our fulfillment services and call center
provider, OneSoft Corporation, which maintains our Web site and provides our
connection to the Internet, Quad/Graphics, Inc., our commercial printer and the
United States Postal Service, our mail carrier. We have sought confirmation from
these four vendors that their systems are Year 2000 compliant. Harrison
Fulfillment Services has informed us that it is in the process of migrating our
fulfillment operations to a Year 2000-compliant system and that this will be
completed by July 1999. OneSoft has informed us that its systems are Year 2000
compliant. We have reviewed Year 2000 readiness disclosure statements prepared
by Quad/Graphics and the U.S. Postal Service. According to the Year 2000
readiness disclosure statement prepared by the U.S. Postal Service, remediation
on 135 of 141 severe and critical systems has been completed. As of the first
quarter of 1999, Quad/Graphics reports in its Year 2000 readiness statement that
it has completed a full Year 2000 imaging system test on live work with no
failures. Quad/Graphics also reports that ongoing live Year 2000 tests of the
press systems have not yet produced any failures. We believe, from information
provided in the Year 2000 disclosures, that both the U.S. Postal Service and
Quad/Graphics will be Year 2000 compliant by September 1999.
We do not expect to experience any material adverse effects on our
business, financial condition or results of operations from any other vendor,
distributor or supplier who may experience Year 2000 problems.
We have completed an internal assessment of all material information
technology and non-information technology systems at our headquarters, including
our accounting software, our network server and related software, our personal
computers and related software and our telephone system. We believe that all of
these systems either are or will be made Year 2000 compliant. The majority of
our material information technology and non-information technology systems are
PC-based, and therefore, are currently Year 2000 compliant. We are not currently
aware of any Year 2000 problems relating to these systems which would have a
material adverse effect on our business, financial condition or results of
operations. Any systems discovered to be non-compliant will be made Year 2000
compliant through normal upgrades of our software or hardware, or, when
necessary, replacement of our software or hardware.
Costs. To date, we have not incurred any material costs in identifying or
evaluating Year 2000 compliance issues. Most of our expenses have related to,
and are expected to continue to relate to, the upgrades or replacements, when
necessary, of software or hardware, as well as costs associated with time spent
by employees in the evaluation process and Year 2000 compliance matters
generally. These expenses are included in our capital expenditures budget and
are not expected to be material to our financial position or results of
operations. These expenses, however, if higher than anticipated, could have a
material and adverse effect on our business, results of operations and financial
condition.
Risks. There can be no assurance that we will not discover Year 2000
compliance problems in our systems that will require substantial revisions or
replacements. In the event that the fulfillment and operational facilities that
support our business, or our Web-hosting facilities, are not Year 2000
compliant, we may be unable to deliver goods or services to our customers and
portions of our Web site may become unavailable. In addition, there can be no
assurance that third-party software, hardware or services incorporated into our
material systems will not need to be revised or replaced, which could be time-
consuming and expensive. Our inability to fix or replace third-party software,
hardware or services on a timely basis could result in lost revenues, increased
operating costs and other business interruptions, any of which could have a
material and adverse effect on our business, results of operations and financial
condition. Moreover, the failure to adequately address Year 2000 compliance
issues in our software,
25
<PAGE> 27
hardware or systems could result in claims of mismanagement, misrepresentation
or breach of contract and related litigation, which could be costly and
time-consuming to defend.
In addition, there can be no assurance that governmental agencies, utility
companies, Internet access companies and others outside our control will be Year
2000 compliant. The failure by these entities to be Year 2000 compliant could
result in a systemic failure beyond our control, including, for example, a
prolonged Internet, telecommunications or electrical failure, which could also
prevent us from delivering our services to our users, decrease the use of the
Internet or prevent users from accessing our services, any of which would have a
material and adverse effect on our business, results of operations and financial
condition.
Contingency Plan. As discussed above, we are engaged in an ongoing Year
2000 assessment and do not currently have a contingency plan to deal with the
worst case scenario that might occur if technologies on which we depend are not
Year 2000 compliant and fail to operate effectively after the Year 2000. The
results of our Year 2000 compliance evaluation and the responses received from
distributors, suppliers and other third parties with which we conduct business
will be taken into account in determining the need for and nature and extent of
any contingency plans.
If our present efforts to address the Year 2000 compliance issues discussed
above are not successful, or if distributors, suppliers and other third parties
with which we conduct business do not successfully address such issues, our
users could seek alternate suppliers of our products and services. Any material
Year 2000 problem could require us to incur significant unanticipated expenses
to remedy and could divert our management's time and attention, either of which
could have a material and adverse effect on our business, operating results and
financial condition.
RECENT ACCOUNTING PRONOUNCEMENTS
In the quarter ended April 30, 1998, we adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of financial
statements. The adoption of SFAS No. 130 did not have an effect on our financial
position or results of operations.
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 131, "Disclosure About Segments of an Enterprise and Related Information,"
which is effective for fiscal years beginning after December 15, 1997. SFAS No.
131 requires that public companies report information about operating segments
in their annual financial statements and in subsequent condensed financial
statements of interim periods issued to shareholders. This statement also
requires that public companies report information about their products and
services, the geographic areas in which they operate and their major customers.
Reportable operating segments are determined based on the management approach,
as defined by SFAS No. 131. The management approach is based on the way that the
chief operating decision-maker organizes the segments within an enterprise for
making operating decisions and assessing performance. We currently operate under
two segments, merchandise revenues and sponsorship and other revenues. However,
we have not provided segment disclosure for the periods presented because
sponsorship and other revenues only accounted for approximately 1% of total
revenues in fiscal 1998.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. SFAS
No. 133 is effective for fiscal years beginning after June 15, 1999. We do not
use derivatives and therefore this new pronouncement is not applicable.
The FASB is currently addressing significant current practices relating to
accounting for stock-based compensation awards under APB 25. The FASB is also
addressing the accounting for the repricing of stock options. Tentatively, the
FASB has decided that awards to non-employee directors would be charged to
operations based upon the fair value of the award.
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<PAGE> 28
BUSINESS
OUR BUSINESS
Alloy Online is a leading Web site providing community, content and
commerce to Generation Y, the 56 million boys and girls between the ages of 10
and 24. Through our Web site, www.alloy.com, Generation Y boys and girls can
interact, share information, explore compelling and relevant content and shop
for a variety of merchandise, including boys and girls apparel, accessories,
footwear, music, cosmetics and magazine subscriptions. Due to our unique blend
of online services, our Web site generated approximately 25 million page views
in March 1999, up from approximately 1.5 million in March 1998, and
approximately 480,000 users have registered to receive our weekly electronic
magazine, Alloy E-Zine. We believe our Web site represents one of the largest
and most vibrant Generation Y communities on the Internet. This growing
community drives merchandise sales, our principal source of revenues, and
positions us to be a leading channel for marketers that are increasingly looking
to the Internet to reach this growing and influential consumer group.
INDUSTRY BACKGROUND
The Internet
Growth of the Internet and Online Commerce. The Internet has rapidly
become a significant global medium for communications, entertainment, news,
information and commerce. International Data Corporation, a market research
firm, estimates the number of users accessing the Web will increase from
approximately 100 million in 1998 to approximately 320 million by the end of
2002. As Internet use has grown, shopping online has become increasingly
popular, and the number of people who buy products and services on the Internet
is growing rapidly. According to International Data Corporation, online commerce
transactions to the home are expected to increase from approximately $11 billion
in 1998 to approximately $94 billion in 2002.
Emergence of Community Web Sites. An important development on the Internet
has been the emergence of community Web sites. Community sites provide a single
online destination where like-minded users can interact and quickly find
pertinent information, products and services related to their particular
interests or needs. Community sites generally offer free services including
access to e-mail accounts, chat rooms, message boards, news and entertainment.
Through these features, online communities seek to establish a close
relationship with their audience and evolve over time according to the interests
of their members. As a result, we believe that users tend to be loyal to and
spend more time online at community sites.
Growth of Online Advertising. The Web has become an attractive medium for
advertisers, offering a level of targetability, flexibility, interactivity and
measurability not available in traditional media. The Web enables advertisers to
demographically target their messages to specific groups of consumers as well as
to change their advertisements frequently in response to market factors, current
events and consumer feedback. Moreover, advertisers can track more accurately
the effectiveness of their advertising messages by receiving reports of the
number of advertising "impressions" delivered to consumers and the resulting
"click-through" rate to their Web sites. Jupiter Communications, Inc. estimates
that the amount of Internet advertising in the U.S. will grow from approximately
$1.9 billion in 1998 to $7.7 billion by 2002, a compound annual growth rate of
42%.
Online Direct Marketing. The Internet permits the capture of valuable
customer demographic and preference information. This allows direct marketers to
target electronic offers of products and services directly to consumers with
desirable characteristics and interests. Direct marketers have traditionally
relied on print media, mail and telemarketing to reach their customers. By
virtue of the Internet, direct marketers are able to increase response rates and
reduce the cost per transaction.
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<PAGE> 29
Generation Y
The Growing Economic Importance of Generation Y. In the United States,
Generation Y is made up of the 56 million boys and girls between the ages of 10
and 24. The United States Census Bureau projects that Generation Y will continue
to grow through 2015 when it will reach 63.5 million people, an increase of
12.8% from its 1998 level. Over the next 12 years, the Census Bureau estimates
that the growth of Generation Y will outpace the growth of the general
population by 19.5%. Generation Y also accounts for more than $250 billion in
annual disposable income. We believe approximately 70% of Generation Y's
disposable income is discretionary.
Popularity of the Internet with Generation Y. Generation Y is the first
generation to grow up with the Internet as a part of daily life. The Internet's
graphical user interface, robust communication capabilities, dynamic content,
and ability to rapidly disseminate and access information make it a popular
medium for Generation Y. Based on eMarketer estimates, we believe that the
number of teens and college students who regularly access the Internet at least
twice a week for an hour or more will rise from an estimated 12.0 million in
1998 to 22.3 million by the year 2000.
The Need for a Comprehensive Generation Y Online Destination. The Internet
has created an ideal medium for Generation Y to gather, access information and
communicate with one another. However, we believe Generation Y is underserved by
the offerings on the Internet. While numerous Web sites provide some Generation
Y-specific content and commerce, most fail to provide the breadth and depth of
youth-oriented content that Generation Y seeks because these sites focus on a
broader audience. We believe Generation Y seeks a Web site that integrates:
- Community -- an environment in which to socialize with peers and to voice
opinions away from parents and other adults;
- Content -- dynamic information and entertainment about relevant
Generation Y topics such as music, relationships, fashion, entertainment,
astrology, gossip and sports; and
- Commerce -- products and services that appeal specifically to the tastes
of Generation Y presented in an appealing and trusted environment.
Generation Y also presents an important opportunity for advertisers and
direct marketers. Marketers are focusing on this group because of Generation Y's
significant and growing spending power and tendency to carry brand loyalties
established at a young age into adulthood. However, we believe that this group
is difficult for marketers to reach online because of the dispersed nature of
the Generation Y Internet audience. To maximize the impact of their marketing
dollars, advertisers seek to bring their messages to places on the Internet
where Generation Y congregates. In addition, direct marketers seek a Web site
with the ability to capture valuable demographic and customer preference
information to enable them more effectively to target their product and service
offerings to Generation Y. As a result, we believe that a vibrant and growing
Generation Y community can serve as a valuable conduit to advertisers and direct
marketers targeting this group.
THE ALLOY SOLUTION
Alloy is a leading online destination focused exclusively on Generation Y.
We have built a feature-rich Web site that addresses Generation Y's needs for
community, content and commerce. Our Web site is a destination where Generation
Y boys and girls can interact, share information, explore compelling and
relevant content and shop. These online services are reinforced by our widely
recognized Alloy brand which serves as a popular reference for the Generation Y
lifestyle. With approximately 25 million page views in March 1999, we believe
that we have aggregated one of the largest and most vibrant Generation Y
communities on the Internet. This focused Generation Y community offers a
valuable channel for advertisers and direct marketers to efficiently and
effectively reach their desired audience.
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We satisfy the needs of Generation Y through a site with the following
attributes:
- Community. Based on the feedback of our visitors, our community is a
"cool" environment for Generation Y boys and girls to interact, share
their ideas, express their opinions and develop their interests. We
facilitate communication among our Web site users through a variety of
free interactive services such as e-mail, instant messaging and real-time
chat. Additionally, we provide member-generated interactive content areas
such as personal homepage hosting services, topical message boards and
opinion polls and surveys. Our Generation Y-focused editorial staff also
provides advice in areas of interest to users, such as relationships and
fashion, in a forum where our users can express their opinions. We
believe that the sense of community we promote fosters loyalty among our
users and increases the amount of time they spend on our site.
- Content. Our Web site provides regularly updated content on topics of
interest to Generation Y boys and girls, including music, relationships,
celebrities, horoscopes, gossip, fashion trends, current events, sports
and a variety of other key topics. Our professional editorial staff
aggregates content from a variety of sources and develops an edited
presentation of the most compelling and relevant Generation Y content.
Additionally, our editors create selected original content in specific
areas of interest to our users. We believe that by continually refreshing
our content we have positioned Alloy as a daily online information and
entertainment source for Generation Y.
- Commerce. Our community and content services attract a significant
number of Generation Y users to our Web site and enable us to provide a
trusted, appealing environment in which to shop. Alloy offers Generation
Y a wide range of products that are specifically geared to their
interests and tastes. We currently offer boys and girls apparel,
outerwear, accessories, footwear, music, cosmetics and magazine
subscriptions. To encourage first-time and repeat Web purchases, we also
offer frequent product promotions and specials. Our product offerings are
selected from a wide range of the most popular brands and are continually
updated to keep pace with trends and seasons. We offer many of the same
products through our Alloy catalog frequently distributed throughout the
year. We believe the catalog not only adds significantly to our sales but
also is a key driver of additional users to our Web site.
- Targeted cost-effective medium for advertisers and direct marketers. As
a leading online destination for Generation Y, Alloy provides marketers
with a powerful channel to target this important consumer group. Our Web
site is organized around specific content areas that allow marketers to
deliver highly targeted messages to users with specific interests.
Additionally, as a result of our large online user base, we are able to
compile valuable demographic and customer preference information. With
approximately 480,000 registered users, of which approximately 127,000
are boys, we offer direct marketers the ability to effectively reach
their targeted consumer group. We currently offer marketers run-of-site
and premium placement advertisements, sponsorship of an electronic
newsletter, space in our widely circulated Alloy lifestyle catalog and
sponsorship of special contests.
OUR STRATEGY
Alloy's objective is to become the leading Generation Y online destination.
We intend to achieve our objective through the following strategies:
Maintain Single Brand Focus. We will continue to build Alloy as a single
brand known for high quality, Generation Y-focused community, content and
commerce for both boys and girls. Rather than dividing our marketing resources
across multiple brands and Web sites, we seek to maximize the impact of our
marketing efforts by promoting a single brand. We believe this allows us to
attract visitors to our Web site and build customer loyalty rapidly and
efficiently. We intend to initiate a national campaign in traditional and online
media and continue to use our popular Alloy catalog to reinforce the Alloy
brand.
Pursue Additional Revenue Opportunities. We intend to increase online
revenues by taking advantage of our targeted community, our database, our proven
direct marketing capabilities and our
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substantial experience in marketing to Generation Y. We intend to expand our
product and service offerings to create multiple and recurring revenue streams.
These revenue streams may include:
- sales of additional product categories;
- sales of advertising and sponsorships on our Web site; and
- sales of third-party services.
Strengthen Co-ed Community. We will continue to foster a community that
appeals to both boys and girls. We believe that a successful Generation Y
community site is largely dependent on dynamic boy-girl interaction. We will
continue to create an engaging environment for youths of both sexes to meet and
"hang out" by presenting information, products and services that have co-ed
appeal.
Continue to Improve User Experience. We intend to enhance the appeal of
our Web site by aggressively developing our content, services and
community-oriented features. We aggregate, edit and continually refresh high
quality and popular information, products and services to satisfy the evolving
interests and tastes of Generation Y. Recent content additions to our Web site
include Homework 911, a homework assistance resource and AstroStation, a
personalized astrology service. Recent technology-driven enhancements to our Web
site include Personal Homepages, a do-it-yourself homepage service and
AlloyLink, an instant messaging service. We also intend to provide more
personalized features and to make the user interface as easy-to-use, engaging
and fast as possible.
Attract Additional Visitors to Our Web Site. We intend to attract an
increasing number of visitors to our Web site through promotional campaigns in
traditional and online media. Through traditional media, we will continue to
market aggressively our Web site via our Alloy catalog, which leverages our
integrated direct mail and online offerings. We also intend to initiate new
campaigns via broadcast and print media. Online, we intend to increase our
advertising and expand our content syndication and other relationships with
heavily-trafficked Web sites. We also intend to explore cross-promotional
opportunities and product tie-ins that attract additional visitors to our Web
site.
Enhance Web Site and Technology Infrastructure. We will continue to invest
in infrastructure technologies and transaction-processing systems to support our
expected growth. We will continue to incorporate third-party technologies that
will efficiently and effectively support our fulfillment, commerce, transaction
processing and communications capabilities. We also intend to increase the
automation and efficiency of our supply chain and fulfillment activities to
enhance our customers' shopping experience.
Expand Internationally. Based on preliminary test marketing, we believe
that significant opportunities exist to address the global adoption of the
Internet and the international demand for Generation Y-focused community,
content and commerce. The size of Generation Y internationally and the emergence
of a global youth culture that is heavily influenced by the U.S. present
substantial overseas opportunities. We believe that an early presence in these
markets will enhance our long-term competitive position. We intend to explore
these opportunities to extend the reach of the Alloy brand and to create
strategic relationships in important international markets.
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OUR WEB SITE
Our homepage, www.alloy.com, contains five main areas that satisfy
Generation Y's needs for community, content and commerce. The majority of the
features and services of our Web site are accessible by all users; however,
registration is required for access to a number of our free community services.
Each of the features described below corresponds to the boxes on the picture of
our homepage.
Alloy Online Homepage Picture
1. Today in Alloy. This channel of our Web site contains daily features,
including the latest news, celebrity gossip, horoscopes, special promotional
offers, user surveys and more.
- News and Gossip -- daily headlines and celebrity gossip focusing on
music, movies and TV;
- Horoscopes -- daily horoscopes, love scopes, celebrity horoscopes and
Chinese astrology;
- Special Promotions -- daily special Alloy product promotions;
- Today's Trivia -- a daily trivia question where users can win prizes;
- Alloy Poll -- Generation Y-focused survey questions;
- Trend of the Day -- a chosen Alloy user reports on fashion trends in his
or her town; and
- Joke of the Day -- a chosen daily joke submitted by an Alloy user.
2. Shop. This is the main purchasing area of our Web site where online
shopping is designed to be fun, safe and simple. We carry over 300 different
products from over 70 vendors that include boys and girls apparel, outwear,
footwear, accessories, music, magazines and cosmetics.
- Shop -- shop online for our merchandise;
- Great Deals -- special opportunities to purchase products at reduced
prices in "Bargain Basement," "Deal of the Day" and "After School
Specials";
- Get a Free Catalog -- allows users to order the Alloy catalog online;
- Alloy Magstand -- special magazine subscription offers;
- Alloy Tunes -- Alloy-compiled compact disc offers; and
- Alloy Glam -- hair and makeup product offerings.
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3. Get Free E-mail. We provide free e-mail service for our users.
4. Connect. This channel contains a number of the community-oriented features
for our Web site.
- Alloy Chat -- multiple areas where Generation Y boys and girls are able
to communicate with one another via text messages in real time;
- Message Boards -- topic specific areas, such as "general hang" and "hook
up" and special interest areas such as skateboarding and music where
registered users can communicate with one another via text messages;
- Alloy Homepages -- allows registered users to create personal Web pages
with text, pictures, links and opinions;
- Fashion Diva -- interactive forum for fashion tips and advice moderated
by our fashion expert Carrie B;
- Ask Tucker and Ask Fiona -- interactive advice forums moderated by Tucker
and Fiona, our columnists on school, relationships, friendships and other
Generation Y subjects; and
- Dig or Dis -- an area where our registered users can express their
opinions on current Generation Y trends.
5. Do it Yourself. This channel of our Web site encourages our users to
contribute their own content.
- Art Gallery -- user-submitted photographs, drawings and paintings;
- Be a Critic -- user-submitted reviews of movies, music and books;
- Guest Editor -- editorial commentary contributed by a different user each
week;
- Poetry Pages -- user-submitted poetry;
- Post Your Stories -- user-submitted stories; and
- Zine Zone -- links to selected user homepages.
6. Music. This channel presents updated music-related news about bands,
artists, CDs, events and concert schedules.
7. TV & Movies. This channel presents news and features about television and
movies.
- Alloy TV -- Generation Y-focused programming via streaming audio and
video; and
- Movie Previews -- Trailers from the latest hit movies.
8. Advice & Articles. This channel highlights our advice columns and special
articles.
- Ask Tucker and Ask Fiona;
- Quiz -- fun quizzes about Generation Y Life;
- Homework 911 -- a resource to help with homework and school;
- Trauma Central -- highlights embarrassing, yet humorous, moments in our
users' lives; and
- Search -- a custom teen Internet search engine.
9. Fashion & Beauty. This channel highlights the latest in Generation Y fashion
and beauty trends.
- Virtual Makeover -- weekly online fashion and makeup advice based on
photographs submitted by Alloy users;
- Model Interviews -- interviews with the latest Alloy models;
- Fashion Scopes -- updated fashion advice based on users' astrological
signs; and
- Trend of the Day -- a chosen Alloy user reports on fashion trends in his
or her town.
10. Alloy Sports. This channel provides updated news about Generation Y sports
including skateboarding, snowboarding and other sports.
11. Alloy E-Zine. This channel allows users to easily subscribe to the Alloy
E-Zine.
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MARKETING AND PROMOTION
We market and promote our unified Alloy brand through channels that we have
developed as well as through traditional marketing channels. We believe we are
able to powerfully communicate our marketing messages through our Alloy catalog
and our Alloy E-Zine, a weekly broadcast e-mail to our registered users. Our
catalog and E-Zine continually remind customers about events, promotions and
other items of interest occurring online. We have complete control over how we
promote our Web site through our catalog and our E-Zine, thus allowing more
opportunities for our advertisers to reach Generation Y.
The marketing channels that we have developed are as follows:
- The Alloy Catalog. Our catalog serves as our primary offline marketing
tool to attract users to our Web site and to reinforce the Alloy brand.
With an expected 20 million catalogs to be circulated in 1999, our
catalog's circulation is comparable to major teen magazines, including
Seventeen, Teen and YM. Using an integrated marketing approach, we
heavily promote our Web site and prominently display special events and
online sales promotions throughout our catalog. We believe that our large
circulation, as well as the integrated relationship between our catalog
and our Web site, gives us an advantage over many of our competitors.
- Direct Marketing. Our databases of approximately 2.2 million Generation
Y boys and girls and approximately 480,000 registered users of our Web
site enable us to sell products and services using a variety of direct
marketing techniques. We believe these individuals represent a desirable
socioeconomic subset of the Generation Y demographic group who are
receptive to our direct marketing messages. We are able to leverage our
user database to deliver a weekly broadcast e-mail, Alloy E-Zine, that
contains information about fashion, music, contests, special Alloy
merchandise sales and links to our Web site. We intend to expand our use
of broadcast e-mail to include more targeted messages and promotions to
specific segments of our registered users. Additionally, we intend to use
our database to target specific groups of individuals via direct mail
with special online offers.
We also promote, advertise and increase the visibility of our brand and
attract new users and customers through the following methods:
- Traditional and Internet Advertising. Our advertising efforts to date
have been focused primarily offline. We believe that our strategy of
using traditional offline media to generate online sales enables us to
reach our target audience, build our brand name, control our promotional
budgets more effectively and tie advertising to revenue. To maximize our
visibility with our target audience, we advertise in the Generation Y
fashion, music and sports magazines such as Seventeen Magazine, YM, Teen,
Rolling Stone and Snowboarder. We have selectively placed online
advertising where we believed it to be most cost-effective. Following
this offering, we expect to significantly increase our investment in both
offline and online advertising and promotion, including a television
advertising campaign as well as testing online advertising programs.
- Strategic Alliances. We have entered into strategic relationships with
several Internet companies to increase the number of visitors to our Web
site. We have existing relationships providing us with prominent exposure
on such sites as Yahoo! Shopping, FashionMall.com, CatalogCity.com and
CatalogLink.com. We intend to enter into additional strategic alliances
with heavily trafficked Web sites.
- Special Co-Promotions. We have structured high profile, co-promotion
arrangements with a number of leading marketers including, among others,
MGM Entertainment, Sony Music, Burton Snowboards, MCI and
EarthLink/Sprint. Because of our large community, strong brand and
extensive distribution, these marketers have provided free products and
services that we use as special promotions for the Alloy community.
Promotions have included product give-aways, private movie screenings,
exclusive music give-aways and celebrity online chats. These promotions
help attract visitors to our Web site.
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SPONSORSHIP AND ADVERTISING SALES
We provide marketers with a large, demographically desirable Generation Y
audience. We believe that our Web site visitors represent an attractive
socioeconomic subset of active Generation Y consumers for companies focused on
the youth market.
For the year ended January 31, 1999, we derived less than 2.0% of our
revenues from sponsorships and advertising. However, we plan to generate an
increasing amount of revenue from sponsorship and advertising sales. Currently,
we use a third-party firm to sell advertising on our Web site. We intend to
build an in-house sales force during the coming year and offer the following
programs:
- Sponsorships. Sponsorships will allow advertisers to gain maximum
exposure by sponsoring areas of our Web site. We offer sponsorship
opportunities throughout our entire site. We also offer sponsorship
advertising in Alloy E-Zine, our weekly electronic magazine distributed
by e-mail to approximately 480,000 subscribers.
- Run-of-Site. Run-of-site rotations are banner advertisements that rotate
on a random basis throughout our Web site, appealing to advertisers
seeking to establish general brand recognition with our users. To date,
participating advertisers have included Princeton Review, Sony
Playstation and Partnership for a Drug Free America.
- Targeted Advertising. Targeted advertising allows companies to deliver
their advertisements to specific segments of our user base. This
segmentation can be done by specific area of our Web site, by the time of
day, user location or age.
- Combination Print/Web Site Advertising. Unlike many of our competitors,
we have the ability to offer selected combinations of print and Web site
advertisements. With an estimated circulation of 20 million catalogs in
1999, we believe we offer advertisers the option to gain significant
additional exposure to the Generation Y demographic group. To date,
advertisers that have chosen this type of program have included Seventeen
Magazine, Elektra Records and N2K.
MERCHANDISING
Our merchandise strategy is designed to minimize fashion risk and
facilitate speed to market and product assortment flexibility. Our objective is
to reflect, not to lead, Generation Y styles and tastes. We select merchandise
from the best existing designers and producers allowing us to stay current with
the tastes of the market rather than to predict future fashion trends. Our
buyers and merchandisers work closely with our many vendors to tailor products
to our specifications, rather than design and produce our own line. By doing
this, we are able to minimize design risk and make final product selections only
two to three months before the products are brought to market, not the typical
six to nine months for many apparel companies. We believe this strategy
significantly reduces our trend risk and is consistent with our role as an
"editor" of Generation Y lifestyle.
Our organization and operational processes support our merchandising
strategy. Our buyers have significant experience with retail and media companies
that market to Generation Y. We believe our staff has a proven ability to
identify desirable products and ensure that our vendors meet specific guidelines
regarding product quality and production time. At present, we use primarily
domestic vendors who must have the ability to produce and ship products within
two to eight weeks. This speed to market gives us the flexibility to incorporate
the latest trends into our product mix and to better serve the evolving tastes
of Generation Y.
Our merchandising strategy also enables us to closely control our inventory
levels. We typically purchase only approximately 50% of our initial sales
estimates and rely on quick re-order ability. Because we do not make aggressive
initial orders, we believe we are able to minimize our risk of excess inventory.
Additionally, we use our Web site to offer special product prices as part of our
"Bargain Basement" section and in the past have mailed various sales circulars
to our customers to sell slower moving inventory.
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Alloy has created a strong brand presence among our vendor group. We
believe that presence on our Web site and in our circulating catalog is a
valuable marketing tool for our vendors and, as a result, our vendors typically
grant us online and catalog exclusivity for each product we select. We believe
this exclusivity makes the merchandise in the Alloy catalog more attractive to
our target audience and protects us from direct price comparisons. At any one
time, our merchandise selection includes more than 70 vendors. No vendor
accounts for more than 10% percent of our sales. Brands currently offered
through Alloy include nationally recognized names such as Vans, O'Neill and
Diesel, as well as smaller, niche producers, including Dawls, Free People and
Kikwear.
A typical Alloy catalog is 60 to 68 pages, with approximately 220 unique
items. Apparel for girls ranges from basics, such as shorts, jeans and T-shirts,
to seasonal and fashion-oriented merchandise such as outerwear and swimwear,
dresses and accessories. Boys' apparel includes shorts, T-shirts, jeans,
outerwear and sports-related attire. Accessories include bags, watches,
cosmetics and costume jewelry. Our footwear selections include sandals,
platforms, sneakers, boots and flats.
ORDERING, FULFILLMENT AND CUSTOMER SERVICE
In order to attract and retain customers, we use a full-service, scalable,
and state-of-the-art call center and fulfillment center with trained personnel.
Our call center and fulfillment center for both the Alloy catalog and our Web
site are provided by Harrison Fulfillment Services. Contracting with Harrison
has allowed Alloy to grow rapidly without incurring major capital expenditures
or dedicating management resources to build and staff an in-house call and
fulfillment center. This has also allowed us to maintain a high level of
customer service during our period of rapid growth.
Harrison has sufficient capacity at its fulfillment center to accommodate
our expected growth until at least 2001. Our inventory is stored at Harrison's
2.1 million cubic foot warehouse in Chattanooga, Tennessee. We estimate that we
currently occupy only 100,000 cubic feet of this facility. As we continue to
grow, it may become cost-effective at some point in the future to bring the call
center and fulfillment center in-house, but we do not currently anticipate
undertaking such a project until at least the year 2001.
We also believe that high levels of customer service and support are
critical to the value of our services and to retaining and expanding our
customer base. Harrison maintains two call centers with approximately 200
stations and an interactive voice response system. Harrison personnel conduct
teleservice training sessions continuously, and Alloy personnel visit
approximately once a month to introduce and explain new Alloy products and
procedures. These customer service representatives are available 24 hours a day,
7 days a week through a toll-free telephone number. The representatives are able
to guide customers through the order process, monitor order progress and provide
general information about our products such as sizing advice and product
features.
INFRASTRUCTURE, OPERATIONS AND TECHNOLOGY
The technology infrastructure of our operations provides continuous
availability of our online service. All of the critical components of the system
are redundant, which allows continuous service in case of unexpected component
failure, maintenance and upgrades.
Currently, we license commercially available technology whenever possible
in lieu of dedicating our financial and human resources to developing solutions.
Our system hardware is hosted at OneSoft Corporation, a third-party facility in
Annandale, Virginia. A group of systems administrators and network managers at
OneSoft operate our Web site, network operations and transactions-processing
systems and monitor our systems 24 hours a day. Our infrastructure is scalable,
allowing us to quickly adjust to our rapidly expanding user base.
Our operations are dependent on our ability to maintain our computer and
telecommunications systems in effective working order and to protect our systems
against damage from fire, natural disaster, power loss, telecommunications
failure or similar events. Our servers are powered by an uninterruptible power
supply to provide back-up power supply at the operations facility within seconds
of a power outage.
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Our systems are copied to backup tapes each night and regularly stored at an
off-site storage facility. We have implemented these various redundancies and
backup systems in order to minimize the risk associated with damage from fire,
power loss, telecommunications failure, break-ins, computer viruses and other
events beyond our control.
OPPORTUNITIES IN INTERNATIONAL MARKETS
Based on preliminary test marketing, we believe that significant
opportunities exist to address the global adoption of the Internet and the
international demand for Generation Y-focused community, content and commerce.
The size of the Generation Y population internationally and the emergence of a
global youth culture that is heavily influenced by the U.S. present substantial
overseas opportunities. For example, the European Union currently has 72 million
people between the ages of 10 and 24, 16 million more than in the United States.
Japan's Generation Y population numbers approximately 25 million. We believe
that an early presence in these markets will enhance our long-term competitive
position. We intend to explore these opportunities to extend the reach of the
Alloy brand and to create strategic relationships in important international
markets.
COMPETITION
Electronic Commerce and Catalog Sales. The online commerce market is new,
rapidly evolving and intensely competitive. Current and new competitors can
launch new Web sites at relatively low cost. Our catalog competes with other
catalog retailers and direct marketers, some of which may specifically target
our customers. We currently or potentially compete with a variety of other
companies serving segments of the Generation Y market including:
- various mail-order retailers;
- various Web-based retailers;
- various Generation Y traditional retailers, either in their physical or
online stores; and
- various online service providers that offer products of interest to our
Generation Y consumers; including America Online and Microsoft Network.
We believe that the following are the principal competitive factors in our
market:
- brand recognition;
- quality of site content;
- merchandise selection;
- convenience;
- price;
- customer service; and
- reliability and speed of fulfillment.
Many of our current and potential store-based, catalog and online
competitors have longer operating histories, larger customer or user bases and
significantly greater financial, marketing and other resources than we do. In
addition, competitors could enter into exclusive distribution arrangements with
our vendors and deny us access to their products. If we face increased commerce
competition, our business, operating results and financial condition may be
materially and adversely affected.
Internet Community Services. We compete for users and advertisers with
many providers of community services, including companies that attempt, as we
do, to target Generation Y consumers. These include:
- Web sites primarily focused on the Generation Y demographic group;
- online service providers with teen-specific channels, such as America
Online; and
- community Web sites, such as GeoCities, that may create Generation-Y
specific communities.
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In addition, we could face competition in the future from traditional media
companies, a number of which, including Disney, CBS and NBC, have recently
acquired or invested in Internet companies. The Generation Y-focused magazines,
such as Seventeen, YM or Teen, might devote additional efforts to their existing
Web sites which would compete with us for users and advertising dollars.
We believe that the principal competitive factors for companies seeking to
create Generation Y-focused communities on the Internet are:
- brand recognition;
- critical mass of both boys and girls;
- relevant content and editorial expertise;
- functionality of the Web site; and
- user loyalty.
We believe that the strong Alloy brand combined with our ability to deliver
targeted audiences to advertisers and the overall cost-effectiveness of the
advertising medium we offer are principal competitive advantages. However, many
of our competitors, current and potential, may have greater financial or
technical resources and we could face additional competitive pressures that
would have a material and adverse effect on our business, results of operations
and financial condition.
INTELLECTUAL PROPERTY
We have applied for trademark or service mark protection for the names
"Alloy", "Alloyonline.com", "Alloymail.com", "Local 212", "Stationwagon" and
"Hello My Name Is". We also have rights to numerous Internet domain names
including alloy.com, alloyonline.com, alloymail.com, alloysports.com and
alloymusic.com. We regard our service marks, trademarks, trade secrets and
similar intellectual property as critical to our success. We rely on a
combination of trademark and copyright law, trade secret protection and
confidentiality, license and other agreements with employees, customers,
strategic partners and others to protect our intellectual property rights.
Effective trademark, service mark, copyright and trade secret protection may not
be available in every country in which we sell our products and services online.
Therefore, the steps we take to protect our intellectual property rights may be
inadequate. In addition, we regard our database as critical to our success. Our
database is maintained on a secure system by a third-party database service
bureau and is accessible only by us.
GOVERNMENT REGULATION
We are subject, both directly and indirectly, to various laws and
governmental regulations relating to our business. The Internet is rapidly
evolving and there are few laws or regulations directly applicable to online
commerce and community Web sites. Due to the increasing popularity and use of
the Internet, governmental authorities in the United States and abroad may adopt
laws and regulations to govern Internet activities. Laws with respect to online
commerce may cover issues such as pricing, distribution and characteristics and
quality of products and services. Laws with respect to community Web sites may
cover content, copyrights, libel, obscenity and personal privacy. Any new
legislation or regulation or the application of existing laws and regulations to
the Internet could have a material and adverse effect on our business, results
of operations and financial condition.
Although our online transmissions generally originate in New York and
Virginia, the governments of other states or foreign countries might attempt to
regulate our transmissions or levy sales or other taxes relating to our
activities. As our products and services are available over the Internet
anywhere in the world, multiple jurisdictions may claim that we are required to
qualify to do business as a foreign corporation in each of those jurisdictions.
Our failure to qualify as a foreign corporation in a jurisdiction where we are
required to do so could subject us to taxes and penalties for the failure to
qualify. It is possible that state and foreign governments might also attempt to
regulate our transmissions of content on our Web site or prosecute us for
violations of their laws. We cannot assure you that state or foreign
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governments will not charge us with violations of local laws or that we might
not unintentionally violate these laws in the future.
The U.S. Congress recently enacted the Children's Online Privacy Protection
Act of 1998. The principal provisions of the law are expected to become
effective between April 21, 2000 and April 21, 2001. Among other things, subject
to limited exceptions, this act:
- makes it unlawful for an operator of a Web site or online service
directed to children under age 13, and any operator that has actual
knowledge that it is collecting personal information from children under
age 13, to collect personal information from these children without
having obtained verifiable parental consent; and
- prohibits requiring that a child under age 13 disclose more information
than is reasonably necessary in order to participate in a game, the
offering of a prize, or another activity.
The Federal Trade Commission has not yet promulgated regulations
interpreting this act. We believe that the promulgation of regulations under
this act will make it more difficult for us to collect personal information from
our audience.
A number of government authorities are increasingly focusing on online
privacy issues and the use of personal information. The Federal Trade Commission
and several states have investigated the use by some Internet companies of
personal information. Our business could be adversely affected if new
regulations regarding the use of personal information are introduced or if
government authorities choose to investigate our privacy practices. In addition,
the European Union recently adopted a directive addressing data privacy that may
limit the collection and use of some information regarding Internet users. This
directive may limit our ability to target advertising or collect and use
information in some European countries.
EMPLOYEES
As of March 9, 1999, we had 25 full-time employees, of which:
- five work in merchandising;
- four work in editorial and content development;
- three work in customer service;
- three work in sales and marketing;
- three work in technology development;
- four work in operations; and
- three work in administration.
None of our employees is represented by a labor union or is the subject of a
collective bargaining agreement. We consider relations with our employees to be
good.
LEGAL
There are no material legal proceedings pending, or to our knowledge,
threatened against our company.
FACILITIES
Our principal offices are located between New York City's Silicon Alley and
the Garment District at 115 West 30th Street, New York, New York 10001, where we
lease approximately 7,000 square feet of space. This lease expires in February
2002. We believe that our current facilities will be adequate to meet our needs
for the near future. Sufficient space is available on the current premises for
expansion. We do not own any real estate.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
Directors, executive officers and other key employees of Alloy, and their
ages, as of May 7, 1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Matthew C. Diamond................... 30 Chairman, Chief Executive Officer, Treasurer
and Director
James K. Johnson, Jr................. 32 Chief Operating Officer, President and Director
Samuel A. Gradess.................... 33 Chief Financial Officer, Secretary and Director
Neil I. Vogel........................ 29 Chief Corporate Development Officer
Andrew A. Roberts.................... 32 Vice President Business Development
Susan K. Kaplow...................... 31 Director of Internet Development
Joan D. Rosenstock................... 33 Marketing Director
Karen K. Ngo......................... 27 Creative Director
J. Scott Caldwell.................... 35 Director of Catalog Operations
Peter M. Graham...................... 44 Director
David Yarnell........................ 43 Director
</TABLE>
Matthew C. Diamond founded Alloy together with Mr. Johnson in January 1996,
and served as the Director of Marketing and Planning until January 1999. He has
served as a director of Alloy since July 1996, was appointed as Chief Executive
Officer in January 1999 and was elected Chairman of the Board in April 1999.
From 1991 to 1994, Mr. Diamond held a variety of financial and operations posts
at the GE Company, including a two-year business development assignment in Asia.
Mr. Diamond received his MBA from the Harvard Graduate School of Business in
1996 and his BA in Economics from the University of North Carolina at Chapel
Hill in 1991.
James K. Johnson, Jr. founded Alloy together with Mr. Diamond in January
1996 and has been a director since that time. He was appointed President of
Alloy in January 1997 and Chief Operating Officer in January 1999. From 1989 to
1996, Mr. Johnson held a variety of financial, operations and business
development positions with the GE Company. Mr. Johnson received his BA in
History from Hamilton College in 1989.
Samuel A. Gradess joined Alloy in July 1996 and has been a director since
that time. He was appointed as Secretary and Director of Finance and
Administration of Alloy in January 1997 and Chief Financial Officer in January
1999. From 1987 to 1997, Mr. Gradess was a Vice President at Goldman, Sachs &
Co., an investment bank. Mr. Gradess received his BA in Economics from the
University of Virginia in 1987.
Neil I. Vogel joined Alloy in February 1999 and has been Chief Corporate
Development Officer since that time. From 1993 to 1999, Mr. Vogel held various
positions in the Investment Banking department of Ladenburg Thalmann & Co. Inc.,
an investment bank, most recently Vice President in the Consumer and Internet
Group. Mr. Vogel received a BS in Economics from the Wharton School of Business
at the University of Pennsylvania in 1992.
Andrew A. Roberts joined Alloy in January 1999 and has been Vice President
Business Development since that time. From 1996 to 1999, Mr. Roberts was a
management consultant at PricewaterhouseCoopers LLP, focusing on developing
growth strategies for a variety of clients. Mr. Roberts received his MBA from
the Harvard Graduate School of Business in 1996, his MMHS from Brandeis
University 1992 and his BA from Brandeis University in 1991.
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<PAGE> 41
Susan K. Kaplow joined Alloy in March 1998 and has been Director of
Internet Development since that time. From 1994 to 1998, Ms. Kaplow held a
variety of positions at Seventeen Magazine including Senior Editor and Music
Editor. From 1992 to 1994, Ms. Kaplow served as a Staff Writer for Allure
magazine. Ms. Kaplow received her BA in English from the University of Maryland
in 1988.
Joan D. Rosenstock joined Alloy in August 1998 and has served as Director
of Marketing since that time. From 1995 to 1998, Ms. Rosenstock held a variety
of positions at NBA Properties, the marketing arm of the National Basketball
Association, most recently Director of Marketing. Ms. Rosenstock received her
MBA from the Harvard Graduate School of Business in 1995 and her BA in Liberal
Arts from the University of Michigan in 1987.
Karen K. Ngo joined Alloy in March 1997 and has been Creative Director
since that time. From 1996 to 1997, Ms. Ngo held a variety of positions at
Seventeen Magazine including Feature Editor and Fashion Stylist. From 1995 to
1996, Ms. Ngo served as a Production Coordinator for 2X4 Design Studios, a
photography studio. Ms. Ngo received her BA in Art from Yale University in 1993.
J. Scott Caldwell joined Alloy in January 1999 and has been Director of
Catalog Operations since that time. From 1998 to 1999, Mr. Caldwell was a Brand
Manager at Genesis Direct, a direct marketer. From 1996 to 1997, Mr. Caldwell
was a Principal of Authentic Sports Marketing, a direct marketer. From 1994 to
1996, Mr. Caldwell was a Marketing Manager with the Direct Marketing Division of
Killir Enterprises. Mr. Caldwell attended the University of Kansas.
Peter M. Graham has served as a director of Alloy since November 1998. He
has been the President and Chief Operating Officer of Ladenburg Thalmann Group
Inc. and Vice Chairman of its principal subsidiary, Ladenburg Thalmann & Co.
Inc., since 1994. Mr. Graham joined Ladenburg Thalmann & Co. Inc. in 1976 after
having attended the Wharton School of Business at the University of
Pennsylvania. Mr. Graham is a director of Regency Equities Corp. and Seventh
Generation, both of which are publicly traded companies. Mr. Graham was elected
to the board pursuant to a stockholders agreement that will terminate upon the
completion of this offering.
David Yarnell has served as a director of Alloy since November 1998. He has
been a Managing Member of Brand Equity Partners I, LLC since March 1997 and a
Vice President of Consumer Venture Partners since June 1993. From June 1991 to
June 1993, Mr. Yarnell served as President of Mexx USA, Inc., a contemporary
apparel company. Mr. Yarnell is a director of Cyberian Outpost, Inc., a publicly
traded online commerce company, and Buca di Beppo, a restaurant chain. He
received his MBA from the Harvard Graduate School of Business in 1982. Mr.
Yarnell was elected to the board pursuant to a stockholders agreement that will
terminate upon the completion of this offering.
EMPLOYMENT AGREEMENTS
All of our executive officers and key employees have entered into
agreements that contain non-competition, non-disclosure and non-solicitation
restrictions and covenants, including a provision prohibiting these officers
from competing with Alloy during their employment with us and for a period of
one year after termination of their employment with us. In addition, we have
entered into employment agreements with Matthew C. Diamond, James K. Johnson and
Samuel A. Gradess that will take effect upon the completion of this offering.
They will each receive initial annual base salaries of $150,000 and be eligible
for annual bonuses of up to 25% of base salary to be determined by a mutually
agreed-upon formula. The agreements further provide that, if we terminate any of
Messrs. Diamond, Johnson or Gradess without "cause", as defined in the
agreements, they will be entitled to severance pay equal to their annual base
salaries, payable in installments, for a period of 12 months from the date of
termination. If termination is voluntary, by Alloy for cause or as a result of
death or disability, we have no obligation to pay severance beyond the
individual's accrued base salary and bonus up to the date of termination. As of
February 22, 1999, we entered into an employment letter with Neil Vogel, our
Chief Corporate Development Officer. Mr. Vogel receives an annual salary of
$85,000. We also granted Mr. Vogel options to purchase 304,560 shares of our
common stock under our 1997 Restated Employee, Director and
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<PAGE> 42
Consultant Stock Option Plan. Except in some circumstances, his options have the
following vesting schedules and exercise prices:
- 28,200 options are currently exercisable at an exercise price equal to
the price paid by the public in this offering;
- 28,200 options will be exercisable on February 22, 2000 at an exercise
price equal to the price paid by the public in this offering;
- 56,400 options will be exercisable on February 22, 2001 at an exercise
price equal to 120% of the price paid by the public in this offering;
- 84,600 options will be exercisable on February 22, 2002 at an exercise
price equal to 150% of the price paid by the public in this offering; and
- 107,160 options will be exercisable on February 22, 2003 at an exercise
price equal to 175% of the price paid by the public in this offering.
Mr. Vogel is eligible for any bonus and benefits we offer to our executive
officers.
BOARD OF DIRECTORS
Upon the completion of this offering, our board of directors will be
divided into three classes as nearly equal in number as possible. Each year the
stockholders will elect the members of one of the three classes to a three-year
term of office. Mr. Graham and Mr. Yarnell will serve in the class whose term
expires in the year 2000, Mr. Gradess will serve in the class whose term expires
in the year 2001 and Mr. Diamond and Mr. Johnson will serve in the class whose
term expires in the year 2002.
BOARD COMMITTEES
The compensation committee of the board of directors determines the
salaries and incentive compensation of our officers and provides recommendations
for the salaries and incentive compensation of our other employees. The
compensation committee also administers our 1997 Restated Employee, Director and
Consultant Stock Option Plan. The members of the compensation committee are
Messrs. Graham and Yarnell.
The audit committee of the board of directors reviews, acts on and reports
to the board of directors with respect to various auditing and accounting
matters, including the selection of our independent auditors, the scope of the
annual audits, fees to be paid to the auditors, the performance of our
independent auditors and our accounting practices. The members of the audit
committee are Messrs. Graham and Yarnell.
DIRECTORS COMPENSATION
Directors are reimbursed for reasonable out-of-pocket expenses incurred in
attending board meetings. Non-employee directors receive no directors' fees, but
directors are eligible to receive grants of non-qualified stock options under
our 1997 Restated Employee, Director and Consultant Stock Option Plan. Messrs.
Graham and Yarnell, as non-employee directors, will each receive an option to
purchase 40,000 shares of common stock, at an exercise price equal to the
initial public offering price, effective on the closing of this offering. These
options will vest in equal annual installments of 10,000 shares over four years.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee of the board of directors consists of Messrs.
Graham and Yarnell, neither of whom has been an officer or employee of Alloy at
any time since our inception. No executive officer of Alloy serves as a member
of the board of directors or compensation committee of any entity that has one
or more executive officers serving as a member of our board of directors or
compensation
41
<PAGE> 43
committee. Prior to the formation of the compensation committee, the board of
directors as a whole made decisions relating to the compensation of our
executive officers.
KEY PERSON LIFE INSURANCE
Alloy has purchased and presently maintains key person life insurance
policies in the amount of $2.0 million on the lives of each of Messrs. Diamond,
Johnson and Gradess.
EXECUTIVE COMPENSATION
Summary Compensation. The table below sets forth the compensation earned
during the fiscal year ended January 31, 1999 by our chief executive officer. No
other executive officer or employee of Alloy received compensation in excess of
$100,000 in the fiscal year ended January 31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION(1)
NAME AND PRINCIPAL POSITION SALARY
--------------------------- ---------------
<S> <C>
Matthew C. Diamond $70,000
Chief Executive Officer, Treasurer and Director
</TABLE>
- ------------
(1) The columns for "Bonus" and "Other Annual Compensation" have been omitted
because there is no compensation required to be reported.
OPTION GRANTS IN LAST FISCAL YEAR
Alloy did not grant any options to Mr. Diamond during the fiscal year ended
January 31, 1999.
OPTION EXERCISES AND YEAR-END OPTION
Mr. Diamond did not exercise any options to purchase securities of Alloy
during the fiscal year ended January 31, 1999 and did not hold any options as of
January 31, 1999.
EMPLOYEE BENEFIT PLANS
Restated 1997 Employee, Director and Consultant Stock Option Plan. The
following description of Alloy's Restated 1997 Employee, Director and Consultant
Stock Option Plan is a summary and qualified in its entirety by the text of the
plan, which is filed as an exhibit to the registration statement of which this
prospectus is a part.
The purpose of the plan is to enhance the profitability and value of Alloy
for the benefit of its stockholders by enabling Alloy to offer to employees,
directors and consultants stock based incentives. This is a means to both
increase the ownership of Alloy held by those individuals in order to attract,
retain and reward them and strengthen the mutual interests between those
individuals and the stockholders of Alloy. The plan authorizes the grant of
options to purchase shares of common stock to employees, directors and
consultants of Alloy and its affiliates. Under the plan, Alloy may grant
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986 and non-qualified stock options. Incentive stock options
may only be granted to employees of Alloy.
The plan was approved by Alloy's board of directors and its stockholders in
June 1997 and subsequently amended by the board of directors and stockholders in
April 1999. A total of 4,000,000 shares are reserved for issuance under the
plan. As of the date of this prospectus, 362,481 shares had been issued as the
result of the exercise of options, 807,232 shares were subject to outstanding
options and 2,830,287 shares were available for future grants. The plan is
administered by the compensation committee of the board. Subject to the
provisions of the plan, the committee has authority to determine the
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<PAGE> 44
employees, directors and consultants of Alloy who are to be awarded options and
the terms of these awards, including:
- the number of shares subject to an option;
- when the option becomes exercisable;
- the option exercise price per share; and
- the duration of the option.
Incentive stock options must have an exercise price equal to at least 100%
(110% if the grant is to a stockholder holding more than 10% of Alloy's voting
stock) of the fair market value of a share on the date of the award and
generally cannot have a duration of more than ten years (five years if the grant
is to a stockholder holding more than 5% of Alloy's voting stock). Terms and
conditions of awards are in written agreements between Alloy and the holders of
the options. Awards under the plan may not be made after the tenth anniversary
of the date of its adoption but awards granted before that date may extend
beyond that date.
If the employment with Alloy of the holder of an incentive stock option is
terminated for any reason other than as a result of the holder's death or
disability or for "cause" as defined in the plan, the holder may exercise the
option, to the extent exercisable on the date of termination of employment,
until the earlier of the option's specified expiration date and 90 days after
the date of termination. If an option holder dies or becomes disabled, both
incentive and non-qualified stock options may generally be exercised, to the
extent exercisable on the date of death or disability, by the option holder or
the option holder's survivors until the earlier of the option's specified
termination date and one year after the date of death or disability. If an
option holder's employment with Alloy is terminated for cause, all outstanding
and unexercised options are forfeited.
Under the Restated 1997 Employee, Director and Consultant Stock Option
Plan, any non-employee or non-affiliate director first elected or appointed to
the board following the consummation of this offering will be granted a
non-qualified stock option to purchase 40,000 shares of our common stock as of
the date of election or appointment to the board. If the director has been in
continuous and uninterrupted service to the board on the fourth anniversary of
election or appointment, the director will be granted another non-qualified
stock option to purchase 40,000 shares of our common stock. Similarly, Messrs.
Graham and Yarnell, our current non-employee directors, have received options on
the same terms. Each of these options will vest in equal annual installments of
10,000 shares over four years and each has a term of ten years.
Employee Stock Purchase Plan. On April 16, 1999, the board of directors
adopted the 1999 Employee Stock Purchase Plan. This plan will be submitted for
approval by our stockholders prior to the closing of this offering. The 1999
Employee Stock Purchase Plan authorizes the issuance of a maximum of 500,000
shares of common stock to participating employees through the grant of
nontransferable options.
The 1999 Employee Stock Purchase Plan is administered by the board's
compensation committee. All employees working 20 hours or more per week for more
than five months of the year and who have been with Alloy for at least three
consecutive months are eligible to participate. Employees who own more than 5%
of Alloy's stock may not participate in the 1999 Employee Stock Purchase Plan.
To participate in the 1999 Employee Stock Purchase Plan, an employee authorizes
a deduction from his or her pay, not to exceed $21,250 per year, beginning on
the first day of a designated six month offering period. On the first day of
each of these offering periods, twice per year, each participating employee
receives an option to purchase Alloy shares at an exercise price which is the
lesser of 85% of the fair market value of Alloy's common stock on the first or
last business day of the particular offering period. On the last day of each
offering period, each outstanding option granted under the 1999 Employee Stock
Purchase Plan is automatically exercised using funds withheld from each
employee's compensation as of that date. A participating employee may withdraw
from the 1999 Employee Stock Purchase Plan at any time.
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<PAGE> 45
401(k) Plan. Effective January 1, 1999, we instituted the Alloy Online,
Inc. 401(k) Savings Plan (the "401(k) Plan"). Eligible employees of the Company
who are at least 21 years of age may begin making deferrals under the 401(k)
Plan as of the first month following their date of hire, or the date they become
otherwise eligible. The 401(k) Plan is intended to be a qualified plan under
Internal Revenue Code Section 401(a), with a cash or deferred option governed by
Section 401(k) of the Internal Revenue Code. Employees may elect to defer their
eligible current compensation up to the statutorily and 401(k) Plan prescribed
limits and have the amount of such deferral contributed to the 401(k) Plan.
Contributions to the 401(k) Plan are invested in the investment funds described
in the 401(k) Plan.
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<PAGE> 46
CERTAIN TRANSACTIONS
DIRECTORS AND EXECUTIVE OFFICERS
On January 22, 1996, Mr. Diamond, our chairman and chief executive officer,
and Mr. Johnson, our chief operating officer, each purchased 1,353,600 shares of
our common stock for a purchase price of $0.03695 per share which they paid in
cash (60%) and by contribution of services (40%). Mr. Gradess, our chief
financial officer, purchased 1,353,600 shares of common stock in September 1996
for a purchase price of $.11081 per share in cash.
COMMON STOCK OFFERINGS
June 1997 Offering. In June 1997, Alloy raised gross proceeds of
approximately $2.36 million from the issue and sale of a total of 2,732,219
shares of common stock in a private placement to 36 investors at a price of
$0.87 per share. Each purchaser of shares in the offering also received a
warrant to purchase additional shares of our common stock for nominal
consideration which provided these purchasers with dilution protection in the
event of specified future sales of equity securities by Alloy prior to June 30,
1998. These warrants were exercised in July 1998 and resulted in the issuance of
an additional 711,560 shares of common stock to the purchasers. Purchasers
included the following individuals who are members of the immediate families of
directors and executive officers of Alloy:
<TABLE>
<CAPTION>
ADDITIONAL SHARES
NUMBER OF SHARES ACQUIRED UPON EXERCISE OF
NAME RELATIONSHIP PURCHASED WARRANTS IN JULY 1998
- ---- -------------------------- ----------------- --------------------------
<S> <C> <C> <C>
Robert D. Diamond........ Father of Matthew Diamond 69,316 18,053
Stuart Gradess........... Father of Samuel Gradess 28,882 7,521
Anita R. Johnson......... Mother of James Johnson 34,657 9,026
</TABLE>
Mr. Robert E. Kerson, uncle of Matthew Diamond and a beneficial owner of
more than five percent of our common stock, purchased 138,633 shares of common
stock in the offering at a price of $0.87 per share and upon exercise of the
warrant associated with these shares acquired an additional 36,104 shares in
July 1998. These shares are held by Mr. Kerson and his wife, Miriam K. Kerson,
as Joint Tenants with Right of Survivorship.
January 1998 Offering. In January 1998, Alloy raised gross proceeds of
approximately $1.69 million from the issue and sale of a total of 975,148 shares
of common stock in a private placement to 19 investors at a price of $1.73 per
share. Purchasers included the following individuals who are members of the
immediate families of directors and executive officers of Alloy:
<TABLE>
<CAPTION>
NAME RELATIONSHIP NUMBER OF SHARES PURCHASED
- ---- --------------------------- ---------------------------
<S> <C> <C>
Robert D. Diamond....................... Father of Matthew Diamond 57,821
David M. Diamond........................ Brother of Matthew Diamond 11,564
Joseph Diamond.......................... Brother of Matthew Diamond 5,782
Amy K. Diamond.......................... Sister of Matthew Diamond 5,782
Michael K. Diamond...................... Brother of Matthew Diamond 5,782
Jeffrey Speer and Joy Diamond, JTWROS... Brother-in-law and Sister 30,355
of Matthew Diamond
</TABLE>
Mr. Kerson purchased 173,463 shares of common stock in the offering at a
price of $1.73 per share. These shares are held by Mr. Kerson and his wife as
Joint Tenants with Right of Survivorship.
OFFERING OF NOTES AND WARRANTS
In May 1998, Alloy raised gross proceeds of approximately $3.81 million
from the issue and sale of promissory notes together with warrants to purchase a
total of 480,682 shares of common stock in a private
45
<PAGE> 47
placement to 31 investors. The notes bear an interest rate of 10% per annum
compounded quarterly, payable at maturity and are repayable on the first to
occur of:
- May 13, 2001;
- the closing of this offering; and
- other transactions constituting a change in control of Alloy.
Accordingly, Alloy will be obligated to repay the notes from the proceeds
of this offering. The warrants are exercisable until May 12, 2001 and had an
initial exercise price of $5.465 per share. The exercise price was reduced to
$5.035 per share as a result of the sale of shares of convertible preferred
stock at a price of $3.391 per share in November 1998 and February 1999.
Purchasers of the notes and the warrants included the following individuals who
are members of the immediate families of directors and executive officers of
Alloy:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT SHARES REPRESENTED
NAME RELATIONSHIP OF NOTE BY WARRANT
---- ------------ ---------------- ------------------
<S> <C> <C> <C>
Robert D. Diamond...... Father of Matthew Diamond $ 5,000 630
David M. Diamond....... Brother of Matthew Diamond $35,000 4,416
Joseph Diamond......... Brother of Matthew Diamond $10,000 1,262
Amy K. Diamond......... Sister of Matthew Diamond $ 5,000 630
Michael K. Diamond..... Brother of Matthew Diamond $ 5,000 630
Joy Diamond............ Sister of Matthew Diamond $ 5,000 630
</TABLE>
Mr. Peter Graham, who became a director of Alloy in November 1998 and is
President and Chief Operating Officer of Ladenburg Thalmann Group Inc. and Vice
Chairman of its principal subsidiary, Ladenburg Thalmann & Co. Inc., an
underwriter in connection with this offering, purchased notes in the principal
amount of $500,000 together with warrants to purchase a total of 63,084 shares
of common stock.
CONVERTIBLE PREFERRED STOCK OFFERING
In November 1998 and February 1999, Alloy raised gross proceeds of
approximately $5.05 million from the issue and sale of a total of 1,487,843
shares of convertible preferred stock in a private placement to two investors at
a price of $3.391 per share. Brand Equity Ventures I, L.P., a five percent
beneficial stockholder of Alloy, purchased a total of 1,474,573 shares of
convertible preferred stock at a price of $3.391 per share. David Yarnell, a
director of Alloy, is a Managing Member of Brand Equity Partners I, LLC, the
General Partner of Brand Equity Ventures I, L.P., and was elected to our board
of directors pursuant to a stockholders agreement that terminates upon the
closing of this offering.
Upon the closing of this offering, each outstanding share of convertible
preferred stock will be converted into 1.128 shares of common stock.
TRANSACTIONS WITH LADENBURG THALMANN & CO. INC.
In April 1998, Alloy entered into a letter agreement with Ladenburg
Thalmann & Co. Inc., an underwriter of this offering. In accordance with the
terms of this agreement, Ladenburg acted as placement agent for Alloy's offering
of promissory notes and warrants in May 1998, for which Alloy paid Ladenburg a
fee consisting of $122,903 in cash and a warrant to purchase 25,299 shares of
common stock with an initial exercise price of $5.465 per share. The terms of
this warrant are substantially the same as those of the warrants issued to the
purchasers of notes and warrants in May 1998 and the exercise price was also
reduced to $5.035 per share following the subsequent sale of shares of our
convertible preferred stock.
In October 1998, Alloy entered into a second letter agreement with
Ladenburg that provided for Alloy to pay Ladenburg placement fees for sales of
securities by Alloy equal to three percent of the value of any securities sold
by Alloy to Brand Equity Ventures. In December 1998 and February 1999 and in
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<PAGE> 48
accordance with the terms of this letter agreement, Alloy paid Ladenburg fees
totaling $150,000 in connection with the sale of shares of convertible preferred
stock.
OTHER TRANSACTIONS
Alloy has had an oral agreement since June 1997 with Mr. Kerson, uncle of
Matthew Diamond, regarding consulting services. In August 1998, as consideration
for these consulting services, and in replacement of an earlier arrangement,
Alloy granted Mr. Kerson a non-qualified option at an exercise price of $0.709
per share to purchase 282,000 shares of common stock under Alloy's 1997 Restated
Employee, Director and Consultant Stock Option Plan. Alloy recorded compensation
expense of $668,000 in connection with this option grant. In connection with the
grant of this option to Mr. Kerson, Alloy also entered into a letter agreement
with Mr. Kerson in which Alloy agreed to pay Mr. Kerson a bonus equal to the
exercise price of the option upon its exercise. On March 5, 1999, Mr. Kerson
exercised this option.
Joseph Diamond, brother of Matthew Diamond, is employed by Alloy as a
business analyst. In the fiscal year ended January 31, 1999, Alloy paid Joseph
Diamond total compensation of $34,000 in cash. In September 1997, Alloy granted
him options to purchase 13,863 shares of common stock at an exercise price of
$0.361 per share. In March 1998, Alloy granted him options to purchase 8,673
shares of common stock at an exercise price of $0.433 per share and in February
1999, Alloy granted him options to purchase 6,768 shares of common stock at an
exercise price of $0.60 per share. In connection with the September 1997 and
March 1998 grants, Alloy entered into letter agreements with Joseph Diamond in
which Alloy agreed to pay him bonuses equal to the exercise price of the options
upon their exercise. On March 5, 1999, Joseph Diamond exercised the options
granted to him in 1997 and 1998. Through January 31, 1999, Alloy recognized a
total of $35,000 in compensation expense related to the 1997 and 1998 option
grants.
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<PAGE> 49
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of Alloy's common stock as of March 5, 1999, and as adjusted to
reflect the sale of the shares of common stock offered by this prospectus, by:
- each person, or group of affiliated persons, who Alloy knows beneficially
owns 5% or more of the common stock;
- each director and named executive officer of Alloy; and
- all directors and executive officers of Alloy as a group.
In accordance with the SEC's rules, the following table gives effect to the
shares of common stock that could be issued upon the exercise of outstanding
options and warrants within 60 days of March 5, 1999. Unless otherwise indicated
in the footnotes to the table,
- the following individuals have sole vesting and sole investment control
with respect to the shares they beneficially own; and
- the address of each beneficial owner listed below is c/o Alloy Online,
Inc. 115 West 30th Street, Suite 201, New York, NY 10001.
<TABLE>
<CAPTION>
PERCENT
BENEFICIALLY OWNED
-----------------------
NUMBER BEFORE AFTER
NAME OF BENEFICIAL OWNER OF SHARES OFFERING OFFERING(1)
- ------------------------ --------- -------- -----------
<S> <C> <C> <C>
Executive Officers and Directors:
Matthew C. Diamond(1)....................................... 1,353,600 12.9% 9.5%
James K. Johnson, Jr(1)..................................... 1,353,600 12.9 9.5
Samuel A. Gradess(1)........................................ 1,353,600 12.9 9.5
Neil I. Vogel(2)............................................ 32,616 * *
Peter M. Graham(3).......................................... 151,466 1.4 1.0
David Yarnell(4)............................................ 1,663,318 15.8 11.7
All directors and executive officers as a group (6
persons)(5)............................................... 5,908,200 55.2 41.0
Other 5% Stockholders:
Brand Equity Ventures I, L.P.(6)............................ 1,663,318 15.8 11.7
Robert E. Kerson(7)......................................... 630,200 6.0 4.4
</TABLE>
- ------------
* Less than one percent
(1) Consists of shares held of record by each of Messrs. Diamond, Johnson and
Gradess. Does not include a total of 4,781,408 shares of common stock over
which each of them has voting control pursuant to an irrevocable proxy
granted under a Stockholders and Voting Agreement dated August 19, 1997.
Counting these shares, each of Messrs. Diamond, Johnson and Gradess may be
deemed to beneficially own a total of 6,135,008 shares, or 58.3% of the
outstanding stock prior to this offering. The Stockholders and Voting
Agreement and the proxy granted thereunder terminate upon the completion of
this offering.
(2) Includes 28,200 shares subject to currently exercisable options and 4,416
shares subject to a currently exercisable warrant.
(3) Consists of (1) 63,084 shares subject to currently exercisable warrants held
by Mr. Graham, (2) 63,083 shares subject to a currently exercisable warrant
held by The LLZ 1997 Trust and (3) 25,299 shares subject to a currently
exercisable warrant held by Ladenburg Thalmann & Co. Inc. Mr. Graham is a
trustee of The LLZ 1997 Trust and shares voting and investment power over
its shares. However, Mr. Graham has no pecuniary interest in the trust's
shares and therefore expressly disclaims beneficial ownership of these
shares. Mr. Graham is President and Chief Operating Officer
48
<PAGE> 50
of Ladenburg Thalmann Group Inc. and Vice Chairman of its principal
subsidiary, Ladenburg Thalmann & Co. Inc. Mr. Graham expressly disclaims
beneficial ownership of the shares held by Ladenburg Thalmann & Co. Inc.,
except to the extent of his pecuniary interest therein. The address for
Ladenburg Thalmann & Co. Inc. is 590 Madison Avenue, New York, NY 10022.
(4) Consists of 1,663,318 shares owned by Brand Equity Ventures I, L.P. Mr.
Yarnell is a Managing Member of Brand Equity Partners I, LLC, the General
Partner of Brand Equity Ventures I, LP. Brand Equity Partners I, LLC has
sole voting and investment power with respect to these shares. Mr. Yarnell
expressly disclaims beneficial ownership of these shares, except to the
extent of his pecuniary interest therein. The address for Brand Equity
Partners I, LLC and Brand Equity Ventures I, LP is Three Pickwick Plaza,
Greenwich, Connecticut 06830.
(5) See footnotes 1 through 4 above.
(6) Brand Equity Partners I, LLC, the General Partner of Brand Equity Ventures
I, L.P., has sole voting and investment power with respect to these shares.
(7) All of these shares are held by Mr. Kerson and his wife, Miriam K. Kerson,
as Joint Tenants with Right of Survivorship.
49
<PAGE> 51
DESCRIPTION OF CAPITAL STOCK
We are authorized to issue 50,000,000 shares of common stock, par value
$.01 per share, and 5,000,000 shares of preferred stock, par value $.01 per
share. Upon completion of this offering, there will be 14,231,774 shares of
common stock and no shares of preferred stock outstanding. As of April 21, 1999,
we had 8,842,208 shares of common stock outstanding held of record by 59
stockholders.
COMMON STOCK
Holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders and do not have
cumulative voting rights. Subject to preferences that may be applicable to any
outstanding shares of preferred stock, holders of common stock are entitled to
receive ratably such dividends, if any, as may be declared by our board of
directors out of funds legally available therefor. All outstanding shares of
common stock are fully paid and nonassessable, and the holders of common stock
have no preferences or rights of conversion, exchange or preemption. In the
event of any liquidation, dissolution or winding-up of our affairs, holders of
common stock will be entitled to share ratably in our assets that are remaining
after payment or provision for payment of all of our debts and obligations and
after liquidation payments to holders of outstanding shares of preferred stock,
if any.
PREFERRED STOCK
Upon the closing of this offering, all of our outstanding shares or
convertible preferred stock will convert into 1,678,286 shares of common stock
after giving effect to the stock split. These shares of convertible preferred
stock will no longer be authorized, issued or outstanding after completion of
this offering.
The preferred stock, if issued, would have priority over the common stock
with respect to dividends and other distributions, including the distribution of
assets upon liquidation. Our board of directors has the authority, without
further stockholder authorization, to issue from time to time shares of
preferred stock in one or more series and to fix the terms, limitations,
relative rights and preferences and variations of each series. We have no
present plans to issue any shares of preferred stock. See "-- Anti-Takeover
Effects of Various Provisions of Delaware Law and Alloy's Restated Certificate
of Incorporation and Bylaws."
WARRANTS
As of the date of this prospectus, warrants to purchase a total of 505,981
shares of common stock are held by Ladenburg Thalmann & Co. Inc. and 31 other
holders. The warrants were issued in connection with the sale of our promissory
notes in May 1998. These warrants are currently exercisable at an exercise price
of $5.035 per share and expire on May 12, 2001. The number of shares for which
each of the warrants described above is exercisable is subject to adjustment
upon changes in our capital structure, including stock splits, combinations or
dividends and reclassifications, exchanges or substitutions.
REGISTRATION RIGHTS
Convertible Preferred Stock. The 1,487,843 shares of convertible preferred
stock outstanding will be automatically converted into shares of common stock in
connection with this offering. Pursuant to a stockholders agreement, the
convertible preferred stockholders are entitled to specified registration rights
with respect to the registration of their shares of common stock under the
Securities Act of 1933. Subject to various exceptions and after this public
offering, if we propose to register shares of the common stock under the
Securities Act, these holders are entitled to notice of the registration and are
entitled to include their shares of common stock in the registration at our
expense. If the registration is underwritten, the managing underwriters have the
right to limit the number of shares included in the registration. Subject to
various conditions and limitations, these holders may require us, at our expense
but on not more than two occasions, to file a registration statement under the
Securities Act with respect to their shares of common stock. These rights to
require registration may not be exercised until November 24, 2001. Subject to
50
<PAGE> 52
various conditions and limitations, these holders may also require us, at our
expense, to register their shares of common stock on Form S-3 when we become
eligible to use such form.
Warrant Holders. Pursuant to the terms of their warrants, holders of
warrants to purchase a total of 505,981 shares of common stock are also entitled
to specified rights with respect to the registration of their shares of common
stock under the Securities Act. Subject to various and customary exceptions, if
we propose to register shares of the common stock under the Securities Act,
other than this offering, holders are entitled to notice of the registration and
are entitled to include their shares of common stock in the registration at our
expense. If the registration is underwritten, the managing underwriters have the
right to limit the number of shares included in the registration. Subject to
conditions and limitations and our reasonable commercial judgment, we are
obligated to file a registration statement, but not on more than one occasion,
covering the shares of common stock underlying such warrants within one year
after the closing of this offering.
ANTI-TAKEOVER EFFECTS OF VARIOUS PROVISIONS OF DELAWARE LAW AND ALLOY'S
CERTIFICATE OF INCORPORATION AND BYLAWS
After the closing of this offering, we will be subject to the anti-takeover
provisions of Section 203 of the Delaware General Corporation Law. In general,
Section 203 prohibits a publicly-held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the interested stockholders attained that status with the
approval of the board of directors or unless the business combination is
approved in a prescribed manner. "Business combinations" include mergers, asset
sales and other transactions resulting in a financial benefit to the interested
stockholder. Generally, an "interested stockholder" is a person who, together
with his affiliates and associates, owns, or within the prior three years did
own, 15% or more of the corporation's voting stock. This statute could prohibit
or delay the accomplishment of mergers or other takeover or change of control
attempts with respect to Alloy and, accordingly, may discourage attempts to
acquire us.
In addition, our certificate of incorporation and bylaws that will be in
effect upon the closing of this offering and are summarized below may delay,
defer or prevent a tender offer or takeover attempt that a stockholder might
consider in its best interest, including those attempts that might result in a
premium over the market price for the shares held by stockholders.
Classified Board of Directors. Following the completion of this offering,
our board of directors will be divided into three classes serving staggered
three-year terms. As a result, approximately one-third of the board of directors
will be elected each year. These provisions are likely to increase the time
required for stockholders to change the composition of our board of directors.
For example, in general, at least two annual meetings will be necessary for
stockholders to effect a change in the majority of our board of directors.
Advance Notice Requirements for Stockholder Proposals and Director
Nominees. Our bylaws provide that, for nominations to the board of directors or
for other business to be properly brought by a stockholder before a meeting of
stockholders, the stockholder must first have given timely notice of the
proposal in writing to our Secretary. For an annual meeting, a stockholder's
notice generally must be delivered not less than 45 days nor more than 75 days
prior to the anniversary of the preceding year's mailing date. For a special
meeting, the notice must generally be delivered not later than the later of 90
days prior to the special meeting or ten days following the day on which public
announcement of the meeting is first made. Detailed requirements as to the form
of the notice and information required in the notice are specified in our
bylaws. If it is determined that business was not properly brought before a
meeting in accordance with our bylaw provisions, such business will not be
conducted at the meeting.
Stockholder Action; Special Meeting of Stockholders. Our restated
certificate of incorporation does not permit our stockholders to act by written
consent. As a result, any action to be effected by our stockholders must be
effected at a duly called annual or special meeting of the stockholders. Special
meetings of the stockholders may be called only by our board of directors.
51
<PAGE> 53
Amendment of Certificate of Incorporation or Bylaws. The Delaware General
Corporation Law generally provides that the affirmative vote of a majority of
the shares entitled to vote on any matter is required to amend a corporation's
certificate of incorporation or bylaws, unless the corporation's certificate of
incorporation or bylaws, as the case may be, requires a greater percentage. Our
restated certificate of incorporation requires the affirmative vote of the
holders of at least 70% of our outstanding voting stock to amend or repeal any
of the provisions discussed in this section or to reduce the number of
authorized shares of common stock or preferred stock. This 70% stockholder vote
would be in addition to any separate class vote that might in the future be
required pursuant to the terms of any preferred stock that might then be
outstanding. A 70% vote is also required for any amendment to, or repeal of, our
bylaws by the stockholders. Our bylaws may also be amended or repealed by a
simple majority vote of the board of directors.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
As permitted by the Delaware General Corporation Law, our restated
certificate of incorporation includes a provision that eliminates the personal
liability of our directors for monetary damages for breaches of fiduciary duty
as a director, except for liability:
- for any breach of the director's duty of loyalty to Alloy or its
stockholders;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the Delaware General Corporation Law regarding
unlawful dividends and stock purchases; or
- for any transaction from which the director derived an improper personal
benefit.
Our bylaws generally provide that we must indemnify our directors and
officers to the fullest extent permitted by Delaware law and advance expenses to
such directors or officers to defend any action for which rights of
indemnification are provided. In addition, our restated certificate of
incorporation and bylaws also permit us to grant such rights to indemnification
to our employees and agents. Our bylaws also provide that we may enter into
indemnification agreements with our directors and officers and purchase
insurance on behalf of any person whom we are required or permitted to
indemnify. We have obtained liability insurance for our officers and directors.
We are not aware of any threatened litigation or proceeding that may result in a
claim for indemnification.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is American Stock
Transfer & Trust Company, New York, New York.
52
<PAGE> 54
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has not been any public market for our common
stock, and no prediction can be made as to the effect, if any, that sales of
shares of common stock or the availability of shares of common stock for sale
will have on the market price of the common stock prevailing from time to time.
Nevertheless, sales of substantial amounts of common stock in the public market,
or the perception that these sales could occur, could adversely affect the
market price of our common stock and could impair our future ability to raise
capital through the sale of our equity securities.
Upon the completion of this offering, we will have a total of 14,231,774
shares of common stock outstanding, assuming no exercise of the underwriters'
over-allotment option and no exercise of options or warrants outstanding. Of the
outstanding shares, the 3,700,000 shares sold in this offering will be freely
tradeable, except that any shares purchased by our "affiliates" (as that term is
defined in Rule 144 promulgated under the Securities Act) may be sold only in
compliance with the limitations described below. The remaining shares of common
stock will be deemed "restricted securities" as defined under Rule 144 and may
not be sold publicly unless they are registered under the Securities Act or are
sold pursuant to Rule 144 or another exemption from registration. Substantially
all of our other stockholders, holding a total of 10,531,774 shares, have agreed
that they will not sell, directly or indirectly, any shares of common stock
without the prior written consent of BancBoston Robertson Stephens Inc. for a
period of 180 days from the date of this prospectus. Subject to these lock-up
agreements, the shares of common stock outstanding upon the completion of this
offering will be available for sale in the public market as follows:
<TABLE>
<CAPTION>
APPROXIMATE
NUMBER OF
SHARES DESCRIPTION
----------- -----------
<C> <S>
3,700,000 After the date of this prospectus, freely tradeable shares
sold in this offering and shares saleable under Rule 144(k)
that are not subject to the 180-day lock-up
0 After 90 days from the date of this prospectus, additional
shares saleable under Rule 144 that are not subject to the
180-day lock-up
10,158,013 After 180 days from the date of this prospectus, the 180-day
lock-up is released and these additional shares are saleable
under Rule 144 (subject, in some cases, to volume
limitations), or Rule 144(k)
373,761 Over 180 days from the date of this prospectus, restricted
shares that are held for less than one year and are not yet
saleable under Rule 144
</TABLE>
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are required to be aggregated), including an affiliate, who has
beneficially owned shares for at least one year is entitled to sell, within any
three-month period commencing 90 days after the date of this prospectus, a
number of shares that does not exceed the greater of (1) 1% of the then
outstanding shares of common stock which will equal approximately 142,317 shares
after the closing of this offering or (2) the average weekly trading volume in
the common stock during the four calendar weeks preceding the date on which
notice of the sale is filed, subject to various restrictions. In addition, a
person who is not deemed to have been an affiliate of ours at any time during
the 90 days preceding a sale and who has beneficially owned the shares proposed
to be sold for at least two years would be entitled to sell those shares under
Rule 144(k) without regard to the requirements described above. To the extent
that shares were acquired from an affiliate, this person's holding period for
the purpose of effecting a sale under Rule 144 begins on the date of transfer
from the affiliate.
Upon completion of this offering, options and warrants to purchase a total
of 1,313,213 shares of common stock were outstanding, of which 559,181 were
exercisable. Upon the completion of this offering, we intend to file a
registration statement to register for resale the 3,637,519 shares of common
stock reserved for issuance under our Restated 1997 Employee, Director and
Consultant Stock Option Plan. That registration statement will become effective
immediately upon filing. Accordingly, shares covered by that registration
statement will become eligible for sale in the public market subject to vesting
restrictions
53
<PAGE> 55
or the lock-up agreements with BancBoston Robertson Stephens Inc. Holders of
options to purchase 807,232 shares of common stock and holders of warrants to
purchase 502,828 shares of common stock have entered into lock-up agreements.
We have agreed not to sell or otherwise dispose of any shares of common
stock during the 180-day period following the date of the prospectus, except we
may issue, and grant options to purchase, shares of common stock under the 1997
Restated Employee, Director and Consultant Stock Option Plan.
Following this offering, under specified conditions and subject to
customary exceptions, holders of 1,678,286 shares of common stock will have
demand registration rights with respect to their shares of common stock (subject
to the 180-day lock-up arrangement described above) to require us to register
their shares of common stock under the Securities Act, and they will have rights
to participate in any future registration of securities by us. We are not
required to effect more than a total of two demand registrations on behalf of
these holders. In addition, under specified conditions and subject to customary
exceptions, holders of warrants to purchase a total of 505,981 shares of common
stock are entitled to demand registration rights with respect to their shares of
common stock (subject to the 180-day lock-up arrangement described above). They
also have rights to participate in any future registration of securities by us.
Under the terms of the warrants, we are obligated to file a registration
statement covering the shares of common stock underlying the warrants within a
year after the completion of this offering.
54
<PAGE> 56
UNDERWRITING
The underwriters named below, acting through their representatives,
BancBoston Robertson Stephens Inc., Volpe Brown Whelan & Company, LLC, Dain
Rauscher Wessels, a division of Dain Rauscher Incorporated, and Ladenburg
Thalmann & Co. Inc. (the "Representatives") have severally agreed with us,
subject to the terms and conditions of the underwriting agreement, to purchase
from us the number of shares of common stock set forth opposite their names
below. The underwriters are committed to purchase and pay for all these shares
if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ----------
<S> <C>
BancBoston Robertson Stephens Inc. .........................
Volpe Brown Whelan & Company, LLC...........................
Dain Rauscher Wessels.......................................
Ladenburg Thalmann & Co. Inc. ..............................
----------
Total............................................. 3,700,000
==========
</TABLE>
The Representatives have advised us that the underwriters propose to offer
the shares of common stock to the public at the public offering price on the
cover page of this prospectus and to some dealers at such price less a
concession of not in excess of $ per share, of which $ may be
reallowed to other dealers. After this offering, the public offering price,
concession, and reallowance to dealers may be reduced by the Representatives.
This reduction shall not change the amount of proceeds to be received by us as
stated on the cover page of this prospectus. The common stock is offered by the
underwriters as stated herein, subject to receipt and acceptance by them and
subject to their right to reject any order in whole or in part.
Over-Allotment Option. We have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to 555,000 additional shares of common stock at the same price per
share as we will receive for the 3,700,000 shares that the underwriters have
agreed to purchase. To the extent that the underwriters exercise this option,
each of the underwriters will have a firm commitment to purchase approximately
the same percentage of the additional shares that the number of shares of common
stock to be purchased by it shown in the above table represents as a percentage
of the 3,700,000 shares offered hereby. If purchased, these additional shares
will be sold by the underwriters on the same terms as those on which the
3,700,000 shares are being sold. We will be obligated, pursuant to the option,
to sell shares to the extent the option is exercised. The underwriters may
exercise this option only to cover over-allotments made in connection with the
sale of the shares of common stock offered hereby. If this option is exercised
in full, the total price to public, underwriting discounts and commissions and
proceeds to company will be $46.8 million, $3.3 million and $43.5 million,
respectively.
Directed Share Program. At our request, the underwriters have reserved up
to 125,000 shares of common stock to be issued by us and offered hereby for
sale, at the initial public offering price, to our directors, officers,
employees, business associates and persons otherwise related to Alloy. The
number of shares of common stock available for sale to the general public will
be reduced to the extent these individuals purchase these reserved shares. The
underwriters will offer any reserved shares that are not so purchased to the
general public on the same basis as the other shares offered hereby.
Indemnity. The underwriting agreement contains covenants of indemnity
among the underwriters and us against various civil liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.
Lock-Up Agreements. Each executive officer and director of Alloy and
substantially all of our other stockholders have agreed, during the period
ending 180 days after the date of this prospectus ("the lock-up period"),
subject to various exceptions, not to offer to sell, contract to sell, or
otherwise sell, dispose of, loan, pledge or grant any rights with respect to any
shares of common stock or any options or warrants to purchase any shares of
common stock, or any securities convertible into or exchangeable for shares of
55
<PAGE> 57
common stock owned as of the date of this prospectus or thereafter acquired
directly by these holders or with respect to which they have the power of
disposition, without the prior written consent of BancBoston Robertson Stephens
Inc. BancBoston Robertson Stephens Inc. may, in its sole discretion and at any
time or from time to time without notice, release all or any portion of the
securities subject to the lock-up agreements. There are no existing agreements
between the Representatives and any of our stockholders who have executed a
lock-up agreement providing consent to the sale of shares prior to the
expiration of the lock-up period.
In addition, we have agreed that during the lock-up period we will not,
without the prior written consent of BancBoston Robertson Stephens Inc., subject
to various exceptions,
- consent to the disposition of any shares held by stockholders subject to
lock-up agreements prior to the expiration of the lock-up period; or
- issue, sell, contract to sell, or otherwise dispose of, any shares of
common stock, any options to purchase any shares of common stock or any
securities convertible into, exercisable for or exchangeable for shares
of common stock other than our sale of shares in this offering, the
issuance of common stock upon the exercise of outstanding options, and
the issuance of options under existing stock option and incentive plans
provided the options do not vest prior to the expiration of the lock-up
period. See "Shares Eligible for Future Sale."
The underwriters have advised us that they do not intend to confirm sales
of more than 5% of the common stock offered in this offering to accounts over
which they exercise discretionary authority.
Pursuant to letter agreements entered into by Alloy, Ladenburg Thalmann &
Co. Inc. acted as the placement agent for Alloy's sale of $3.81 million of notes
and warrants in May 1998 and for the sale of $5.05 million of convertible
preferred stock in November 1998 and February 1999. In connection with these
services, Ladenburg Thalmann & Co. Inc. received fees totaling $272,903 and a
warrant to purchase 25,299 shares of common stock with a current exercise price
of $5.035 per share. In addition, Mr. Peter Graham, a director of Alloy and the
President and Chief Operating Officer of Ladenburg Thalmann Group Inc. and Vice
Chairman of its principal subsidiary, Ladenburg Thalmann & Co. Inc., purchased
notes in the principal amount of $500,000 and warrants to purchase 63,084 shares
of common stock in Alloy's May 1998 financing. Nine other Ladenburg Thalmann &
Co. Inc. employees also purchased notes in the principal amount of $315,000 and
warrants to purchase a total of 39,743 shares of common stock. The notes issued
in Alloy's May 1998 financing by their terms are required to be paid in full
upon the completion of this offering.
Prior to this offering, there has been no public market for the common
stock. Consequently, the public offering price for the common stock offered by
this prospectus will be determined through negotiations among the
Representatives and us. Among the factors to be considered in such negotiations
are prevailing market conditions, some of our financial information, market
valuations of other companies that the Representatives and we believe to be
comparable to us, estimates of our business potential, the present state of our
development and other factors deemed relevant.
Listing. Application has been made to have the shares of common stock
approved for quotation on the Nasdaq National Market under the symbol "ALOY."
Stabilization. The Representatives have advised us that, pursuant to
Regulation M under the Securities Act, some persons participating in this
offering may engage in transactions, including stabilizing bids, syndicate
covering transactions or the imposition of penalty bids, that may have the
effect of stabilizing or maintaining the market price of the common stock at a
level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of shares of common stock on
behalf of the underwriters for the purpose of fixing or maintaining the price of
the common stock. A "syndicate covering transaction" is the bid for or the
purchase of common stock on behalf of the underwriters to reduce a short
position incurred by the underwriters in connection with this offering. A
"penalty bid" is an arrangement permitting the Representatives to reclaim the
selling concession otherwise
56
<PAGE> 58
accruing to an underwriter or syndicate member in connection with this offering
if the common stock originally sold by such underwriter or syndicate member is
purchased by the Representatives in a syndicate covering transaction and has
therefore not been effectively placed by such underwriter or syndicate member.
The Representatives have advised us that these transactions may be effected on
the Nasdaq National Market or otherwise and, if commenced, may be discontinued
at any time.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
Alloy by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., Boston,
Massachusetts, and for the underwriters by Brobeck, Phleger & Harrison LLP, New
York, New York.
EXPERTS
The audited financial statements and schedules included in this prospectus
and elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
to those financial statements, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-l. This prospectus, which is a part of the registration
statement, does not contain all of the information included in the registration
statement and its exhibits and schedules. Particular items are omitted in
accordance with the rules and regulations of the Securities and Exchange
Commission. For further information with respect to Alloy and the common stock
offered by this prospectus, reference is made to the registration statement and
its exhibits and schedules. You may review a copy of the registration statement,
including exhibits, at the Securities and Exchange Commission's public reference
room at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 or Seven
World Trade Center, 13th Floor, New York, New York 10048 or Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Please call the
Securities and Exchange Commission at 1-800-SEC-0330 for further information on
the operation of the public reference rooms.
We will also file annual, quarterly and current reports, proxy statements
and other information with the Securities and Exchange Commission. You may read
and copy any reports, statements or other information on file at the public
reference rooms. You can also request copies of these documents, for a copying
fee, by writing to the Securities and Exchange Commission.
Our Securities and Exchange Commission filings and the registration
statement can also be reviewed by accessing the Securities and Exchange
Commission's Internet site at http://www.sec.gov, which contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the Securities and Exchange Commission.
57
<PAGE> 59
ALLOY ONLINE, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants.................... F-2
Financial Statements:
Balance Sheets as of January 31, 1998 and 1999.............. F-3
Statements of Operations for the years ended January 31,
1997, 1998 and 1999....................................... F-4
Statements of Changes in Stockholders' Equity (Deficit) for
the years ended January 31, 1997, 1998 and 1999........... F-5
Statements of Cash Flows for the years ended January 31,
1997, 1998 and 1999....................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 60
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Alloy Online, Inc.:
We have audited the accompanying balance sheets of Alloy Online, Inc. (a
Delaware corporation) as of January 31, 1998 and 1999, and the related
statements of operations, stockholders' equity (deficit) and cash flows for each
of the three years in the period ended January 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Alloy Online, Inc. as of
January 31, 1998 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended January 31, 1999 in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
March 5, 1999 (except with respect
to the matter discussed in Note 13,
as to which the date is ).
F-2
<PAGE> 61
ALLOY ONLINE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31,
-----------------------------------------------
PRO FORMA
1998 1999 JANUARY 31, 1999
---- ---- ----------------
(UNAUDITED)
(NOTE 14)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (includes
restricted cash of $51,000 and $182,000 at
January 31, 1998 and 1999, respectively)... $ 2,320,548 $ 2,983,283 $ 2,983,283
Accounts receivable.......................... -- 145,476 145,476
Stock subscription receivable (Note 7)....... -- 2,500,000 2,500,000
Inventories, net............................. 512,006 810,354 810,354
Other current assets......................... 305,387 458,687 458,687
----------- ----------- -----------
Total current assets......................... 3,137,941 6,897,800 6,897,800
Property and equipment, net....................... 22,874 178,017 178,017
Deferred financing costs, net..................... -- 125,851 125,851
Other assets...................................... 5,661 205,387 205,387
----------- ----------- -----------
Total assets................................. $ 3,166,476 $ 7,407,055 $ 7,407,055
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................. $ 379,378 $ 936,291 $ 936,291
Accrued expenses............................. 308,033 622,186 622,186
Current portion of capital lease
obligation................................. -- 73,178 73,178
----------- ----------- -----------
Total current liabilities.................... 687,411 1,631,655 1,631,655
Promissory notes, net of unamortized discount..... -- 3,945,122 3,945,122
Capital lease obligation, less current portion.... -- 40,218 40,218
----------- ----------- -----------
Series A convertible redeemable preferred stock:
$.01 par value; 1,678,286 shares authorized; 0
and 1,487,843 shares issued and outstanding as
of January 31, 1998 and February 1, 1999,
respectively (liquidation preference $5,045,276)
(Note 7)........................................ -- 4,836,387 --
----------- ----------- -----------
Commitments and contingencies (Note 11)
Stockholders' equity (deficit):
Common stock; $.01 par value; 11,500,000
shares authorized; 7,768,167 and 8,479,727
shares issued and outstanding and
10,158,013 pro forma shares issued and
outstanding, respectively.................. 77,682 84,797 101,580
Additional paid-in capital................... 4,384,301 5,441,012 10,260,616
Accumulated deficit.......................... (1,982,918) (8,347,241) (8,347,241)
Deferred compensation........................ -- (224,895) (224,895)
----------- ----------- -----------
Total stockholders' equity (deficit).... 2,479,065 (3,046,327) 1,790,060
----------- ----------- -----------
Total liabilities and stockholders'
equity (deficit)...................... $ 3,166,476 $ 7,407,055 $ 7,407,055
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE> 62
ALLOY ONLINE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
---------------------------------------
1997 1998 1999
--------- ----------- -----------
<S> <C> <C> <C>
Net merchandise revenues............................. $ 25,020 $ 1,799,992 $10,085,832
Sponsorship and other revenues....................... -- -- 124,565
--------- ----------- -----------
Total revenues....................................... 25,020 1,799,992 10,210,397
Cost of goods sold................................... 16,885 1,050,136 5,486,018
--------- ----------- -----------
Gross profit......................................... 8,135 749,856 4,724,379
--------- ----------- -----------
Operating expenses:
Selling and marketing........................... 98,495 1,966,744 9,166,490
General and administrative...................... 27,948 682,090 1,682,839
--------- ----------- -----------
Total operating expenses............................. 126,443 2,648,834 10,849,329
--------- ----------- -----------
Loss from operations................................. (118,308) (1,898,978) (6,124,950)
Interest income (expense), net....................... -- 34,368 (239,373)
--------- ----------- -----------
Net loss............................................. $(118,308) $(1,864,610) $(6,364,323)
========= =========== ===========
Net loss per common share:
Basic.............................................. $ (.03) $ (.33) $ (.75)
========= =========== ===========
Diluted............................................ $ (.03) $ (.31) $ (.72)
========= =========== ===========
Weighted average common shares outstanding:
Basic.............................................. 4,060,800 5,617,577 8,479,727
========= =========== ===========
Diluted............................................ 4,450,353 6,007,130 8,869,280
========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 63
ALLOY ONLINE, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK
------------------- ADDITIONAL ACCUMULATED DEFERRED
SHARES AMOUNT PAID-IN CAPITAL DEFICIT COMPENSATION TOTAL
--------- ------- --------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 31, 1996........ -- $ -- $ -- $ -- $ -- $ --
Issuance of stock to
Founders..................... 4,060,800 40,608 209,392 -- -- 250,000
Net loss....................... -- -- -- (118,308) -- (118,308)
--------- ------- ---------- ----------- --------- -----------
Balance, January 31, 1997........ 4,060,800 40,608 209,392 (118,308) -- 131,692
Proceeds from issuance of
common stock in connection
with private placements, net
of issuance costs............ 3,707,367 37,074 3,984,909 -- -- 4,021,983
Issuance of options to
consultant for services
rendered..................... -- -- 120,000 -- -- 120,000
Issuance of options to
employees for services
rendered..................... -- -- 70,000 -- -- 70,000
Net loss....................... -- -- -- (1,864,610) -- (1,864,610)
--------- ------- ---------- ----------- --------- -----------
Balance, January 31, 1998........ 7,768,167 77,682 4,384,301 (1,982,918) -- 2,479,065
Issuance of shares in
connection with anti-dilution
protection included in
private placement............ 711,560 7,115 (7,115) -- -- --
Issuance of warrants to holders
of promissory notes.......... -- -- 183,762 -- -- 183,762
Issuance of warrants to
placement agent.............. -- -- 8,545 -- -- 8,545
Issuance of warrants in
connection with capital
lease........................ -- -- 20,691 -- -- 20,691
Issuance of options to
consultant for services
rendered..................... -- -- 547,750 -- -- 547,750
Issuance of options to
employees for services
rendered..................... -- -- 310,271 -- (229,680) 80,591
Amortization of deferred
compensation................. -- -- -- -- 4,785 4,785
Accretion of preferred stock
issuance costs............... -- -- (7,193) -- -- (7,193)
Net loss....................... -- -- -- (6,364,323) -- (6,364,323)
--------- ------- ---------- ----------- --------- -----------
Balance, January 31, 1999........ 8,479,727 $84,797 $5,441,012 $(8,347,241) $(224,895) $(3,046,327)
========= ======= ========== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 64
ALLOY ONLINE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
---------------------------------------
1997 1998 1999
--------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss............................................. $(118,308) $(1,864,610) $(6,364,323)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation.................................... -- 2,084 21,382
Amortization of financing costs................. -- -- 86,047
Compensation charge for issuance of options and
common stock.................................. -- 422,000 441,126
Accrued interest on promissory notes............ -- -- 278,068
Changes in Operating Assets and Liabilities:
Accounts receivable........................ (2,665) -- (145,476)
Inventories, net........................... (21,951) (490,054) (298,348)
Prepaid catalog costs...................... -- (223,562) (202,450)
Other current assets....................... -- (81,825) 49,150
Other assets............................... (175) (5,486) (199,726)
Accounts payable........................... 5,486 380,202 556,913
Accrued expenses........................... -- 112,387 506,152
--------- ----------- -----------
Net cash used in operating activities................ (137,613) (1,748,864) (5,271,485)
--------- ----------- -----------
INVESTING ACTIVITIES:
Capital expenditures................................. (3,345) (21,613) (14,043)
--------- ----------- -----------
Net cash used in investing activities................ (3,345) (21,613) (14,043)
--------- ----------- -----------
FINANCING ACTIVITIES:
Net proceeds from issuances of common stock.......... 160,000 4,071,983 --
Net proceeds from issuance of promissory notes....... -- -- 3,656,737
Net proceeds from issuance of preferred stock........ -- -- 2,329,194
Payments of capital lease obligation................. -- -- (37,668)
--------- ----------- -----------
Net cash provided by financing activities............ 160,000 4,071,983 5,948,263
--------- ----------- -----------
Net increase in cash and cash equivalents............ 19,042 2,301,506 662,735
Cash and cash equivalents, beginning of year......... -- 19,042 2,320,548
--------- ----------- -----------
Cash and cash equivalents, end of year............... $ 19,042 $ 2,320,548 $ 2,983,283
========= =========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITY:
Purchase of computer equipment under capital lease... $ -- $ -- $ 162,482
========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 65
ALLOY ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS
Alloy Online, Inc. ("Alloy") (Note 12) was incorporated in the State of
Delaware on January 22, 1996 and is a direct marketer of casual apparel and
accessories targeting the high growth Generation Y marketplace (10 to 24 year
olds). Alloy's revenues are primarily derived from merchandise sales from its
print catalog and merchandise and advertising sales from its Internet Website,
www.alloy.com. (Note 12). Alloy.com was launched in August 1996 as a community
which addresses the diverse concerns, interests, tastes and needs of Generation
Y.
Activities from the date of inception to January 31, 1999 have been
directed primarily to developing the Alloy brand through direct marketing
efforts to the Generation Y demographic group, growing merchandise sales and
advertising revenues, performing administrative functions and raising capital.
Since inception, Alloy has incurred recurring losses and negative operating
cash flow, and has relied primarily on equity and debt financing to fund its
operations. As of January 31, 1999, Alloy had cash and cash equivalents of
$2,983,283. Subsequent to January 31, 1999, Alloy received an additional
$2,500,000 which represents the final installment of the proceeds from the
issuance of the Series A Convertible Redeemable Preferred Stock (Note 7). In the
opinion of Alloy's management, Alloy has liquidity and sufficient working
capital resources to fund its operations through the quarter ended April 30,
2000.
The success of future operations will be dependent primarily upon Alloy's
ability to consistently offer merchandise appealing to its target audience;
manage the anticipated growth of its operations; attract, build and retain
significant traffic levels on its website; deliver adequate customer service and
compete effectively with other companies targeting the Generation Y market.
Reference is made to the risk factors discussed in this prospectus.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
For the purposes of the notes to financial statements, the fiscal year
ended January 31, 1997 is referred to as fiscal 1996; the fiscal year ended
January 31, 1998 is referred to as fiscal 1997; and the fiscal year ended
January 31, 1999 is referred to as fiscal 1998.
REVENUE RECOGNITION
Merchandise revenues are recognized at the time the products are shipped to
customers. Alloy provides an allowance for sales returns in accordance with its
return policy and based on historical experience. At January 31, 1998 and 1999,
the allowance for sales returns was approximately $15,000 and $57,000,
respectively.
Revenues from sponsorships, advertising and other arrangements are
recognized during the period in which the sponsorship or advertisement is
displayed, provided that no significant performance obligations remain and
collection of the related receivable is probable.
Alloy is subject to seasonal fluctuations in its merchandise sales and
results of operations. Alloy expects its net sales and operating results
generally to be lower in the first half of each fiscal year.
F-7
<PAGE> 66
ALLOY ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, Alloy considers all highly
liquid investments with an original maturity of three months or less to be cash
equivalents. Alloy maintains cash balances in excess of federally insured
amounts with commercial banks.
Alloy's credit card processing services agreement requires the maintenance
of a reserve balance, against which chargebacks are assessed. At January 31,
1998 and 1999, cash and cash equivalents includes approximately $51,000 and
$182,000, respectively, of cash restricted for such purposes.
No supplemental disclosure of cash flow information is required as it is
not applicable for the periods presented.
CREDIT RISK
Alloy's fulfillment services provider performs credit card authorizations
and check verifications of its customers. Credit risk is limited due to the
collection of payments in advance or at time of shipment and Alloy's large
number of diversified customers.
INVENTORIES
Inventories, which consist of finished goods, are stated at the lower of
cost (first-in, first-out) or market value. At January 31, 1998 and 1999, Alloy
has recorded an inventory valuation allowance of approximately $158,000 and
$271,000, respectively.
ADVERTISING COSTS
The cost of advertising is expensed the first time the advertising takes
place, except for direct-mail advertising which is capitalized and expensed over
its expected period of benefit in accordance with the American Institute of
Certified Public Accountants' Statement of Position (SOP) 93-7. Direct-mail
advertising consists of catalog production and mailing costs. Catalog costs are
capitalized and expensed over the three to four month period from the date the
catalogs are mailed. Deferred catalog costs as of January 31, 1998 and 1999 were
approximately $224,000 and $426,000, respectively. Catalog costs expensed for
the years ended January 31, 1997, 1998 and 1999 were approximately $53,000,
$845,000 and $4,836,000, respectively, and are included within selling and
marketing expenses in the accompanying statements of operations.
INTERNALLY CAPITALIZED SOFTWARE COSTS
Alloy has adopted the provisions of SOP 98-1, "Accounting for Costs of
Computer Software Developed or Obtained for Internal Use", which requires the
capitalization of internal and external costs incurred to develop or obtain
internal-use computer software under certain circumstances. During fiscal 1998,
Alloy capitalized approximately $382,000 of software development costs
associated with its Internet activities. In the second quarter of fiscal 1998,
Alloy determined that such software would not achieve its intended objectives
and, accordingly charged the entire amount that was capitalized to selling and
F-8
<PAGE> 67
ALLOY ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
marketing expenses during the second quarter of fiscal 1998. The Company now
utilizes the services of a third-party service provider on a revenue sharing
basis.
DEFERRED FINANCING COSTS
Legal and financing costs incurred in connection with Alloy's issuance of
promissory notes in fiscal 1998 (Note 6) have been deferred and are being
amortized over the expected term of the notes.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Computer equipment under capital lease...................... Life of the lease
Computer equipment.......................................... 5 Years
Office furniture and equipment.............................. 10 Years
</TABLE>
LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to Be Disposed Of," Alloy periodically reviews long-lived assets and certain
identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to the fair value of the asset as
measured by the future net cash flows (on an undiscounted basis) expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized would be measured by the amount by which the
carrying amount of the assets exceeds the underlying fair value of the assets.
Alloy has performed a review of its long-lived assets and has determined that no
impairment of the respective carrying values has occurred as of January 31,
1999.
STOCK BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation," allows companies
to account for stock-based compensation either under the provisions of SFAS No.
123 or under the provisions of Accounting Principles Bulletin No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), but requires pro forma
disclosure in the footnotes to the financial statements as if the measurement
provisions of SFAS No. 123 had been adopted. Alloy has elected to account for
its stock-based compensation in accordance with the provisions of APB 25 and has
provided the disclosures required under SFAS No. 123 in Note 8.
INCOME TAXES
Alloy accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under the asset and liability method of SFAS No.
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement and tax
bases of assets and liabilities. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. Under SFAS No. 109, the effect of a change in tax rates on deferred tax
assets and liabilities is recognized in income in the period that includes the
enactment date. Differences between assets and liabilities for financial
statement and tax return purposes are principally related to inventories,
accruals and deferred compensation.
F-9
<PAGE> 68
ALLOY ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NET LOSS PER SHARE
Alloy has adopted SFAS No. 128, "Earnings Per Share," which established new
standards for computing and presenting net income per share information. Basic
and diluted loss per share is also computed pursuant to the Securities and
Exchange Commission Staff Accounting Bulletin No. 98 ("SAB 98"). SAB 98 requires
that all equity instruments issued at nominal prices prior to the effective date
of an initial public offering be included in the calculation of basic and
diluted loss per share as if they were outstanding for all periods presented
whether or not the impact is dilutive. Basic net loss per share was determined
by dividing net loss by the weighted average number of common shares outstanding
during each period. Diluted net loss per share includes stock options issued at
nominal prices and excludes the impact of the conversion of convertible
preferred stock and the exercise of outstanding warrants as the inclusion of
these instruments would be anti-dilutive. A reconciliation of the net loss
available for common stockholders and the number of shares used in computing
basic and diluted net loss per share is provided in Note 10.
RECENT ACCOUNTING PRONOUNCEMENTS
In the quarter ended April 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income". SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of financial statements. The adoption of SFAS No. 130 did not have an effect on
Alloy's financial position or results of operations.
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosure About Segments of an Enterprise and Related Information,"
which is effective for fiscal years beginning after December 15, 1997. SFAS No.
131 requires that public companies report certain information about operating
segments in their annual financial statements and in subsequent condensed
financial statements of interim periods issued to shareholders. This statement
also requires that public companies report certain information about their
products and services, the geographic areas in which they operate and their
major customers. Reportable operating segments are determined based on the
management approach, as defined by SFAS No. 131. The management approach is
based on the way that the chief operating decision maker organizes the segments
within an enterprise for making operating decisions and assessing performance.
Alloy currently operates under two segments, merchandise revenues and
sponsorship and other revenues. No segment disclosure has been provided for the
periods presented due to the fact the Company was primarily operating under one
segment (e.g. sponsorship and other revenues only accounted for approximately 1%
of total revenues in fiscal 1998).
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. Alloy currently does not use derivatives and
therefore this new pronouncement is not applicable.
The FASB is currently addressing significant current practices relating to
accounting for stock-based compensation awards under APB 25. The FASB is also
addressing the accounting for the repricing of stock options. Tentatively, the
FASB has decided that awards to non-employee directors would be charged to
operations based upon the fair value of the award.
F-10
<PAGE> 69
ALLOY ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. OTHER CURRENT ASSETS
At January 31, 1998 and 1999, other current assets consists of the
following:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Prepaid catalog costs....................................... $223,562 $426,012
Other....................................................... 81,825 32,675
-------- --------
$305,387 $458,687
======== ========
</TABLE>
4. PROPERTY AND EQUIPMENT
At January 31, 1998 and 1999, property and equipment consists of the
following:
<TABLE>
<CAPTION>
1998 1999
------- --------
<S> <C> <C>
Computer equipment under capital lease...................... $ -- $162,482
Computer equipment.......................................... 16,711 21,999
Office furniture and equipment.............................. 8,247 17,001
------- --------
24,958 201,482
Less: accumulated depreciation.............................. 2,084 23,465
------- --------
$22,874 $178,017
======= ========
</TABLE>
5. ACCRUED EXPENSES
At January 31, 1998 and 1999, accrued expenses consists of the following:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Professional fees........................................... $ 15,000 $200,000
Accrued consulting fees..................................... 192,000 --
Accrued salaries -- officers................................ 25,000 140,000
Other....................................................... 76,033 282,186
-------- --------
$308,033 $622,186
======== ========
</TABLE>
6. PROMISSORY NOTES
In May 1998, Alloy issued $3,810,000 of promissory notes together with
warrants to purchase an aggregate of 480,682 shares of common stock. In
connection with the issuance of the notes, Alloy paid legal and financing costs
of approximately $153,000 and issued warrants to the placement agent to purchase
25,299 shares of common stock. The notes bear interest at 10% per annum
compounded quarterly and are payable in full on the earlier of (i) May 31, 2001,
(ii) the closing of an initial public offering or (iii) the occurrence of
certain other significant events, as defined. Interest is payable upon maturity
of the notes. As of January 31, 1999, Alloy has recorded accrued interest
payable of $278,000. The warrants issued in connection with the notes carry
certain anti-dilution provisions. The warrants are exercisable until May 12,
2001 and had an initial exercise price of $5.47 per share. In accordance with
the anti-dilution provision in the agreement, the exercise price of the warrants
was reduced to $5.04 per share as a result of the issuance of the Series A
Convertible Redeemable Preferred Stock (Note 7) in November 1998. The impact of
such revaluation was an increase to the debt discount in the amount of
approximately $40,000.
Alloy evaluated the fair value of the warrants issued based upon the
Black-Scholes option-pricing model with the following assumptions: dividend
yield of 0%, volatility of 50%, risk-free interest rate of
F-11
<PAGE> 70
ALLOY ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5.25% and expected lives of 3 years. The fair value of the warrants issued to
the holders of the notes of approximately $184,000 has been recorded as notes
discount. The fair value of the warrants issued to the placement agent, valued
at approximately $9,000, has been recorded as deferred financing costs. The
notes discount of $184,000 and total deferred financing costs of $162,000 are
being amortized as a component of interest expense over the term of the notes.
Amortization of notes discount and deferred financing costs recorded in fiscal
1998 was approximately $41,000 and $36,000, respectively.
7. SERIES A CONVERTIBLE REDEEMABLE PREFERRED STOCK
In November 1998, Alloy entered into an agreement to issue 1,678,286 shares
of its Series A Convertible Redeemable Preferred Stock (the "Preferred Stock")
to investors for approximately $5,045,000. Alloy paid issuance costs of
approximately $216,000, which has been recorded as a reduction of the carrying
value of the Preferred Stock and is being accreted over the expected period to
redemption of five years. Accretion of the issuance costs of approximately
$7,000 was recorded in fiscal 1998. The issuance of the Preferred Stock occurred
in two installments in November 1998 and February 1999. Alloy received payment
of the second installment of $2,500,000 on February 1, 1999 and therefore has
classified this amount as a stock subscription receivable within current assets
in the accompanying balance sheets.
Each holder of Preferred Stock is entitled to vote on all matters as if
their shares were converted to voting common stock on a one-for-one basis. All
holders of the Preferred Stock have the right to convert into common stock. All
outstanding shares of Preferred Stock have an automatic conversion feature into
common stock upon the consummation of a firm commitment underwritten public
offering of at least $15 million with a valuation of Alloy greater than $75
million. The conversion ratio is initially on a one-for-one basis, however, the
conversion price is subject to adjustment based on the issuance price of equity
securities subsequently issued by Alloy and certain other diluting issues as
discussed in Alloy's Restated Certificate of Incorporation.
The Preferred Stock is redeemable at the election of at least 75% of the
Preferred Stock holders in two equal installments, if notice is provided to
Alloy on or after December 24, 2003. The redemption price per share is an amount
equal to the fair market value of the Preferred Stock, as defined, or $3.01 per
share plus a further amount per share equal to any declared but unpaid
dividends. If Alloy's funds legally available for redemption of the Preferred
Stock are insufficient to redeem the total number of outstanding shares of
Preferred Stock on the redemption date, the holders of the Preferred Stock shall
share ratably in any funds legally available for redemption of such shares.
Interest shall accrue at the rate of 10% per annum on any unpaid amounts.
In the event of either a voluntary or involuntary liquidation, dissolution
or winding up of Alloy, the holders of the Preferred Stock will be entitled to
receive, prior and in preference to any distribution of any of Alloy's assets to
holders of Alloy's common stock, $3.01 per share (or as adjusted based upon the
provisions in the agreement) plus declared and unpaid dividends.
8. STOCKHOLDERS' EQUITY
COMMON STOCK
Change in Par Value and Authorized Number of Shares
In June 1997, Alloy amended its Certificate of Incorporation to authorize
15,000,000 shares of common stock from 1,500 and to change the par value from no
par value per share to $.01 par value per share. In November 1998, Alloy amended
its Certificate of Incorporation to reduce the number of the authorized shares
of common stock from 15,000,000 to 11,500,000.
F-12
<PAGE> 71
ALLOY ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Stock Split
Effective June 1997, Alloy authorized a 4,000-for-1 stock split of common
shares. All share and per share information included in these financial
statements has been adjusted to retroactively reflect the stock split.
Private Placements
In June 1997, Alloy issued 2,732,219 shares of its common stock in a
private placement receiving net proceeds of $2,347,880 (after issuance expenses
of approximately $17,000). These stockholders each received one warrant with the
shares of stock they purchased which entitled the holders to dilution protection
in the event of a future sale of the Company's equity securities.
In January 1998, Alloy issued 975,148 additional shares of its common stock
in a second private placement receiving net proceeds of $1,674,103 (after
issuance expenses of approximately $12,000). The second private placement,
together with the issuance of employee and consultant options and lessor
warrants, resulted in Alloy issuing 711,560 additional shares to the
stockholders who participated in the June 1997 private placement in accordance
with the dilution protection warrants which expired on June 30, 1998.
STOCK OPTIONS
In 1997, Alloy's Board of Directors adopted a Stock Option Plan (the
"Plan"). The Plan, as amended, authorizes the granting of options, the exercise
of which would allow up to an aggregate of 982,885 shares of Alloy's common
stock to be acquired by the holders of the options. The options can take the
form of Incentive Stock Options ("ISOs") or Non-qualified Stock Options
("NQSOs"). Options may be granted to employees, directors and consultants. ISOs
and NQSOs are granted in terms not to exceed ten years and become exercisable as
specified when the option is granted. Options may be exercised in whole or in
part. Vesting terms of the options range from immediately vesting to a ratable
vesting period of four years.
The exercise price of the ISOs must be at least equal to 100% of the fair
market price of Alloy's common stock on the date of grant. In the case of a plan
participant who owns directly or by reason of the applicable attribution rules
in Section 424(d) of the United States Internal Revenue Code of 1986, as
amended, more than 10% of the total combined voting power of all classes of
stock of Alloy, the exercise price shall not be less than 110% of the fair
market value on the date of grant. ISOs must be exercised within five to ten
years from the date of grant depending on the participant's ownership in Alloy.
The exercise price of all NQSO's granted under the Plan shall be determined by
Alloy's Board of Directors at the time of grant.
F-13
<PAGE> 72
ALLOY ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Following is a summary of Alloy's stock option activity:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
------------------------------------------------------------------
1997 1998 1999
------------------- ------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year.......... -- $ -- -- $ -- 183,705 $.26
Options granted......................... -- -- 183,705 .26 392,148 .67
Options exercised....................... -- -- -- -- -- --
Options canceled or expired............. -- -- -- -- (186,300) (.27)
------- ---- ------- ---- -------- ----
Outstanding, end of year................ -- $ -- 183,705 $.26 389,553 $.67
======= ==== ======= ==== ======== ====
Exercisable, end of year................ -- $ -- 183,705 $.26 362,481 $.67
======= ==== ======= ==== ======== ====
</TABLE>
The options outstanding at January 31, 1999 range in price from $.36 per
share to $1.37 per share and have a weighted average remaining contractual life
of 9.47 years.
Alloy entered into option agreements with certain of its employees that
require Alloy to pay the full exercise price of their options. Alloy has valued
the options granted under these agreements using the fair value of the common
stock at the date of grant. Alloy recorded compensation expense of approximately
$0, $70,000 and $105,000 for the years ended January 31, 1997, 1998 and 1999,
respectively, in connection with the granting of these options.
Alloy applies APB 25 in accounting for options issued under the Plan and,
accordingly, recognizes compensation expense for the difference between the fair
value of the underlying common stock and the grant price of the option at the
date of grant. Pro forma disclosure of the impact of applying the provisions of
SFAS No. 123 is not required due to the fact that Alloy charged compensation
expense equal to the fair value of the common stock at the date of grant for
primarily all of the stock options issued. Therefore, net loss and per share
information is the same under APB 25 and SFAS No. 123.
The weighted average fair value of the options granted during 1998 and 1999
was estimated at $1.04 and $2.77, respectively, as of the date of grant using
the Black-Scholes option-pricing model with the following assumptions: dividend
yield of 0%, volatility of 50%, risk-free interest rate of 5.25% and expected
lives of 5 years.
Consultant Option Agreement
In fiscal 1997, Alloy entered into an agreement granting 138,633 options to
a consultant for services rendered. Under the terms of the agreement, Alloy was
obligated to pay the full exercise price of the options and reimburse the
individual for certain taxes resulting from the exercise of such options. This
agreement resulted in Alloy charging approximately $312,000 of compensation
expense equal to the fair market value of the options at the date of grant and
related taxes.
In fiscal 1998, Alloy entered into a new agreement with the consultant that
voided and nullified the original agreement and canceled the then outstanding
options. The new agreement provided that Alloy grant to the consultant an option
to purchase 282,000 shares of common stock at an exercise price of $.71 per
share and pay to the consultant the full exercise price of his option. This
option is fully exercisable from the date of grant and expires ten years after
the date of grant. Alloy has valued the option granted to the consultant using
the fair value of the common stock at the date of grant. This agreement and the
nullification of the original agreement resulted in Alloy charging additional
compensation expense of approximately $356,000 for the year ended January 31,
1999.
F-14
<PAGE> 73
ALLOY ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The consultant provided the Company with services in connection with the
development of strategic plans for human resources and market development. This
non-employee was the only shareholder who rendered services to the Company and
received compensation in the form of equity rights. Although there is no formal
agreement between the parties, these services have been provided from
time-to-time. There is no formal or informal commitment for the consultant to
provide additional services to the Company in the future.
WARRANTS
The following table summarizes all common stock and preferred stock warrant
activity:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
--------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Outstanding, beginning of year........................ -- -- --
Warrants issued..................................... -- -- 517,261
Warrants exercised.................................. -- -- --
------- ------- -------
Outstanding, end of year.............................. -- -- 517,261
======= ======= =======
</TABLE>
The weighted average fair value of the warrants granted during fiscal 1998
was estimated at $0.38, using the Black-Scholes option-pricing model with the
following assumptions: dividend yield of 0%, volatility of 50%, risk-free
interest rate of 5.25% and expected lives of 3 years. The warrants have a
weighted average exercise price of $4.99 per share and weighted average
remaining contractual term of 2.35 years.
In connection with the execution of a capital lease for computer equipment,
Alloy issued a warrant to purchase 11,280 shares of common stock at an exercise
price of $2.66 per share. The warrants are exercisable at the earlier of June
30, 2003 or the closing of an initial public offering. Alloy recorded prepaid
interest, in the amount of $21,000, based on the fair value of the warrant and
is amortizing such amount over the life of the capital lease obligation.
Shares Reserved for Future Issuance:
At January 31, 1999, shares reserved for future issuance are as follows:
<TABLE>
<S> <C>
Series A Convertible Redeemable Preferred Stock............. 1,678,286
Stock Option Plan........................................... 982,885
Warrants.................................................... 517,261
----------
3,178,432
==========
</TABLE>
Subsequent Activity
Subsequent to January 31, 1999, the following transactions relating to
stock options and warrants occurred (1) the Company granted 780,160 options to
employees having a weighted average exercise price of $9.87, including options
with an assumed exercise price equal to the pending initial public offering
price, currently projected to be $11.00, and (2) 362,481 options were exercised
having a weighted average exercise price of $.68. In addition, it is expected
that 11,280 of previously issued warrants will be exercised at $2.66 upon
consummation of the Company's initial public offering.
F-15
<PAGE> 74
ALLOY ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES
At January 31, 1998 and 1999, net deferred tax assets consist of the
following:
<TABLE>
<CAPTION>
1998 1999
--------- -----------
<S> <C> <C>
Deferred Tax Assets:
Net operating loss carryforwards......................... $ 360,991 $ 2,802,398
Deferred compensation.................................... 168,080 362,175
Accruals................................................. -- 113,783
Inventories.............................................. 69,250 119,240
--------- -----------
598,321 3,397,596
Less: valuation allowance.................................. (598,321) (3,397,596)
--------- -----------
Net deferred tax assets.................................. $ -- $ --
========= ===========
</TABLE>
Alloy has recorded a valuation allowance to fully reserve for the deferred
tax benefit attributable to its temporary differences and its net operating loss
carryforwards due to the uncertainty as to their ultimate realizability.
The provision for income taxes differed from the amount computed by
applying the U.S. federal statutory rate to the loss before income taxes due to
the effects of the following:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Expected tax benefit at federal statutory rate.............. (34%) (34%) (34%)
Future state benefit, net of federal benefit................ (10%) (10%) (10%)
Non-deductible expenses and other........................... -- -- --
Increase in valuation allowance............................. 44% 44% 44%
---- ---- ----
0% 0% 0%
==== ==== ====
</TABLE>
Alloy was an S Corporation for income tax purposes through October 31,
1997. On November 1, 1997, Alloy elected to be taxed as a C Corporation. The
income tax benefit represents the estimated benefit that would have been
reported had Alloy filed its tax return as a taxable C corporation for all
periods presented.
At January 31, 1999, Alloy had net operating loss carryforwards aggregating
approximately $6,369,000, which may be applied against future years' income with
expiration dates through 2019. As a result of the provisions of Internal Revenue
Code Section 382, a significant portion of these net operating loss
carryforwards may be subject to limitation on future utilization.
F-16
<PAGE> 75
ALLOY ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net
loss per share:
<TABLE>
<CAPTION>
JANUARY 31,
---------------------------------------
1997 1998 1999
--------- ----------- -----------
<S> <C> <C> <C>
Numerator:
Net loss........................................ $(118,308) $(1,864,610) $(6,364,323)
Accretion of preferred stock.................... -- -- (7,193)
--------- ----------- -----------
Net loss available to common stockholders....... $(118,308) $(1,864,610) $(6,371,516)
========= =========== ===========
Denominator:
Basic weighted average shares outstanding....... 4,060,800 5,617,577 8,479,727
Nominal issuances of stock options.............. 389,553 389,553 389,553
--------- ----------- -----------
Diluted weighted average shares outstanding..... 4,450,353 6,007,130 8,869,280
========= =========== ===========
Basic net loss per share............................. $ (.03) $ (.33) $ (.75)
========= =========== ===========
Diluted net loss per share........................... $ (.03) $ (.31) $ (.72)
========= =========== ===========
</TABLE>
The following equity instruments were not included in the diluted net loss
per share calculation as their effect would be anti-dilutive:
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- ---------
<S> <C> <C> <C>
Series A Convertible Redeemable Preferred stock...... -- -- 1,678,286
Warrants............................................. -- -- 517,261
</TABLE>
11. COMMITMENTS AND CONTINGENCIES
LEASES
Alloy leases office space and certain computer equipment under
noncancellable leases expiring through fiscal 2001. As of January 31, 1999,
future net minimum lease payments were as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
FISCAL YEAR LEASE LEASE
----------- -------- ---------
<S> <C> <C>
1999........................................................ $ 73,178 $ 82,500
2000........................................................ 50,341 90,200
2001........................................................ 1,295 93,800
-------- --------
Total minimum lease payments................................ 124,814 $266,500
========
Less: amounts representing interest......................... (11,418)
--------
Present value of net minimum lease payments................. 113,396
Current portion............................................. 73,178
--------
Long-term................................................... $ 40,218
========
</TABLE>
Rent expense was approximately $0, $8,000, and $33,000 for the years ended
January 31, 1997, 1998 and 1999, respectively, under noncancellable operating
leases.
F-17
<PAGE> 76
ALLOY ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ORDERING, FULFILLMENT AND CUSTOMER SERVICE
In July 1997, Alloy entered into an agreement with Harrison Fulfillment
Services ("HFS"), a third party service organization, whereby HFS provides Alloy
with a comprehensive call center and order fulfillment services in support of
Alloy's direct marketing operations. All aspects relating to fulfillment of
customer orders are handled by HFS including receipt and processing of customer
orders, shipment of merchandise to customers and customer service.
In consideration for performance of the services provided by HFS during the
contract term, Alloy paid HFS an initial start-up fee and is charged on a fee
for service basis. On October 9, 1998, the original agreement was amended to
permit a reduction in the fee for service charges. The agreement provides that
if Alloy exits the agreement prior to the termination date (July 31, 2003),
Alloy will be required to make a termination payment to HFS equal to the
unamortized amount of the contract savings as defined in the amendment. Alloy's
management currently has no intention of exiting the agreement prior to its
termination date.
SALES TAX
Alloy does not collect sales or other similar taxes in respect of shipments
of goods into most states. However, various states or foreign countries may seek
to impose sales tax obligations on Alloy. A number of proposals have been made
at the state and local levels that would impose additional taxes on the sale of
goods and services through the Internet. The United States Congress has passed
legislation limiting for three years the ability of the states to impose taxes
on Internet-based transactions. Failure to renew this legislation could result
in the imposition by various states of taxes on e-commerce. A successful
assertion by one or more states that Alloy should have collected or be
collecting sales taxes on the sale of products could have a material and adverse
effect on Alloy's operations.
12. SUBSEQUENT EVENTS
PURCHASE OF DOMAIN NAME
In February 1999, Alloy acquired the rights to the domain name alloy.com,
including the registration of the domain name with Network Solutions, Inc. and
the rights to register and use the domain name in jurisdictions other than the
United States of America, from the previous holder of these rights in exchange
for $125,000.
PURCHASE OF CUSTOMER LIST
In February 1999, Alloy purchased on a non-exclusive basis a mailing list
of names and addresses of potential customers for $125,000.
CHANGE OF COMPANY NAME
On March 4, 1999 the Board of Directors elected to change the name of the
Company from Alloy Designs, Inc. to Alloy Online, Inc.
13. PROPOSED INITIAL PUBLIC OFFERING
During March 1999, the Board of Directors authorized Alloy to file a
registration statement with the Securities and Exchange Commission for an
initial public offering of shares of its common stock. Upon the closing of the
offering, Alloy intends to effect a 1.128 for 1 common stock split.
Additionally, Alloy's stock option plan was amended to provide for the issuance
of up to 4,000,000 options.
F-18
<PAGE> 77
ALLOY ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the above, Alloy intends to amend and restate its
Certificate of Incorporation such that it will have the authority to issue an
aggregate of 55,000,000 shares of capital stock, consisting of 50,000,000 shares
of common stock, par value $.01 per share, and 5,000,000 shares of preferred
stock, par value $.01 per share. All references to common shares and per common
share, except for references to authorized common shares, in the financial
statements have been restated to give effect to the common split discussed
herein.
14. PRO FORMA BALANCE SHEET (UNAUDITED)
The pro forma balance sheet as of January 31, 1999 reflects the conversion
of Alloy's Series A Convertible Redeemable Preferred Stock into 1,678,286 shares
of common stock, which conversion will occur upon the consummation of the
Initial Public Offering.
F-19
<PAGE> 78
[Alloy Online]
[Graphic depiction of Alloy Web Pages]
Alloy Homepage
Alloy Shop
Today in Alloy
Alloy Connect
Win Prizes at Alloy
Alloy Catalog
<PAGE> 79
[ALLOY ONLINE CORPORATE LOGO]
<PAGE> 80
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemization of all estimated expenses,
all of which we will pay, in connection with the issuance and distribution of
the securities being registered:
<TABLE>
<CAPTION>
UNDERWRITER AMOUNT
- ----------- ------
<S> <C>
SEC Registration Fee........................................ $ 14,456
Nasdaq National Market Listing Fee.......................... 90,500
NASD Fee.................................................... 5,100
Printing and engraving fees................................. 250,000
Registrant's counsel fees and expenses...................... 700,000
Accounting fees and expenses................................ 300,000
Blue Sky expenses and counsel fees.......................... 5,000
Transfer agent and registrar fees........................... 2,000
Miscellaneous............................................... 2,944
----------
1,370,000
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our restated certificate of incorporation (the "Charter") provides that we
shall indemnify and advance expenses to the fullest extent permitted by Section
145 of the Delaware General Corporation Law ("DGCL"), as amended from time to
time, to each person who is or was one of our directors or officers and the
heirs, executors and administrators of that person. Any expenses, including
attorneys' fees, incurred by a person who is or was one of our directors or
officers, and the heirs, executors and administrators of such a person in
connection with defending any such proceeding in advance of its final
disposition shall be paid by us; provided, however, that if the DGCL requires an
advancement of expenses incurred by an indemnitee in his capacity as a director
or officer, and not in any other capacity in which service was or is rendered by
the indemnitee, including, without limitation, service to an employee benefit
plan, shall be made only upon delivery to us of an undertaking by or on behalf
of the indemnitee, to repay all amounts so advanced, if it shall ultimately be
determined that the indemnitee is not entitled to be indemnified for his or her
expenses. Notwithstanding the aforementioned indemnification provisions, we may,
at the discretion of our chief executive officer, enter into indemnification
agreements with directors or officers.
Section 145 of the DGCL provides that a corporation has the power to
indemnify any director or officer, or former director or officer, who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, other than an action by or in the right of the corporation, by
reason of the fact that director or officer or former director or officer is or
was a director, officer, employee or agent of the corporation, against expenses,
including attorneys' fees, judgments, fines and amounts paid in settlement
actually and reasonably incurred by them in connection with the action, suit or
proceeding, if the person shall have acted in good faith and in a manner
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, provided
that the person had no reasonable cause to believe his or her conduct was
unlawful, except that, if the action shall be in the right of the corporation,
this indemnification shall not be provided as to any claim, issue or matter as
to which the person shall have been judged to have been liable to the
corporation unless and to the extent that the Court of Chancery of the State of
Delaware, or any court in which the suit or action was brought, shall determine
upon application that, in view of all of the circumstances of the case, the
person is fairly and reasonably entitled to indemnity for these expenses that
the court shall deem proper.
II-1
<PAGE> 81
The Charter, which will be filed prior to the completion of our initial
public offering of securities, contains a provision to limit the personal
liability of our directors to the fullest extent permitted by Section 102(b)(7)
of the DGCL, as amended. In addition, the Restated bylaws, which will become
effective prior to the completion of the offering of securities, provide that we
shall indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, other than an action
by us or in our right, by reason of the fact that he is or was one of our
directors, officers, employees or agents, or is or was serving at our request as
a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses, including attorneys'
fees, judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with the action, suit or proceeding if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to our
best interests, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. See Exhibit 3.1, "Restated
Certificate of Incorporation of Alloy."
As permitted by the DGCL, the Charter, which will be filed prior to the
completion of the offering, provides that, subject to limited exceptions, none
of our directors shall be liable to us or our stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability (1) for any
breach of the director's duty of loyalty to us or our stockholders, (2) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (3) for the unlawful payment of dividends on or
redemption or repurchase of our capital stock or (4) for any transaction from
which the director derived an improper personal benefit. The effect of this
provision is to limit our ability and our stockholders' ability through
stockholder derivative suits on our behalf to recover monetary damages against a
director for the breach of certain fiduciary duties as a director, including
breaches resulting from grossly negligent conduct. In addition, the Charter and
Restated bylaws provide that we shall, to the fullest extent permitted by the
DGCL, indemnify all of our directors and officers and that we may, to the extent
permitted by the DGCL, indemnify our employees and agents.
We have agreed to indemnify the underwriters against various liabilities,
including civil liabilities under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Set forth in chronological order is information regarding shares of common
stock issued and options and warrants granted by the registrant since March
1996. Also included is the consideration, if any, received by the registrant for
such shares and options and information relating to the section of the
Securities Act of 1933, as amended (the "Securities Act"), or rule of the
Securities and Exchange Commission under which exemption from registration was
claimed.
In September 1996, the registrant issued 1,353,600 shares of common stock
at a purchase price of $0.125 per share to Samuel A. Gradess, Chief Financial
Officer and a Director of the registrant, for total consideration of $150,000.
In June 1997, the registrant issued and sold a total of 2,732,219 shares of
common stock in a private placement to 36 investors at a price of $0.87 per
share for gross consideration of $2,365,000. Purchasers in this offering also
received warrants to purchase additional shares of common stock for nominal
consideration that provided the purchasers with dilution protection in the event
of specified future sales of equity securities by the registrant. These warrants
were exercised in July 1998 and, in accordance with their terms, a total of
711,560 additional shares of common stock were issued to the purchasers upon
such exercise.
In June 1997, the registrant's 1997 Employee, Director and Consultant Stock
Option Plan was approved and adopted by the Board of Directors and the
stockholders of the registrant. In November 1998, and again in April 1999, the
Board of Directors and the stockholders of the registrant approved and adopted
amendments to the plan that increased the total number of shares of common stock
for which options may be granted under it. Since June 1997, options to purchase
a total of 1,169,713 shares of common stock have been granted. As of March 5,
1999, 362,481 of these options had been exercised.
II-2
<PAGE> 82
In January 1998, the registrant issued and sold a total of 975,148 shares
of common stock in a private placement to 19 investors at a price of $1.73 per
share for gross consideration of $1,688,500.
In March 1998, the registrant issued a warrant to purchase 11,280 shares of
common stock with an exercise price of $2.66 per share to Mr. Ronald Demer. The
warrant was issued in connection with a lease financing agreement. As of March
5, 1999 the warrant had not been exercised. Mr. Demer has indicated that he will
exercise these warrants upon completion of the offering.
In May 1998, the registrant issued warrants to purchase a total of 480,682
shares of common stock in connection with a private placement of promissory
notes to 31 investors. The warrants had an initial exercise price of $5.465 per
share. The exercise price was reduced to $5.035 per share following the issue
and sale of shares of Series A convertible preferred stock in November 1998 and
February 1999. The registrant issued an additional warrant to purchase 25,299
shares of common stock to Ladenburg Thalmann & Co. Inc., as a portion of the
consideration for its services as placement agent for this offering of notes and
warrants. This warrant contained substantially the same terms as the warrants
issued to the purchasers. All of the warrants described in this paragraph are
outstanding and none have been exercised.
In November 1998 and February 1999 the registrant issued and sold a total
of 1,487,843 shares of Series A convertible preferred stock in a private
placement to two investors at a price of $3.391 per share for gross
consideration of $5,045,275.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in the names required by the underwriters to permit
prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described under Item 14 above, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission this indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by the director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of the issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part
of this Registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this Registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
II-3
<PAGE> 83
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------- ----------------------
<C> <S>
1.1 Form of Underwriting Agreement
3.1 Restated Certificate of Incorporation of the Registrant
3.2 Restated Bylaws of the Registrant
4.1 Form of Common Stock Certificate
4.2 See Exhibits 3.1 and 3.2 for provisions of the Restated
Certificate of Incorporation and Restated Bylaws of the
Registrant defining the rights of holders of common stock of
the Registrant
**5.1 Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo,
P.C. with respect to the legality of securities being
registered
**10.1 Agreement of Lease, dated March 1999, between One Fifteen
West Assoc., L.P. and the Registrant
**10.2 Restated 1997 Employee, Director and Consultant Stock Option
Plan
+10.3 Fulfillment Services Agreement, dated July 23, 1997, by and
between Harrison Fulfillment Services, Inc. and the
Registrant
+**10.4 Amendment to Fulfillment Services Agreement, dated September
1, 1997, by and between Harrison Fulfillment Services, Inc.
and the Registrant
+**10.5 Second Amendment to Fulfillment Services Agreement, dated
October 9, 1998, by and between Harrison Fulfillment
Services, Inc. and the Registrant
+10.6 Agreement, dated June 19, 1998, between iName, a Division of
GlobeComm, Inc., and the Registrant
+10.7 Services Agreement, dated February 9, 1999, between OneSoft
Corporation and the Registrant
+**10.8 Mailing List Purchase Agreement, dated February 22, 1999,
between Just Nikki, Inc. and the Registrant
+**10.9 Standard Merchant Terms and Insertion Order, dated November
18, 1998 between Yahoo! Shopping and the Registrant
+**10.10 Top Tier E-Sales Agreement Form, dated December 9, 1998,
between Catalog City and the Registrant
+**10.11 Agreement, dated March 8, 1999, between Internet Fashion
Mall, LLC and the Registrant
+**10.12 Memorandum of Understanding, dated January 28, 1999, between
Primedia Consumer Marketing and the Registrant
10.13 [Intentionally Blank]
10.14 [Intentionally Blank]
**10.15 Stockholders and Voting Agreement, dated as of June 30,
1997, among the stockholders named on Schedule I thereto and
Samuel A. Gradess, James K. Johnson, Jr. and Matthew Diamond
**10.16 Amendment No. 1, dated August 25, 1997, to Stockholders and
Voting Agreement, dated June 30, 1997
**10.17 Stockholders Agreement, dated November 24, 1998, among the
stockholders named on Schedule I thereto and Samuel A.
Gradess, James K. Johnson, Jr. and Matthew Diamond
**10.18 Employment Agreement, dated April 19, 1999, between Matthew
C. Diamond and the Registrant
**10.19 Employment Agreement, dated April 19, 1999, between James K.
Johnson, Jr. and the Registrant
**10.20 Employment Agreement, dated April 19, 1999, between Samuel
A. Gradess and the Registrant
**10.21 Employment letter, dated February 22, 1999, between Neil
Vogel and the Registrant
**10.22 Non-Competition and Confidentiality Agreement, dated
November 24, 1998, between Matthew C. Diamond and the
Registrant
</TABLE>
II-4
<PAGE> 84
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------- ----------------------
<C> <S>
**10.23 Non-Competition and Confidentiality Agreement, dated
November 24, 1998, between James K. Johnson, Jr. and the
Registrant
**10.24 Non-Competition and Confidentiality Agreement, dated
November 24, 1998, between Samuel A. Gradess and the
Registrant
**10.25 Non-Competition and Confidentiality Agreement, dated
February 22, 1999, between Neil Vogel and the Registrant
**10.26 Master Equipment Lease Agreement, dated March 11, 1998,
between Ronald Demer and the Registrant
+**10.27 Agreement, dated April 6, 1998, between Ladenburg Thalmann &
Co. Inc. and the Registrant
+**10.28 Agreement, dated October 12, 1998, between Ladenburg
Thalmann & Co. Inc. and the Registrant
10.29 [Intentionally Blank]
10.30 [Intentionally Blank]
**10.31 Letter Agreement, dated August 14, 1998, between Robert E.
Kerson and the Registrant
**10.32 Form of Non-Qualified Stock Option Agreement
**10.33 Form of Incentive Stock Option Agreement
**10.34 Form of 1997 Stock and Warrant Subscription Agreement
**10.35 Form of May 1998 Subscription Agreement between the
Registrant and each of Peter Graham, Peter M. Graham
Purchase Money Plan, Neil Vogel and Ladenburg Thalmann & Co.
Inc.
**10.36 Form of May 1998 Promissory Note issued by the Registrant to
Peter Graham, Peter M. Graham Purchase Money Plan, and Neil
Vogel
**10.37 Form of Warrant, dated May 13, 1998, issued to Ladenburg
Thalmann & Co. Inc., Peter Graham, Peter M. Graham Purchase
Money Plan and Neil Vogel
**10.38 Series A Convertible Preferred Stock Purchase Agreement,
dated November 24, 1998, between Brand Equity Ventures I,
L.P. and the Registrant
**10.39 Registration Rights Agreement, dated November 24, 1998, by
and among Brand Equity Ventures I, L.P., J. Edward Diamond
and the Registrant
**10.40 Flexible Standardized 401(k) Profit Sharing Plan Adoption
Agreement
**10.41 1999 Employee Stock Purchase Plan
**10.42 Form of Incentive Stock Option Agreement between the
Registrant and Neil Vogel
**10.43 Form of Non-Qualified Stock Option Agreement between the
Registrant and Neil Vogel
23.1 Consent of Arthur Andersen LLP
**23.2 Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo,
P.C. (see Exhibit 5.1)
**24.1 Powers of Attorney (see signature Page of original S-1)
**27.1 Financial Data Schedule
</TABLE>
- ------------
** Previously filed with the SEC.
+ Confidential treatment requested as to certain portions, which portions have
been omitted and filed separately with the SEC.
(B) FINANCIAL STATEMENT SCHEDULES
Financial Statements Schedules are omitted because the information is
included in the Financial Statements or notes thereto.
II-5
<PAGE> 85
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has duly caused this Amendment No. 3 to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, State of New York, on May 7, 1999.
ALLOY ONLINE, INC.
By: /s/ JAMES K. JOHNSON, JR.
------------------------------------
James K. Johnson, Jr.
Chief Operating Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Chief Executive Officer, Treasurer May 7, 1999
- ------------------------------------------------ and Director (principal executive
Matthew C. Diamond officer)
/s/ JAMES K. JOHNSON, JR. Chief Operating Officer, President May 7, 1999
- ------------------------------------------------ and Director
James K. Johnson, Jr.
* Chief Financial Officer, Secretary May 7, 1999
- ------------------------------------------------ and Director (principal financial
Samuel A. Gradess and accounting officer)
* Director May 7, 1999
- ------------------------------------------------
Peter M. Graham
* Director May 7, 1999
- ------------------------------------------------
David Yarnell
</TABLE>
* By executing his name hereto, James K. Johnson, Jr. is signing this document
on behalf of the persons indicated above pursuant to powers of attorney duly
executed by such persons and filed with the Securities and Exchange
Commission.
By: /s/ JAMES K. JOHNSON, JR.
----------------------------------
James K. Johnson, Jr.
(Attorney-in-Fact)
II-6
<PAGE> 86
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SCHEDULE
To Alloy Online, Inc.:
We have audited, in accordance with generally accepted auditing standards,
the financial statements of Alloy Online, Inc. (the "Company") included in this
registration statement and have issued our report thereon dated March 5, 1999.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying schedule is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
New York, New York
March 5, 1999
II-7
<PAGE> 87
SCHEDULE II
ALLOY ONLINE, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED BALANCE AT
BEGINNING OF TO THE END OF
DESCRIPTION PERIOD EXPENSE DEDUCTIONS PERIOD
----------- ------------ ---------- ---------- -----------
<S> <C> <C> <C> <C>
Reserve for sales returns and
allowances:
January 31, 1997................... $ -- -- -- --
======= ========== ========== =======
January 31, 1998................... $ -- $ 193,898 $ 178,898 $15,000
======= ========== ========== =======
January 31, 1999................... $15,000 $1,096,341 $1,054,535 $56,806
======= ========== ========== =======
</TABLE>
II-8
<PAGE> 88
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
- -------- ---------------------- ------------
<C> <S> <C>
1.1 Form of Underwriting Agreement
3.1 Restated Certificate of Incorporation of the Registrant
3.2 Restated Bylaws of the Registrant
4.1 Form of Common Stock Certificate
4.2 See Exhibits 3.1 and 3.2 for provisions of the Restated
Certificate of Incorporation and Restated Bylaws of the
Registrant defining the rights of holders of common stock of
the Registrant
**5.1 Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo,
P.C. with respect to the legality of securities being
registered
**10.1 Agreement of Lease, dated March 1999, between One Fifteen
West Assoc., L.P. and the Registrant
**10.2 Restated 1997 Employee, Director and Consultant Stock Option
Plan
+10.3 Fulfillment Services Agreement, dated July 23, 1997, by and
between Harrison Fulfillment Services, Inc. and the
Registrant
+**10.4 Amendment to Fulfillment Services Agreement, dated September
1, 1997, by and between Harrison Fulfillment Services, Inc.
and the Registrant
+**10.5 Second Amendment to Fulfillment Services Agreement, dated
October 9, 1998, by and between Harrison Fulfillment
Services, Inc. and the Registrant
+10.6 Agreement, dated June 19, 1998, between iName, a Division of
GlobeComm, Inc., and the Registrant
+10.7 Services Agreement, dated February 9, 1999, between OneSoft
Corporation and the Registrant
+**10.8 Mailing List Purchase Agreement, dated February 22, 1999,
between Just Nikki, Inc. and the Registrant
+**10.9 Standard Merchant Terms and Insertion Order, dated November
18, 1998 between Yahoo! Shopping and the Registrant
+**10.10 Top Tier E-Sales Agreement Form, dated December 9, 1998,
between Catalog City and the Registrant
+**10.11 Agreement, dated March 8, 1999, between Fashion Mall, LLC
and the Registrant
10.12 Memorandum of Understanding, dated January 28, 1999, between
Primedia Consumer Marketing and the Registrant
10.13 [Intentionally Blank]
10.14 [Intentionally Blank]
**10.15 Stockholders and Voting Agreement, dated as of June 30,
1997, among the stockholders named on Schedule I thereto and
Samuel A. Gradess, James K. Johnson, Jr. and Matthew Diamond
**10.16 Amendment No. 1, dated August 25, 1997, to Stockholders and
Voting Agreement, dated June 30, 1997
**10.17 Stockholders Agreement, dated November 24, 1998, among the
stockholders named on Schedule I thereto and Samuel A.
Gradess, James K. Johnson, Jr. and Matthew Diamond
**10.18 Employment Agreement, dated April 19, 1999, between Matthew
C. Diamond and the Registrant
**10.19 Employment Agreement, dated April 19, 1999, between James K.
Johnson, Jr. and the Registrant
</TABLE>
<PAGE> 89
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
- -------- ---------------------- ------------
<C> <S> <C>
**10.20 Employment Agreement, dated April 19, 1999, between Samuel
A. Gradess and the Registrant
**10.21 Employment letter, dated February 22, 1999, between Neil
Vogel and the Registrant
**10.22 Non-Competition and Confidentiality Agreement, dated
November 24, 1998, between Matthew C. Diamond and the
Registrant
**10.23 Non-Competition and Confidentiality Agreement, dated
November 24, 1998, between James K. Johnson, Jr. and the
Registrant
**10.24 Non-Competition and Confidentiality Agreement, dated
November 24, 1998, between Samuel A. Gradess and the
Registrant
**10.25 Non-Competition and Confidentiality Agreement, dated
February 22, 1999, between Neil Vogel and the Registrant
**10.26 Master Equipment Lease Agreement, dated March 11, 1998,
between Ronald Demer and the Registrant
+**10.27 Agreement, dated April 6, 1998, between Ladenburg Thalmann &
Co. Inc. and the Registrant
+**10.28 Agreement, dated October 12, 1998, between Ladenburg
Thalmann & Co. Inc. and the Registrant
10.29 [Intentionally Blank]
10.30 [Intentionally Blank]
**10.31 Letter Agreement, dated August 14, 1998, between Robert E.
Kerson and the Registrant
**10.32 Form of Non-Qualified Stock Option Agreement
**10.33 Form of Incentive Stock Option Agreement
**10.34 Form of 1997 Stock and Warrant Subscription Agreement
**10.35 Form of May 1998 Subscription Agreement between the
Registrant and each of Peter Graham, Peter M. Graham
Purchase Money Plan, Neil Vogel and Ladenburg Thalmann & Co.
Inc.
**10.36 Form of May 1998 Promissory Note issued by the Registrant to
Ladenburg Thalmann & Co. Inc., Peter Graham, Peter M. Graham
Money Purchase Plan and Neil Vogel
**10.37 Form of Warrant, dated May 13, 1998, issued to Ladenburg
Thalmann & Co. Inc., Peter Graham and Neil Vogel
**10.38 Series A Convertible Preferred Stock Purchase Agreement,
dated November 24, 1998, between Brand Equity Ventures I,
L.P. and the Registrant
**10.39 Registration Rights Agreement, dated November 24, 1998, by
and among Brand Equity Ventures I, L.P., J. Edward Diamond
and the Registrant
**10.40 Flexible Standardized 401(k) Profit Sharing Plan Adoption
Agreement
**10.41 1999 Employee Stock Purchase Plan
**10.42 Form of Incentive Stock Option Agreement between the
Registrant and Neil Vogel
**10.43 Form of Non-Qualified Stock Option Agreement between the
Registrant and Neil Vogel
23.1 Consent of Arthur Andersen LLP
</TABLE>
<PAGE> 90
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
- -------- ---------------------- ------------
<C> <S> <C>
**23.2 Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo,
P.C. (see Exhibit 5.1)
**24.1 Powers of Attorney (see signature page of original S-1)
**27.1 Financial Data Schedule
</TABLE>
- ------------
** Previously filed with the SEC.
+ Confidential treatment requested as to certain portions, which portions have
been omitted and filed separately with the SEC.
<PAGE> 1
EXHIBIT 1.1
FORM OF UNDERWRITING AGREEMENT
May __, 1999
BancBoston Robertson Stephens Inc.
Volpe Brown Whelan & Company
Dain Rausscher Wessels
Ladenburg Thalmann & Co. Inc.
As Representatives of the several Underwriters
c/o BancBoston Robertson Stephens Inc.
555 California Street, Suite 2600
San Francisco, CA 94104
Ladies and Gentlemen:
INTRODUCTORY. Alloy Online, Inc., a Delaware corporation (the
"Company), proposes to issue and sell to the several underwriters named in
SCHEDULE A (the "Underwriters") an aggregate of [___] shares (the "Firm Shares")
of its Common Stock, par value $[___] per share (the "Common Shares"). In
addition, the Company has granted to the Underwriters an option to purchase up
to an additional [___] Common Shares (the "Option Shares") as provided in
Section 2. The Firm Shares and, if and to the extent such option is exercised,
the Option Shares are collectively called the "Shares". BancBoston Robertson
Stephens Inc., Volpe Brown Whelan & Company, Dain Rausscher Wessels and
Ladenburg Thalmann & Co. have agreed to act as representatives of the several
Underwriters (in such capacity, the "Representatives") in connection with the
offering and sale of the Shares.
The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-1 (File No.
333-74159), which contains a form of prospectus to be used in connection with
the public offering and sale of the Shares. Such registration statement, as
amended, including the financial statements, exhibits and schedules thereto, in
the form in which it was declared effective by the Commission under the
Securities Act of 1933 and the rules and regulations promulgated thereunder
(collectively, the "Securities Act"), including any information deemed to be a
part thereof at the time of effectiveness pursuant to Rule 430A or Rule 434
under the Securities Act, is called the "Registration Statement".
<PAGE> 2
Any registration statement filed by the Company pursuant to Rule 462(b) under
the Securities Act is called the "Rule 462(b) Registration Statement", and from
and after the date and time of filing of the Rule 462(b) Registration Statement
the term "Registration Statement" shall include the Rule 462(b) Registration
Statement. Such prospectus, in the form first used by the Underwriters to
confirm sales of the Shares, is called the "Prospectus"; provided, however, if
the Company has, with the consent of BancBoston Robertson Stephens Inc., elected
to rely upon Rule 434 under the Securities Act, the term "Prospectus" shall mean
the Company's prospectus subject to completion (each, a "preliminary
prospectus") dated [___]1 (such preliminary prospectus is called the "Rule 434
preliminary prospectus"), together with the applicable term sheet (the "Term
Sheet") prepared and filed by the Company with the Commission under Rules 434
and 424(b) under the Securities Act and all references in this Agreement to the
date of the Prospectus shall mean the date of the Term Sheet. All references in
this Agreement to the Registration Statement, the Rule 462(b) Registration
Statement, a preliminary prospectus, the Prospectus or the Term Sheet, or any
amendments or supplements to any of the foregoing, shall include any copy
thereof filed with the Commission pursuant to its Electronic Data Gathering,
Analysis and Retrieval System ("EDGAR").
The Company hereby confirms its agreements with the Underwriters as
follows:
SECTION 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby represents, warrants and covenants to each Underwriter as follows:
(a) Compliance with Registration Requirements. The Registration
Statement and any Rule 462(b) Registration Statement have been declared
effective by the Commission under the Securities Act. The Company has complied
to the Commission's satisfaction with all requests of the Commission for
additional or supplemental information. No stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b) Registration
Statement is in effect and no proceedings for such purpose have been instituted
or are pending or, to the best knowledge of the Company, are contemplated or
threatened by the Commission.
Each preliminary prospectus and the Prospectus when filed complied
in all material respects with the Securities Act and, if filed by electronic
transmission pursuant to EDGAR (except as may be permitted by Regulation S-T
under the Securities Act), was identical to the copy thereof delivered to the
Underwriters for use in connection with the offer and sale of the Shares. Each
of the Registration Statement, any Rule 462(b) Registration Statement and any
post-effective amendment thereto, at the time it became effective and at all
subsequent times, complied and will comply in all material respects with the
Securities Act and did not and will not contain any untrue statement of a
material
- ------------------------------
1 Complete with the date of the Company's most recent preliminary
prospectus that was circulated to prospective offerees.
2
<PAGE> 3
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading. The Prospectus, as amended or
supplemented, as of its date and at all subsequent times, did not and will not
contain any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The representations
and warranties set forth in the two immediately preceding sentences do not apply
to statements in or omissions from the Registration Statement, any Rule 462(b)
Registration Statement, or any post-effective amendment thereto, or the
Prospectus, or any amendments or supplements thereto, made in reliance upon and
in conformity with information relating to any Underwriter furnished to the
Company in writing by the Representative expressly for use therein. There are no
contracts or other documents required to be described in the Prospectus or to be
filed as exhibits to the Registration Statement which have not been described or
filed as required.
(b) Offering Materials Furnished to Underwriters. The Company has
delivered to the Representative four complete conformed copies of the
Registration Statement and of each consent and certificate of experts filed as a
part thereof, and conformed copies of the Registration Statement (without
exhibits) and preliminary prospectuses and the Prospectus, as amended or
supplemented, in such quantities and at such places as the Representative has
reasonably requested for each of the Underwriters.
(c) Distribution of Offering Material By the Company. The Company has
not distributed and will not distribute, prior to the later of the Second
Closing Date (as defined below) and the completion of the Underwriters'
distribution of the Shares, any offering material in connection with the
offering and sale of the Shares other than a preliminary prospectus, the
Prospectus or the Registration Statement.
(d) The Underwriting Agreement. This Agreement has been duly
authorized, executed and delivered by, and is a valid and binding agreement of,
the Company, enforceable in accordance with its terms, except as rights to
indemnification hereunder may be limited by applicable law and except as the
enforcement hereof may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting the rights and
remedies of creditors or by general equitable principles.
(e) Authorization of the Shares To Be Sold by the Company. The Shares
to be purchased by the Underwriters from the Company have been duly authorized
for issuance and sale pursuant to this Agreement and, when issued and delivered
by the Company pursuant to this Agreement, will be validly issued, fully paid
and nonassessable.
(g) No Applicable Registration or Other Similar Rights. There are no
persons with registration or other similar rights to have any equity or debt
securities registered for sale under the Registration Statement or included in
the offering contemplated by this Agreement, except for such rights as have been
duly waived.
3
<PAGE> 4
(h) No Material Adverse Change. Subsequent to the respective dates as
of which information is given in the Prospectus: (i) there has been no material
adverse change, or any development that could reasonably be expected to result
in a material adverse change, in the condition, financial or otherwise, or in
the earnings, business, operations or prospects, whether or not arising from
transactions in the ordinary course of business, of the Company (any such change
or effect, where the context so requires, is called a "Material Adverse Change"
or a "Material Adverse Effect"); (ii) the Company has not incurred any material
liability or obligation, indirect, direct or contingent, not in the ordinary
course of business nor entered into any material transaction or agreement not in
the ordinary course of business; and (iii) there has been no dividend or
distribution of any kind declared, paid or made by the Company or, except for
dividends paid to the Company on any class of capital stock or repurchase or
redemption by the Company of any class of capital stock.
(i) Independent Accountants. Arthur Andersen LLP, who have expressed
their opinion with respect to the financial statements (which term as used in
this Agreement includes the related notes thereto) and supporting schedules
filed with the Commission as a part of the Registration Statement and included
in the Prospectus, are independent public or certified public accountants as
required by the Securities Act.
(j) Preparation of the Financial Statements. The financial statements
filed with the Commission as a part of the Registration Statement and included
in the Prospectus present fairly the financial position of the Company as of and
at the dates indicated and the results of its operations and cash flows for the
periods specified. The supporting schedules included in the Registration
Statement present fairly the information required to be stated therein. Such
financial statements and supporting schedules have been prepared in conformity
with generally accepted accounting principles applied on a consistent basis
throughout the periods involved, except as may be expressly stated in the
related notes thereto. No other financial statements or supporting schedules are
required to be included in the Registration Statement. The financial data set
forth in the Prospectus under the captions "Prospectus Summary--Summary Selected
Financial Data", "Selected Financial Data" and "Capitalization" fairly present
the information set forth therein on a basis consistent with that of the audited
financial statements contained in the Registration Statement.
(k) Company's Accounting System. The Company maintains a system of
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or specific
authorization; (ii) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (iii) access to assets is
permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
4
<PAGE> 5
(l) Subsidiaries of the Company. The Company has no subsidiaries.
(m) Incorporation and Good Standing of the Company. The Company has
been duly organized and is validly existing as a corporation or limited
liability company, as the case may be, in good standing under the laws of the
jurisdiction in which it is organized with full corporate power and authority to
own its properties and conduct its business as described in the prospectus, and
is duly qualified to do business as a foreign corporation and is in good
standing under the laws of each jurisdiction which requires such qualification.
(n) Capitalization and Other Capital Stock Matters. The authorized,
issued and outstanding capital stock of the Company is as set forth in the
Prospectus under the caption "Capitalization" (other than for subsequent
issuances, if any, pursuant to employee benefit plans described in the
Prospectus or upon exercise of outstanding options or warrants described in the
Prospectus). The Common Shares (including the Shares) conform in all material
respects to the description thereof contained in the Prospectus. All of the
issued and outstanding Common Shares have been duly authorized and validly
issued, are fully paid and nonassessable and have been issued in compliance with
federal and state securities laws. None of the outstanding Common Shares were
issued in violation of any preemptive rights, rights of first refusal or other
similar rights to subscribe for or purchase securities of the Company. There are
no authorized or outstanding options, warrants, preemptive rights, rights of
first refusal or other rights to purchase, or equity or debt securities
convertible into or exchangeable or exercisable for, any capital stock of the
Company other than those accurately described in the Prospectus. The description
of the Company's stock option, stock bonus and other stock plans or
arrangements, and the options or other rights granted thereunder, set forth in
the Prospectus accurately and fairly presents the information required to be
shown with respect to such plans, arrangements, options and rights.
(o) Stock Exchange Listing. The Shares have been approved for listing
on the Nasdaq National Market, subject only to official notice of issuance.
(p) No Consents, Approvals or Authorizations Required. No consent,
approval, authorization, filing with or order of any court or governmental
agency or regulatory body is required in connection with the transactions
contemplated herein, except such as have been obtained or made under the
Securities Act and such as may be required (i) under the blue sky laws of any
jurisdiction in connection with the purchase and distribution of the Shares by
the Underwriters in the manner contemplated here and in the Prospectus, (ii) by
the National Association of Securities Dealers, LLC and (iii) by the federal and
provincial laws of Canada.
(q) Non-Contravention of Existing Instruments or Agreements. Neither
the issue and sale of the Shares nor the consummation of any other of the
transactions herein contemplated nor the fulfillment of the terms hereof will
conflict with, result in a breach or violation or imposition of any lien, charge
or encumbrance upon any property or assets
5
<PAGE> 6
of the Company pursuant to, (i) the charter or by-laws of the Company, (ii) the
terms of any indenture, contract, lease, mortgage, deed of trust, note
agreement, loan agreement or other agreement, obligation, condition, covenant or
instrument to which the Company is a party or bound or to which its or its
property is subject or (iii) any statute, law, rule, regulation, judgment, order
or decree applicable to the Company of any court, regulatory body,
administrative agency, governmental body, arbitrator or other authority having
jurisdiction over the Company or any of its properties.
(r) No Defaults or Violations. The Company is not in violation or
default of (i) any provision of its charter or by-laws, (ii) the terms of any
indenture, contract, lease, mortgage, deed of trust, note agreement, loan
agreement or other agreement, obligation, condition, covenant or instrument to
which it is a party or bound or to which its property is subject or (iii) any
statute, law, rule, regulation, judgment, order or decree of any court,
regulatory body, administrative agency, governmental body, arbitrator or other
authority having jurisdiction over the Company or any of its properties, as
applicable, except any such violation or default which would not, singly or in
the aggregate, result in a Material Adverse Change except as otherwise disclosed
in the Prospectus.
(s) No Actions, Suits or Proceedings. No action, suit or proceeding by
or before any court or governmental agency, authority or body or any arbitrator
involving the Company or its property is pending or, to the best knowledge of
the Company, threatened that (i) could reasonably be expected to have a Material
Adverse Effect on the performance of this Agreement or the consummation of any
of the transactions contemplated hereby or (ii) could reasonably be expected to
result in a Material Adverse Effect.
(t) All Necessary Permits, Etc. The Company possesses such valid and
current certificates, authorizations or permits issued by the appropriate state,
federal or foreign regulatory agencies or bodies necessary to conduct its
business, and the Company has not received any notice of proceedings relating to
the revocation or modification of, or non-compliance with, any such certificate,
authorization or permit which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, could result in a Material Adverse
Change.
(u) Title to Properties. The Company has good and marketable title to
all the properties and assets reflected as owned in the financial statements
referred to in Section 1(j) above (or elsewhere in the Prospectus), in each case
free and clear of any security interests, mortgages, liens, encumbrances,
equities, claims and other defects, except such as do not materially and
adversely affect the value of such property and do not materially interfere with
the use made or proposed to be made of such property by the Company. The real
property, improvements, equipment and personal property held under lease by the
Company are held under valid and enforceable leases, with such exceptions as are
not material and do not materially interfere with the use made or proposed to be
made of such real property, improvements, equipment or personal property by the
Company.
6
<PAGE> 7
(v) Tax Law Compliance. The Company has filed all necessary federal,
state and foreign income and franchise tax returns and have paid all taxes
required to be paid by any of them and, if due and payable, any related or
similar assessment, fine or penalty levied against any of them. The Company has
made adequate charges, accruals and reserves in the applicable financial
statements referred to in Section 1(j) above in respect of all federal, state
and foreign income and franchise taxes for all periods as to which the tax
liability of the Company has not been finally determined. The Company is not
aware of any tax deficiency that has been or might be asserted or threatened
against the Company that could result in a Material Adverse Change.
(w) Intellectual Property Rights. The Company owns or possesses
adequate rights to use all patents, patent rights or licenses, inventions,
collaborative research agreements, trade secrets, know-how, trademarks, service
marks, trade names and copyrights which are necessary to conduct its business as
described in the Registration Statement and Prospectus; the expiration of any
patents, patent rights, trade secrets, trademarks, service marks, trade names or
copyrights would not result in a Material Adverse Change that is not otherwise
disclosed in the Prospectus; the Company has not received any notice of, and has
no knowledge of, any infringement of or conflict with asserted rights of the
Company by others with respect to any patent, patent rights, inventions, trade
secrets, know-how, trademarks, service marks, trade names or copyrights; and the
Company has not received any notice of, and has no knowledge of, any
infringement of or conflict with asserted rights of others with respect to any
patent, patent rights, inventions, trade secrets, know-how, trademarks, service
marks, trade names or copyrights which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, might have a Material
Adverse Effect. There is no claim being made against the Company regarding
patents, patent rights or licenses, inventions, collaborative research, trade
secrets, know-how, trademarks, service marks, trade names or copyrights. The
Company does not in the conduct of its business as now or proposed to be
conducted as described in the Prospectus infringe or conflict with any right or
patent of any third party, or any discovery, invention, product or process which
is the subject of a patent application filed by any third party, known to the
Company, which such infringement or conflict is reasonably likely to result in a
Material Adverse Change.
(x) Year 2000 Preparedness. There are no issues related to the
Company's preparedness for the Year 2000 that (i) are of a character required to
be described or referred to in the Registration Statement or Prospectus by the
Securities Act which have not been accurately described in the Registration
Statement or Prospectus or (ii) might reasonably be expected to result in any
Material Adverse Change or that might materially affect its properties, assets
or rights. All internal computer systems and each Constituent Component (as
defined below) of those systems and all computer-related products and each
Constituent Component (as defined below) of those products of the Company fully
comply with Year 2000 Qualification Requirements. "Year 2000 Qualifications
Requirements" means that the internal computer systems and each Constituent
Component (as defined below) of those systems and all computer-related products
and
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each Constituent Component (as defined below) of those products of the Company
(i) have been reviewed to confirm that they store, process (including sorting
and performing mathematical operations, calculations and computations), input
and output data containing date and information correctly regardless of whether
the date contains dates and times before, on or after January 1, 2000, (ii) have
been designated to ensure date and time entry recognition and calculations, and
date data interface values that reflect the century, (iii) accurately manage and
manipulate data involving dates and times, including single century formulas and
multi-century formulas, and will not cause an abnormal ending scenario within
the application or generate incorrect values or invalid results involving such
dates, (iv) accurately process any date rollover, and (v) accept and respond to
two-digit year date input in a manner that resolves any ambiguities as to the
century. "Constituent Component" means all software (including operating
systems, programs, packages and utilities), firmware, hardware, networking
components, and peripherals provided as part of the configuration. The Company
has inquired of material vendors as to their preparedness for the Year 2000 and
has disclosed in the Registration Statement or Prospectus any issues that might
reasonably be expected to result in any Material Adverse Change.
(y) No Transfer Taxes or Other Fees. There are no transfer taxes or
other similar fees or charges under Federal law or the laws of any state, or any
political subdivision thereof, required to be paid in connection with the
execution and delivery of this Agreement or the issuance and sale by the Company
of the shares.
(z) Company Not an "Investment Company". The Company has been advised
of the rules and requirements under the Investment Company Act of 1940, as
amended (the "Investment Company Act"). The Company is not, and after receipt of
payment for the Shares will not be, an "investment company" or an entity
"controlled" by an "investment company" within the meaning of the Investment
Company Act and will conduct its business in a manner so that it will not become
subject to the Investment Company Act.
(aa) Insurance. The Company is insured by recognized, financially sound
and reputable institutions with policies in such amounts and with such
deductibles and covering such risks as are generally deemed adequate and
customary for its business including, but not limited to, policies covering real
and personal property owned or leased by the Company against theft, damage,
destruction, acts of vandalism and earthquakes, general liability and Directors
and Officers liability. The Company has no reason to believe that it will not be
able (i) to renew its existing insurance coverage as and when such policies
expire or (ii) to obtain comparable coverage from similar institutions as may be
necessary or appropriate to conduct its business as now conducted and at a cost
that would not result in a Material Adverse Change. The Company has not been
denied any insurance coverage which it has sought or for which it has applied.
(bb) Labor Matters. To the best of Company's knowledge, no labor
disturbance by the employees of the Company exists or is imminent; and the
Company is
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not aware of any existing or imminent labor disturbance by the employees of any
of its principal suppliers, subcontractors, original equipment manufacturers,
authorized dealers or international distributors] that might be expected to
result in a Material Adverse Change.
(cc) No Price Stabilization or Manipulation. The Company has not taken
and will not take, directly or indirectly, any action designed to or that might
be reasonably expected to cause or result in stabilization or manipulation of
the price of the Common Stock to facilitate the sale or resale of the Shares.
(dd) Lock-Up Agreements. Each officer and director of the company and
each beneficial owner of one or more percent of the outstanding issued share
capital of the Company has agreed to sign an agreement substantially in the form
attached hereto as EXHIBIT A (the "Lock-up Agreements"). The Company has
provided to counsel for the Underwriters a complete and accurate list of all
securityholders of the Company and the number and type of securities held by
each securityholder. The Company has provided to counsel for the Underwriters
true, accurate and complete copies of all of the Lock-up Agreements presently in
effect or effected hereby. The Company hereby represents and warrants that it
will not release any of its officers, directors or other stockholders from any
Lock-up Agreements currently existing or hereafter effected without the prior
written consent of BancBoston Robertson Stephens Inc.
(ee) Related Party Transactions. There are no business relationships or
related-party transactions involving the Company or any other person required to
be described in the Prospectus which have not been described as required.
(ff) No Unlawful Contributions or Other Payments. Neither the Company
nor, to the best of the Company's knowledge, any employee or agent of the
Company, has made any contribution or other payment to any official of, or
candidate for, any federal, state or foreign office in violation of any law or
of the character required to be disclosed in the Prospectus.
(gg) Environmental Laws. (i) The Company is in compliance with all
rules, laws and regulations relating to the use, treatment, storage and disposal
of toxic substances and protection of health or the environment ("Environmental
Laws") which are applicable to its business, except where the failure to comply
would not result in a Material Adverse Change, (ii) the Company has received no
notice from any governmental authority or third party of an asserted claim under
Environmental Laws, which claim is required to be disclosed in the Registration
Statement and the Prospectus, (iii) the Company will not be required to make
future material capital expenditures to comply with Environmental Laws and (iv)
no property which is owned, leased or occupied by the Company has been
designated as a Superfund site pursuant to the Comprehensive Response,
Compensation, and Liability Act of 1980, as amended (42 U.S.C. ss. 9601, ET
SEQ.), or otherwise designated as a contaminated site under applicable state or
local law.
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(hh) Periodic Review of Costs of Environmental Compliance. In the
ordinary course of its business, the Company conducts a periodic review of the
effect of Environmental Laws on the business, operations and properties of the
Company, in the course of which it identifies and evaluates associated costs and
liabilities (including, without limitation, any capital or operating
expenditures required for clean-up, closure of properties or compliance with
Environmental Laws or any permit, license or approval, any related constraints
on operating activities and any potential liabilities to third parties). On the
basis of such review and the amount of its established reserves, the Company has
reasonably concluded that such associated costs and liabilities would not,
individually or in the aggregate, result in a Material Adverse Change.
(ii) ERISA Compliance. The Company and any "employee benefit plan" (as
defined under the Employee Retirement Income Security Act of 1974, as amended,
and the regulations and published interpretations thereunder (collectively,
"ERISA")) established or maintained by the Company or its "ERISA Affiliates" (as
defined below) are in compliance in all material respects with ERISA. "ERISA
Affiliate" means, with respect to the Company, any member of any group of
organizations described in Sections 414(b),(c),(m) or (o) of the Internal
Revenue Code of 1986, as amended, and the regulations and published
interpretations thereunder (the "Code") of which the Company is a member. No
"reportable event" (as defined under ERISA) has occurred or is reasonably
expected to occur with respect to any "employee benefit plan" established or
maintained by the Company or any of its ERISA Affiliates. No "employee benefit
plan" established or maintained by the Company or any of its ERISA Affiliates,
if such "employee benefit plan" were terminated, would have any "amount of
unfounded benefit liabilities" (as defined under ERISA). Neither the Company nor
any of its ERISA Affiliates has incurred or reasonably expects to incur any
liability under (i) Title IV of ERISA with respect to termination of, or
withdrawal from, any "employee benefit plan" or (ii) Sections 412, 4971, 4975 or
4980B of the Code. Each "employee benefit plan" established or maintained by the
Company or any of its ERISA Affiliates that is intended to be qualified under
Section 401(a) of the Code is so qualified and nothing has occurred, whether by
action or failure to act, which would cause the loss of such qualification.
Any certificate signed by an officer of the Company and delivered
to the Representative or to counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to each Underwriter as to the matters
set forth therein.
SECTION 2. PURCHASE, SALE AND DELIVERY OF THE SHARES.
(a) The Firm Shares. The Company agrees to issue and sell to the
several Underwriters the Firm Shares upon the terms herein set forth. On the
basis of the representations, warranties and agreements herein contained, and
upon the terms but subject to the conditions herein set forth, the Underwriters
agree, severally and not jointly, to purchase from the Company the respective
number of Firm Shares set forth
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opposite their names on SCHEDULE A. The purchase price per Firm Share to be paid
by the several Underwriters to the Company shall be $[___] per share.
(b) The First Closing Date. Delivery of the Firm Shares to be purchased
by the Underwriters and payment therefor shall be made by the Company and the
Representatives at 9:00 a.m. Eastern Standard Time, at the offices of Mintz,
Levin, Cohn, Ferris, Glovsky and Popeo, P.C., One Financial Center, Boston,
Massachusetts, 02111 (or at such other place as may be agreed upon among the
Representatives and the Company), (i) on the third (3rd) full business day
following the first day that Shares are traded, (ii) if this Agreement is
executed and delivered after 1:30 P.M., Eastern Standard Time, the fourth (4th)
full business day following the day that this Agreement is executed and
delivered or (iii) at such other time and date not later that seven (7) full
business days following the first day that Shares are traded as the
Representatives and the Company may determine (or at such time and date to which
payment and delivery shall have been postponed pursuant to Section 8 hereof),
such time and date of payment and delivery being herein called the "Closing
Date;" provided, however, that if the Company has not made available to the
Representatives copies of the Prospectus within the time provided in Section
4(d) hereof, the Representatives may, in their sole discretion, postpone the
Closing Date until no later that two (2) full business days following delivery
of copies of the Prospectus to the Representatives.
(c) The Option Shares; the Second Closing Date. In addition, on the
basis of the representations, warranties and agreements herein contained, and
upon the terms but subject to the conditions herein set forth, the Company
hereby grants an option to the several Underwriters to purchase, severally and
not jointly, up to an aggregate of [___] Option Shares from the Company at the
purchase price per share to be paid by the Underwriters for the Firm Shares. The
option granted hereunder is for use by the Underwriters solely in covering any
over-allotments in connection with the sale and distribution of the Firm Shares.
The option granted hereunder may be exercised at any time upon notice by the
Representatives to the Company, which notice may be given at any time within 30
days from the date of this Agreement. The time and date of delivery of the
Option Shares, if subsequent to the First Closing Date, is called the "Second
Closing Date" and shall be determined by the Representatives and shall not be
earlier than three nor later than five full business days after delivery of such
notice of exercise. If any Option Shares are to be purchased, each Underwriter
agrees, severally and not jointly, to purchase the number of Option Shares
(subject to such adjustments to eliminate fractional shares as the
Representatives may determine) that bears the same proportion to the total
number of Option Shares to be purchased as the number of Firm Shares set forth
on SCHEDULE A opposite the name of such Underwriter bears to the total number of
Firm Shares. The Representatives may cancel the option at any time prior to its
expiration by giving written notice of such cancellation to the Company.
(d) Public Offering of the Shares. The Representatives hereby advise
the Company that the Underwriters intend to offer for sale to the public, as
described in the
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Prospectus, their respective portions of the Shares as soon after this Agreement
has been executed and the Registration Statement has been declared effective as
the Representatives, in their sole judgment, has determined is advisable and
practicable.
(e) Payment for the Shares. Payment for the Shares shall be made at the
First Closing Date (and, if applicable, at the Second Closing Date) by wire
transfer in immediately available-funds to the order of the Company.
It is understood that the Representatives have been authorized, for
their own accounts and the accounts of the several Underwriters, to accept
delivery of and receipt for, and make payment of the purchase price for, the
Firm Shares and any Option Shares the Underwriters have agreed to purchase.
BancBoston Robertson Stephens Inc., individually and not as the Representative
of the Underwriters, may (but shall not be obligated to) make payment for any
Shares to be purchased by any Underwriter whose funds shall not have been
received by the Representatives by the First Closing Date or the Second Closing
Date, as the case may be, for the account of such Underwriter, but any such
payment shall not relieve such Underwriter from any of its obligations under
this Agreement.
(f) Delivery of the Shares. The Company shall deliver, or cause to be
delivered, a credit representing the Firm Shares to an account or accounts at
The Depository Trust Company, as designated by the Representatives for the
accounts of the Representatives and the several Underwriters at the First
Closing Date, against the irrevocable release of a wire transfer of immediately
available funds for the amount of the purchase price therefor. The Company shall
also deliver, or cause to be delivered a credit representing the Option Shares
the Underwriters have agreed to purchase at the First Closing Date (or the
Second Closing Date, as the case may be), to an account or accounts at The
Depository Trust Company as designated by the Representatives for the accounts
of the Representatives and the several Underwriters, against the irrevocable
release of a wire transfer of immediately available funds for the amount of the
purchase price therefor. Time shall be of the essence, and delivery at the time
and place specified in this Agreement is a further condition to the obligations
of the Underwriters.
(g) Delivery of Prospectus to the Underwriters. Not later than 12:00
noon on the second business day following the date the Shares are released by
the Underwriters for sale to the public, the Company shall deliver or cause to
be delivered copies of the Prospectus in such quantities and at such places as
the Representatives shall request.
SECTION 3. COVENANTS OF THE COMPANY. The Company further covenants and
agrees with each Underwriter as follows:
(a) Registration Statement Matters. The Company will (i) use its best
efforts to cause a registration statement on Form 8-A (the "Form 8-A
Registration Statement") as required by the Securities Exchange Act of 1934 (the
"Exchange Act") to become
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effective simultaneously with the Registration Statement, (ii) use its best
efforts to cause the Registration Statement to become effective or, if the
procedure in Rule 430A of the Securities Act is followed, to prepare and timely
file with the Commission under Rule 424(b) under the Securities Act a Prospectus
in a form approved by the Representatives containing information previously
omitted at the time of effectiveness of the Registration Statement in reliance
on Rule 430A of the Securities Act and (iii) not file any amendment to the
Registration Statement or supplement to the Prospectus of which the
Representatives shall not previously have been advised and furnished with a copy
or to which the Representatives shall have reasonably objected in writing or
which is not in compliance with the Securities Act. If the Company elects to
rely on Rule 462(b) under the Securities Act, the Company shall file a Rule
462(b) Registration Statement with the Commission in compliance with Rule 462(b)
under the Securities Act prior to the time confirmations are sent or given, as
specified by Rule 462(b)(2) under the Securities Act, and shall pay the
applicable fees in accordance with Rule 111 under the Securities Act.
(b) Securities Act Compliance. The Company will advise the
Representatives promptly (i) when the Registration Statement or any
post-effective amendment thereto shall have become effective, (ii) of receipt of
any comments from the Commission, (iii) of any request of the Commission for
amendment of the Registration Statement or for supplement to the Prospectus or
for any additional information and (iv) of the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement or the use
of the Prospectus or of the institution of any proceedings for that purpose. The
Company will use its best efforts to prevent the issuance of any such stop order
preventing or suspending the use of the Prospectus and to obtain as soon as
possible the lifting thereof, if issued.
(c) Blue Sky Compliance. The Company will cooperate with the
Representatives and counsel for the Underwriters in endeavoring to qualify the
Shares for sale under the securities laws of such jurisdictions (both national
and foreign) as the Representatives may reasonably have designated in writing
and will make such applications, file such documents, and furnish such
information as may be reasonably required for that purpose, provided the Company
shall not be required to qualify as a foreign corporation or to file a general
consent to service of process in any jurisdiction where it is not now so
qualified or required to file such a consent. The Company will, from time to
time, prepare and file such statements, reports and other documents, as are or
may be required to continue such qualifications in effect for so long a period
as the Representatives may reasonably request for distribution of the Shares.
(d) Amendments and Supplements to the Prospectus and Other Securities
Act Matters. The Company will comply with the Securities Act and the Exchange
Act, and the rules and regulations of the Commission thereunder, so as to permit
the completion of the distribution of the Shares as contemplated in this
Agreement and the Prospectus. If during the period in which a prospectus is
required by law to be delivered by an Underwriter or dealer, any event shall
occur as a result of which, in the judgment of the Company or in the reasonable
opinion of the Representatives or counsel for the
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Underwriters, it becomes necessary to amend or supplement the Prospectus in
order to make the statements therein, in the light of the circumstances existing
at the time the Prospectus is delivered to a purchaser, not misleading, or, if
it is necessary at any time to amend or supplement the Prospectus to comply with
any law, the Company promptly will prepare and file with the Commission, and
furnish at its own expense to the Underwriters and to dealers, an appropriate
amendment to the Registration Statement or supplement to the Prospectus so that
the Prospectus as so amended or supplemented will not, in the light of the
circumstances when it is so delivered, be misleading, or so that the Prospectus
will comply with the law.
(e) Copies of any Amendments and Supplements to the Prospectus. The
Company agrees to furnish the Representatives, without charge, during the period
beginning on the date hereof and ending on the later of the First Closing Date
or such date, as in the opinion of counsel for the Underwriters, the Prospectus
is no longer required by law to be delivered in connection with sales by an
Underwriter or dealer (the "Prospectus Delivery Period"), as many copies of the
Prospectus and any amendments and supplements thereto as the Representatives may
request.
(f) Insurance. The Company shall (i) obtain Directors and Officers
liability insurance in the minimum amount of $10 million which shall apply to
the offering contemplated hereby and (ii) shall cause BancBoston Robertson
Stephens Inc. to be added as an additional insured to such policy in respect of
the offering contemplated hereby.
(g) Notice of Subsequent Events. If at any time during the ninety (90)
day period after the Registration Statement becomes effective, any rumor,
publication or event relating to or affecting the Company shall occur as a
result of which in your opinion the market price of the Company Shares has been
or is likely to be materially affected (regardless of whether such rumor,
publication or event necessitates a supplement to or amendment of the
Prospectus), the Company will, after written notice from you advising the
Company to the effect set forth above, forthwith prepare, consult with you
concerning the substance of and disseminate a press release or other public
statement, reasonably satisfactory to you, responding to or commenting on such
rumor, publication or event.
(h) Use of Proceeds. The Company shall apply the net proceeds from the
sale of the Shares sold by it in the manner described under the caption "Use of
Proceeds" in the Prospectus.
(i) Transfer Agent. The Company shall engage and maintain, at its
expense, a registrar and transfer agent for the Company Shares.
(j) Earnings Statement. As soon as practicable, the Company will make
generally available to its security holders and to the Representatives an
earnings statement (which need not be audited) covering the twelve-month period
ending [JULY 31, 2000] that satisfies the provisions of Section 11(a) of the
Securities Act.
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(k) Periodic Reporting Obligations. During the Prospectus Delivery
Period the Company shall file, on a timely basis, with the Commission and the
Nasdaq National Market all reports and documents required to be filed under the
Exchange Act.
(l) Agreement Not to Offer or Sell Additional Securities. The Company
will not, without the prior written consent of BancBoston Robertson Stephens
Inc., for a period of 180 days following the date of the Prospectus, offer, sell
or contract to sell, or otherwise dispose of or enter into any transaction which
is designed to, or could be expected to, result in the disposition (whether by
actual disposition or effective economic disposition due to cash settlement or
otherwise by the Company or any affiliate of the Company or any person in
privity with the Company or any affiliate of the Company) directly or
indirectly, or announce the offering of, any other Common Shares or any
securities convertible into, or exchangeable for, Common Shares; provided,
however, that the Company may (i) issue and sell Common Shares pursuant to any
director or employee stock option plan, stock ownership plan or dividend
reinvestment plan of the Company in effect at the date of the Prospectus and
described in the Prospectus so long as none of those shares may be transferred
on during the period of 180 days from the date that the Registration Statement
is declared effective (the "Lock-Up Period") and the Company shall enter stop
transfer instructions with its transfer agent and registrar against the transfer
of any such Common Shares and (ii) the Company may issue Common Shares issuable
upon the conversion of securities or the exercise of warrants outstanding at the
date of the Prospectus and described in the Prospectus.
(m) Future Reports to the Representatives. During the period of five
years hereafter the Company will furnish to the Representatives (i) as soon as
practicable after the end of each fiscal year, copies of the Annual Report of
the Company containing the balance sheet of the Company as of the close of such
fiscal year and statements of income, stockholders' equity and cash flows for
the year then ended and the opinion thereon of the Company's independent public
or certified public accountants; (ii) as soon as practicable after the filing
thereof, copies of each proxy statement, Annual Report on Form 10-K, Quarterly
Report on Form 10-Q, Current Report on Form 8-K or other report filed by the
Company with the Commission, the National Association of Securities Dealers, LLC
or any securities exchange; and (iii) as soon as available, copies of any report
or communication of the Company mailed generally to holders of its capital
stock.
SECTION 4. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The
obligations of the several Underwriters to purchase and pay for the Shares as
provided herein on the First Closing Date and, with respect to the Option
Shares, the Second Closing Date, shall be subject to the accuracy of the
representations and warranties on the part of the Company set forth in Section 1
hereof as of the date hereof and as of the First Closing Date as though then
made and, with respect to the Option Shares, as of the Second Closing Date as
though then made, to the timely performance by the Company of its covenants and
other obligations hereunder, and to each of the following additional conditions:
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(a) Compliance with Registration Requirements; No Stop Order; No
Objection from the National Association of Securities Dealers, LLC The
Registration Statement shall have become effective prior to the execution of
this Agreement, or at such later date as shall be consented to in writing by
you; and no stop order suspending the effectiveness thereof shall have been
issued and no proceedings for that purpose shall have been initiated or, to the
knowledge of the Company or any Underwriter, threatened by the Commission, and
any request of the Commission for additional information (to be included in the
Registration Statement or the Prospectus or otherwise) shall have been complied
with to the satisfaction of Underwriters' Counsel; and the National Association
of Securities Dealers, LLC shall have raised no objection to the fairness and
reasonableness of the underwriting terms and arrangements.
(b) Corporate Proceedings. All corporate proceedings and other legal
matters in connection with this Agreement, the form of Registration Statement
and the Prospectus, and the registration, authorization, issue, sale and
delivery of the Shares, shall have been reasonably satisfactory to Underwriters'
Counsel, and such counsel shall have been furnished with such papers and
information as they may reasonably have requested to enable them to pass upon
the matters referred to in this Section.
(c) No Material Adverse Change. Subsequent to the execution and
delivery of this Agreement and prior to the First Closing Date, or the Second
Closing Date, as the case may be, there shall not have been any Material Adverse
Change in the condition (financial or otherwise), earnings, operations, business
or business prospects of the Company from that set forth in the Registration
Statement or Prospectus, which, in your sole judgment, is material and adverse
and that makes it, in your sole judgment, impracticable or inadvisable to
proceed with the public offering of the Shares as contemplated by the
Prospectus.
(d) Opinion of Counsel for the Company. You shall have received on the
First Closing Date, or the Second Closing Date, as the case may be, an opinion
of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., counsel for the Company,
substantially in the form of EXHIBIT B attached hereto, dated the First Closing
Date, or the Second Closing Date, addressed to the Underwriters and with
reproduced copies or signed counterparts thereof for each of the Underwriters.
Counsel rendering the opinion contained in EXHIBIT B may rely as to
questions of law not involving the laws of the United States or the Commonwealth
of Massachusetts and state of Delaware upon opinions of local counsel, and as to
questions of fact upon representations or certificates of officers of the
Company, and of government officials, in which case their opinion is to state
that they are so relying and that they have no knowledge of any material
misstatement or inaccuracy in any such opinion, representation or certificate.
Copies of any opinion, representation or certificate so relied upon shall be
delivered to you, as Representatives of the Underwriters, and to Underwriters'
Counsel.
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(e) Opinion of Counsel for the Underwriters. You shall have received on
the First Closing Date or the Second Closing Date, as the case may be, an
opinion of Brobeck, Phleger & Harrison LLP, substantially in the form of EXHIBIT
C hereto. The Company shall have furnished to such counsel such documents as
they may have requested for the purpose of enabling them to pass upon such
matters.
(f) Accountants' Comfort Letter. You shall have received on the First
Closing Date and on the Second Closing Date, as the case may be, a letter from
Arthur Andersen LLP addressed to the Underwriters, dated the First Closing Date
or the Second Closing Date, as the case may be, confirming that they are
independent certified public accountants with respect to the Company within the
meaning of the Act and the applicable published Rules and Regulations and based
upon the procedures described in such letter delivered to you concurrently with
the execution of this Agreement (herein called the "Original Letter"), but
carried out to a date not more than four (4) business days prior to the First
Closing Date or the Second Closing Date, as the case may be, (i) confirming, to
the extent true, that the statements and conclusions set forth in the Original
Letter are accurate as of the First Closing Date or the Second Closing Date, as
the case may be, and (ii) setting forth any revisions and additions to the
statements and conclusions set forth in the Original Letter which are necessary
to reflect any changes in the facts described in the Original Letter since the
date of such letter, or to reflect the availability of more recent financial
statements, data or information. The letter shall not disclose any change in the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company from that set forth in the Registration Statement or
Prospectus, which, in your sole judgment, is material and adverse and that makes
it, in your sole judgment, impracticable or inadvisable to proceed with the
public offering of the Shares as contemplated by the Prospectus. The Original
Letter from Arthur Andersen LLP shall be addressed to or for the use of the
Underwriters in form and substance satisfactory to the Underwriters and shall
(i) represent, to the extent true, that they are independent certified public
accountants with respect to the Company within the meaning of the Act and the
applicable published Rules and Regulations, (ii) set forth their opinion with
respect to their examination of the balance sheet of the Company as of January
31, 1999, and statements of operations, shareholders' equity, and cash flows for
the twelve (12) months ended January 31, 1999, (iii) state that Arthur Andersen
LLP has performed the procedures set out in Statement on Auditing Standards No.
71 ("SAS 71") for a review of interim financial information and providing the
report of Arthur Andersen LLP as described in SAS 71 on the financial statements
for each of the quarters in the six-quarter period ended January 31, 1999 (the
"Quarterly Financial Statements"), (iv) state that in the course of such review,
nothing came to their attention that leads them to believe that any material
modifications need to be made to any of the Quarterly Financial Statements in
order for them to be in compliance with generally accepted accounting principles
consistently applied across the periods presented, and address other matters
agreed upon by Arthur Andersen LLP and you. In addition, you shall have received
from Arthur Andersen LLP a letter addressed to the Company and made available to
you for the use of the Underwriters stating that their review of the Company's
system of internal accounting controls, to the extent they deemed necessary in
establishing the scope of their examination of the Company's financial
statements as of January 31,
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1999, did not disclose any weaknesses in internal controls that they considered
to be material weaknesses.
(h) Officers' Certificate. You shall have received on the First Closing
Date and the Second Closing Date, as the case may be, a certificate of the
Company, dated the First Closing Date or the Second Closing Date, as the case
may be, signed by the Chief Executive Officer and Chief Financial Officer of the
Company, to the effect that, and you shall be satisfied that:
(i) The representations and warranties of the Company in this Agreement are
true and correct, as if made on and as of the First Closing Date or the
Second Closing Date, as the case may be, and the Company has complied with
all the agreements and satisfied all the conditions on its part to be
performed or satisfied at or prior to the First Closing Date or the Second
Closing Date, as the case may be;
(ii) No stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are pending or threatened under the Act;
(iii) When the Registration Statement became effective and at all times
subsequent thereto up to the delivery of such certificate, the Registration
Statement and the Prospectus, and any amendments or supplements thereto,
contained all material information required to be included therein by the
Securities Act and in all material respects conformed to the requirements
of the Securities Act, the Registration Statement and the Prospectus, and
any amendments or supplements thereto, did not and does not include any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading; and, since the effective date of the Registration
Statement, there has occurred no event required to be set forth in an
amended or supplemented Prospectus which has not been so set forth; and
(iv) Subsequent to the respective dates as of which information is given in
the Registration Statement and Prospectus, there has not been (a) any
material adverse change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company, (b)
any transaction that is material to the Company, except transactions
entered into in the ordinary course of business, (c) any obligation, direct
or contingent, incurred by the Company, that is material to the Company,
except obligations incurred in the ordinary course of business, (d) any
change in the capital stock or outstanding indebtedness of the Company that
is material to the Company, (e) any dividend or distribution of any kind
declared, paid or made on the capital stock of the Company, or (f) any loss
or damage (whether or not insured) to the property of the Company which has
been sustained or will have been sustained which has a material adverse
effect on the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company.
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(i) Lock-up Agreement from Certain Stockholders of the Company. The
Company shall have obtained and delivered to you an agreement substantially in
the form of EXHIBIT A attached hereto from each officer and director of the
Company, and each beneficial owner of one or more percent of the outstanding
issued share capital of the Company.
(j) Stock Exchange Listing. The Shares shall have been approved for
listing on the Nasdaq National Market, subject only to official notice of
issuance.
(k) Compliance with Prospectus Delivery Requirements. The Company shall
have complied with the provisions of Sections 2(g) and 3(e) hereof with respect
to the furnishing of Prospectuses.
(l) Additional Documents. On or before each of the First Closing Date
and the Second Closing Date, as the case may be, the Representatives and counsel
for the Underwriters shall have received such information, documents and
opinions as they may reasonably require for the purposes of enabling them to
pass upon the issuance and sale of the Shares as contemplated herein, or in
order to evidence the accuracy of any of the representations and warranties, or
the satisfaction of any of the conditions or agreements, herein contained.
If any condition specified in this Section 4 is not satisfied when and as
required to be satisfied, this Agreement may be terminated by the
Representatives by notice to the Company at any time on or prior to the First
Closing Date and, with respect to the Option Shares, at any time prior to the
Second Closing Date, which termination shall be without liability on the part of
any party to any other party, except that Section 5 (Payment of Expenses),
Section 6 (Reimbursement of Underwriters' Expenses), Section 7 (Indemnification
and Contribution) and Section 10 (Representations and Indemnities to Survive
Delivery) shall at all times be effective and shall survive such termination.
SECTION 5. PAYMENT OF EXPENSES. The Company agrees to pay all costs, fees
and expenses incurred in connection with the performance of its obligations
hereunder and in connection with the transactions contemplated hereby, including
without limitation (i) all expenses incident to the issuance and delivery of the
Common Shares (including all printing and engraving costs), (ii) all fees and
expenses of the registrar and transfer agent of the Common Stock, (iii) all
necessary issue, transfer and other stamp taxes in connection with the issuance
and sale of the Shares to the Underwriters, (iv) all fees and expenses of the
Company's counsel, independent public or certified public accountants and other
advisors, (v) all costs and expenses incurred in connection with the
preparation, printing, filing, shipping and distribution of the Registration
Statement (including financial statements, exhibits, schedules, consents and
certificates of experts), each preliminary prospectus and the Prospectus, and
all amendments and supplements thereto, and this Agreement, (vi) all filing
fees, attorneys' fees and expenses incurred by the Company or the Underwriters
in connection with qualifying or registering (or obtaining exemptions from the
qualification or registration of) all or any part of the Shares for offer and
sale under the state securities or blue sky laws or the provincial securities
laws of
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Canada or any other country, and, if requested by the Representatives, preparing
and printing a "Blue Sky Survey", an "International Blue Sky Survey" or other
memorandum, and any supplements thereto, advising the Underwriters of such
qualifications, registrations and exemptions, (vii) the filing fees incident to,
and the reasonable fees and expenses of counsel for the Underwriters in
connection with, the National Association of Securities Dealers, LLC review and
approval of the Underwriters' participation in the offering and distribution of
the Common Shares, (viii) the fees and expenses associated with listing the
Common Shares on the Nasdaq National Market, (ix) all costs and expenses
incident to the preparation and undertaking of "road show" preparations to be
made to prospective investors, and (x) all other fees, costs and expenses
referred to in Item 13 of Part II of the Registration Statement. Except as
provided in this Section 5, Section 6, and Section 7 hereof, the Underwriters
shall pay their own expenses, including the fees and disbursements of their
counsel.
SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If this Agreement is
terminated by the Representatives pursuant to Section 4, Section 7, Section 8,
Section 9, or if the sale to the Underwriters of the Shares on the First Closing
Date is not consummated because of any refusal, inability or failure on the part
of the Company to perform any agreement herein or to comply with any provision
hereof, the Company agrees to reimburse the Representatives and the other
Underwriters (or such Underwriters as have terminated this Agreement with
respect to themselves), severally, upon demand for all out-of-pocket expenses
that shall have been reasonably incurred by the Representatives and the
Underwriters in connection with the proposed purchase and the offering and sale
of the Shares, including but not limited to fees and disbursements of counsel,
printing expenses, travel expenses, postage, facsimile and telephone charges.
SECTION 7. INDEMNIFICATION AND CONTRIBUTION.
(a) Indemnification of the Underwriters.
(1) The Company agrees to indemnify and hold harmless each
Underwriter, its officers and employees, and each person, if any, who controls
any Underwriter within the meaning of the Securities Act and the Exchange Act
against any loss, claim, damage, liability or expense, as incurred, to which
such Underwriter or such controlling person may become subject, under the
Securities Act, the Exchange Act or other federal or state statutory law or
regulation, or at common law or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent of the
Company, which consent shall not be unreasonably withheld), insofar as such
loss, claim, damage, liability or expense (or actions in respect thereof as
contemplated below) arises out of or is based (i) upon any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement, or any amendment thereto, including any information deemed to be a
part thereof pursuant to Rule 430A or Rule 434 under the Securities Act, or the
omission or alleged omission
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therefrom of a material fact required to be stated therein or necessary to make
the statements therein not misleading; or (ii) upon any untrue statement or
alleged untrue statement of a material fact contained in any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto), or the
omission or alleged omission therefrom of a material fact necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading; or (iii) in whole or in part upon any inaccuracy in
the representations and warranties of the Company contained herein; or (iv) in
whole or in part upon any failure of the Company to perform its obligations
hereunder or under law; or (v) any act or failure to act or any alleged act or
failure to act by any Underwriter in connection with, or relating in any manner
to, the Shares or the offering contemplated hereby, and which is included as
part of or referred to in any loss, claim, damage, liability or action arising
out of or based upon any matter covered by clause (i), (ii), (iii) or (iv)
above, provided that the Company shall not be liable under this clause (v) to
the extent that a court of competent jurisdiction shall have determined by a
final judgment that such loss, claim, damage, liability or action resulted
directly from any such acts or failures to act undertaken or omitted to be taken
by such Underwriter through its bad faith or willful misconduct; and to
reimburse each Underwriter and each such controlling person for any and all
expenses (including the fees and disbursements of counsel chosen by BancBoston
Robertson Stephens Inc.) as such expenses are reasonably incurred by such
Underwriter or such controlling person in connection with investigating,
defending, settling, compromising or paying any such loss, claim, damage,
liability, expense or action; provided, however, that the foregoing indemnity
agreement shall not apply to any loss, claim, damage, liability or expense to
the extent, but only to the extent, arising out of or based upon any untrue
statement or alleged untrue statement or omission or alleged omission made in
reliance upon and in conformity with written information furnished to the
Company by the Representatives expressly for use in the Registration Statement,
any preliminary prospectus or the Prospectus (or any amendment or supplement
thereto); and provided, further, that with respect to any preliminary
prospectus, the foregoing indemnity agreement shall not inure to the benefit of
any Underwriter from whom the person asserting any loss, claim, damage,
liability or expense purchased Shares, or any person controlling such
Underwriter, if copies of the Prospectus were timely delivered to the
Underwriter pursuant to Section 2 and a copy of the Prospectus (as then amended
or supplemented if the Company shall have furnished any amendments or
supplements thereto) was not sent or given by or on behalf of such Underwriter
to such person, if required by law so to have been delivered, at or prior to the
written confirmation of the sale of the Shares to such person, and if the
Prospectus (as so amended or supplemented) would have cured the defect giving
rise to such loss, claim, damage, liability or expense. The indemnity agreement
set forth in this Section 7(a) shall be in addition to any liabilities that the
Company may otherwise have.
(b) Indemnification of the Company, its Directors and Officers. Each
Underwriter agrees, severally and not jointly, to indemnify and hold harmless
the Company, each of its directors, each of its officers who signed the
Registration Statement and each person, if any, who controls the Company within
the meaning of the Securities
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<PAGE> 22
Act or the Exchange Act, against any loss, claim, damage, liability or expense,
as incurred, to which the Company, or any such director, officer or controlling
person may become subject, under the Securities Act, the Exchange Act, or other
federal or state statutory law or regulation, or at common law or otherwise
(including in settlement of any litigation, if such settlement is effected with
the written consent of such Underwriter), insofar as such loss, claim, damage,
liability or expense (or actions in respect thereof as contemplated below)
arises out of or is based upon any untrue or alleged untrue statement of a
material fact contained in the Registration Statement, any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto), or arises
out of or is based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in the Registration Statement, any preliminary prospectus, the
Prospectus (or any amendment or supplement thereto), in reliance upon and in
conformity with written information furnished to the Company by the
Representatives expressly for use therein; and to reimburse the Company, or any
such director, officer or controlling person for any legal and other expense
reasonably incurred by the Company, or any such director, officer or controlling
person in connection with investigating, defending, settling, compromising or
paying any such loss, claim, damage, liability, expense or action. The indemnity
agreement set forth in this Section 7(b) shall be in addition to any liabilities
that each Underwriter may otherwise have.
(c) Information Provided by the Underwriters. The Company hereby
acknowledges that the only information that the Underwriters have furnished to
the Company expressly for use in the Registration Statement, any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto) are the
statements set forth in the table in the first paragraph and the ninth paragraph
under the caption "Underwriting" in the Prospectus; and the Underwriters confirm
that such statements are correct.
(d) Notifications and Other Indemnification Procedures. Promptly after
receipt by an indemnified party under this Section 7 of notice of the
commencement of any action, such indemnified party will, if a claim in respect
thereof is to be made against an indemnifying party under this Section 7, notify
the indemnifying party in writing of the commencement thereof, but the omission
so to notify the indemnifying party will not relieve it from any liability which
it may have to any indemnified party for contribution or otherwise than under
the indemnity agreement contained in this Section 7 or to the extent it is not
prejudiced as a proximate result of such failure. In case any such action is
brought against any indemnified party and such indemnified party seeks or
intends to seek indemnity from an indemnifying party, the indemnifying party
will be entitled to participate in, and, to the extent that it shall elect,
jointly with all other indemnifying parties similarly notified, by written
notice delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party; provided, however, if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that a
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<PAGE> 23
conflict may arise between the positions of the indemnifying party and the
indemnified party in conducting the defense of any such action or that there may
be legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party, the
indemnified party or parties shall have the right to select separate counsel to
assume such legal defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of such indemnifying
party's election so to assume the defense of such action and approval by the
indemnified party of counsel, the indemnifying party will not be liable to such
indemnified party under this Section 7 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party shall have employed separate counsel in
accordance with the proviso to the next preceding sentence (it being understood,
however, that the indemnifying party shall not be liable for the expenses of
more than one separate counsel (together with local counsel), approved by the
indemnifying party (BancBoston Robertson Stephens Inc. in the case of Section
7(b) and Section 8), representing the indemnified parties who are parties to
such action), (ii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party within
a reasonable time after notice of commencement of the action, or (iii) the
indemnifying party has authorized the employment of counsel for the indemnified
party at the expense of the indemnifying party, in each of which cases the fees
and expenses of counsel shall be at the expense of the indemnifying party.
(e) Settlements. The indemnifying party under this Section 7 shall not
be liable for any settlement of any proceeding effected without its written
consent, which consent shall not be unreasonably withheld, but if settled with
such consent or if there be a final judgment for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party against any loss, claim, damage,
liability or expense by reason of such settlement or judgment. Notwithstanding
the foregoing sentence, if at any time an indemnified party shall have requested
an indemnifying party to reimburse the indemnified party for fees and expenses
of counsel as contemplated by Section 7(d) hereof, the indemnifying party agrees
that it shall be liable for any settlement of any proceeding effected without
its written consent if (i) such settlement is entered into more than 30 days
after receipt by such indemnifying party of the aforesaid request and (ii) such
indemnifying party shall not have reimbursed the indemnified party in accordance
with such request prior to the date of such settlement. No indemnifying party
shall, without the prior written consent of the indemnified party, effect any
settlement, compromise or consent to the entry of judgment in any pending or
threatened action, suit or proceeding in respect of which any indemnified party
is or could have been a party and indemnity was or could have been sought
hereunder by such indemnified party, unless such settlement, compromise or
consent includes (i) an unconditional release of such indemnified party from all
liability on claims that are the subject matter of such action, suit or
proceeding and (ii) does not include a statement as to or an admission of fault,
culpability or a failure to act by or on behalf of any indemnified party.
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(f) Contribution. If the indemnification provided for in this Section 7
is unavailable to or insufficient to hold harmless an indemnified party under
Section 7(a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) then each
indemnifying party shall contribute to the aggregate amount paid or payable by
such indemnified party in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and the Underwriters
on the other from the offering of the Shares. If, however, the allocation
provided by the immediately preceding sentence is not permitted by applicable
law then each indemnifying party shall contribute to such amount paid or payable
by such indemnified party in such proportion as is appropriate to reflect not
only such relative benefits but also the relative fault of the Company on the
one hand and the Underwriters on the other in connection with the statements or
omissions which resulted in such losses, claims, damages or liabilities, (or
actions or proceedings in respect thereof), as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and the Underwriter on the other shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company bears to the total underwriting discounts and
commissions received by the Underwriters, in each case as set forth in the table
on the cover page of the Prospectus. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company on the one hand or the
Underwriters on the other and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and Underwriters agree that it would not be just and equitable
if contributions pursuant to this Section 7(f) were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 7(f). The amount paid
or payable by an indemnified party as a result of the losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to above in
this Section 7(f) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
subsection (f), (i) no Underwriter shall be required to contribute any amount in
excess of the underwriting discounts and commissions applicable to the Shares
purchased by such Underwriter and (ii) no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this Section 7(f)
to contribute are several in proportion to their respective underwriting
obligations and not joint.
(g) Timing of Any Payments of Indemnification. Any losses, claims,
damages, liabilities or expenses for which an indemnified party is entitled to
indemnification or contribution under this Section 7 shall be paid by the
indemnifying party to the
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<PAGE> 25
indemnified party as such losses, claims, damages, liabilities or expenses are
incurred, but in all cases, no later than thirty (30) days of invoice to the
indemnifying party.
(h) Survival. The indemnity and contribution agreements contained in
this Section 7 and the representation and warranties of the Company set forth in
this Agreement shall remain operative and in full force and effect, regardless
of (i) any investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter, the Company, its directors or officers or any
persons controlling the Company, (ii) acceptance of any Shares and payment
therefor hereunder, and (iii) any termination of this Agreement. A successor to
any Underwriter, or to the Company, its directors or officers, or any person
controlling the Company, shall be entitled to the benefits of the indemnity,
contribution and reimbursement agreements contained in this Section 7.
(i) Acknowledgements of Parties. The parties to this Agreement hereby
acknowledge that they are sophisticated business persons who were represented by
counsel during the negotiations regarding the provisions hereof including,
without limitation, the provisions of this Section 7, and are fully informed
regarding said provisions. They further acknowledge that the provisions of this
Section 7 fairly allocate the risks in light of the ability of the parties to
investigate the Company and its business in order to assure that adequate
disclosure is made in the Registration Statement and Prospectus as required by
the Securities Act and the Exchange Act.
SECTION 8. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITERS. If, on the
First Closing Date or the Second Closing Date, as the case may be, any one or
more of the several Underwriters shall fail or refuse to purchase Shares that it
or they have agreed to purchase hereunder on such date, and the aggregate number
of Common Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase does not exceed 10% of the aggregate number of the
Shares to be purchased on such date, the other Underwriters shall be obligated,
severally, in the proportions that the number of Firm Common Shares set forth
opposite their respective names on SCHEDULE A bears to the aggregate number of
Firm Shares set forth opposite the names of all such non-defaulting
Underwriters, or in such other proportions as may be specified by the
Representatives with the consent of the non-defaulting Underwriters, to purchase
the Shares which such defaulting Underwriter or Underwriters agreed but failed
or refused to purchase on such date. If, on the First Closing Date or the Second
Closing Date, as the case may be, any one or more of the Underwriters shall fail
or refuse to purchase Shares and the aggregate number of Shares with respect to
which such default occurs exceeds 10% of the aggregate number of Shares to be
purchased on such date, and arrangements satisfactory to the Representatives and
the Company for the purchase of such Shares are not made within 48 hours after
such default, this Agreement shall terminate without liability of any party to
any other party except that the provisions of Section 4, and Section 7 shall at
all times be effective and shall survive such termination. In any such case
either the Representatives or the Company shall have the right to postpone the
First Closing Date or the Second Closing Date, as the case may be, but in no
event for longer
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than seven days in order that the required changes, if any, to the Registration
Statement and the Prospectus or any other documents or arrangements may be
effected.
As used in this Agreement, the term "Underwriter" shall be deemed
to include any person substituted for a defaulting Underwriter under this
Section 8. Any action taken under this Section 8 shall not relieve any
defaulting Underwriter from liability in respect of any default of such
Underwriter under this Agreement.
SECTION 9. TERMINATION OF THIS AGREEMENT. Prior to the First Closing Date,
this Agreement may be terminated by the Representatives by notice given to the
Company if at any time (i) trading or quotation in any of the Company's
securities shall have been suspended or limited by the Commission or by the
Nasdaq Stock Market, or trading in securities generally on either the Nasdaq
Stock Market or the New York Stock Exchange shall have been suspended or
limited, or minimum or maximum prices shall have been generally established on
any of such stock exchanges by the Commission or the National Association of
Securities Dealers, LLC; (ii) a general banking moratorium shall have been
declared by any of federal, New York, Delaware or California authorities; (iii)
there shall have occurred any outbreak or escalation of national or
international hostilities or any crisis or calamity, or any change in the United
States or international financial markets, or any substantial change or
development involving a prospective change in United States' or international
political, financial or economic conditions, as in the judgment of the
Representatives is material and adverse and makes it impracticable or
inadvisable to market the Common Shares in the manner and on the terms described
in the Prospectus or to enforce contracts for the sale of securities; (iv) in
the judgment of the Representatives there shall have occurred any Material
Adverse Change; or (v) the Company shall have sustained a loss by strike, fire,
flood, earthquake, accident or other calamity of such character as in the
judgment of the Representatives may interfere materially with the conduct of the
business and operations of the Company regardless of whether or not such loss
shall have been insured. Any termination pursuant to this Section 9 shall be
without liability on the part of (a) the Company to any Underwriter, except that
the Company shall be obligated to reimburse the expenses of the Representatives
and the Underwriters pursuant to Sections 5 and 6 hereof, (b) any Underwriter to
the Company or (c) of any party hereto to any other party except that the
provisions of Section 7 shall at all times be effective and shall survive such
termination.
SECTION 10. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY. The
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers and of the several Underwriters set
forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of any Underwriter
or the Company or any of its or their partners, officers or directors or any
controlling person, as the case may be, and will survive delivery of and payment
for the Shares sold hereunder and any termination of this Agreement.
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SECTION 11. NOTICES. All communications hereunder shall be in writing and
shall be mailed, hand delivered or telecopied and confirmed to the parties
hereto as follows:
If to the Representatives:
BANCBOSTON ROBERTSON STEPHENS INC.
555 California Street
San Francisco, California 94104
Facsimile: (415) 676-2696
Attention: General Counsel
If to the Company:
Alloy Online, Inc.
115 West 30th Street, #304
New York, New York 10001
Facsimile: (212) 244-4311
Attention: Mr. Matthew Diamond, Chief Executive Officer
Any party hereto may change the address for receipt of communications by giving
written notice to the others.
SECTION 12. SUCCESSORS. This Agreement will inure to the benefit of and be
binding upon the parties hereto, including any substitute Underwriters pursuant
to Section 9 hereof, and to the benefit of the employees, officers and directors
and controlling persons referred to in Section 7, and to their respective
successors and personal representatives, and no other person will have any right
or obligation hereunder. The term "successors" shall not include any purchaser
of the Shares as such from any of the Underwriters merely by reason of such
purchase.
SECTION 13. PARTIAL UNENFORCEABILITY. The invalidity or unenforceability of
any Section, paragraph or provision of this Agreement shall not affect the
validity or enforceability of any other Section, paragraph or provision hereof.
If any Section, paragraph or provision of this Agreement is for any reason
determined to be invalid or unenforceable, there shall be deemed to be made such
minor changes (and only such minor changes) as are necessary to make it valid
and enforceable.
SECTION 14. GOVERNING LAW PROVISIONS.
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(a) Governing Law. This agreement shall be governed by and construed in
accordance with the internal laws of the state of New York applicable to
agreements made and to be performed in such state.
(b) Consent to Jurisdiction. Any legal suit, action or proceeding
arising out of or based upon this Agreement or the transactions contemplated
hereby ("Related Proceedings") may be instituted in the federal courts of the
United States of America located in the City and County of San Francisco or the
courts of the State of California in each case located in the City and County of
San Francisco (collectively, the "Specified Courts"), and each party irrevocably
submits to the exclusive jurisdiction (except for proceedings instituted in
regard to the enforcement of a judgment of any such court (a "Related
Judgment"), as to which such jurisdiction is non-exclusive) of such courts in
any such suit, action or proceeding. Service of any process, summons, notice or
document by mail to such party's address set forth above shall be effective
service of process for any suit, action or other proceeding brought in any such
court. The parties irrevocably and unconditionally waive any objection to the
laying of venue of any suit, action or other proceeding in the Specified Courts
and irrevocably and unconditionally waive and agree not to plead or claim in any
such court that any such suit, action or other proceeding brought in any such
court has been brought in an inconvenient forum. Each party not located in the
United States irrevocably appoints CT Corporation System, which currently
maintains a San Francisco office at 49 Stevenson Street, San Francisco,
California 94105, United States of America, as its agent to receive service of
process or other legal summons for purposes of any such suit, action or
proceeding that may be instituted in any state or federal court in the City and
County of San Francisco.
SECTION 15. GENERAL PROVISIONS. This Agreement constitutes the entire
agreement of the parties to this Agreement and supersedes all prior written or
oral and all contemporaneous oral agreements, understandings and negotiations
with respect to the subject matter hereof. This Agreement may be executed in two
or more counterparts, each one of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement may not be amended or modified unless in writing by all of the
parties hereto, and no condition herein (express or implied) may be waived
unless waived in writing by each party whom the condition is meant to benefit.
The Table of Contents and the Section headings herein are for the convenience of
the parties only and shall not affect the construction or interpretation of this
Agreement.
[The remainder of this page has been intentionally left blank.]
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If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Company the enclosed copies hereof, whereupon this
instrument, along with all counterparts hereof, shall become a binding agreement
in accordance with its terms.
Very truly yours,
ALLOY ONLINE, INC.
By: ________________________________
Matthew Diamond, Chief Executive
Officer
The foregoing Underwriting Agreement is hereby confirmed and
accepted by the Representatives as of the date first above written.
BANCBOSTON ROBERTSON STEPHENS INC.
VOLPE BROWN WHELAN & COMPANY
DAIN RAUSSCHER WESSELS
LADENBURG THALMANN & CO. INC.
On their behalf and on behalf of each of the several underwriters named in
SCHEDULE A hereto.
BY BANCBOSTON ROBERTSON STEPHENS INC.
By: _________________________________
Authorized Signatory
29
<PAGE> 30
SCHEDULE A
Number of
Firm Common
Shares
Underwriters To be Purchased
BANCBOSTON ROBERTSON STEPHENS INC. ....................... [___]
VOLPE BROWN WHELAN & COMPANY ............................. [___]
DAIN RAUSSCHER WESSELS ................................... [___]
LADENBURG THALMANN & CO. INC.............................. [___]
[___] .................................................... [___]
Total............................................ [___]
B-1
<PAGE> 31
EXHIBIT A
LOCK-UP AGREEMENT
BancBoston Robertson Stephens
Volpe Brown Whelan & Company
Dain Rausscher Wessels
Ladenburg Thalmann & Co.
As Representatives of the Several Underwriters
c/o BancBoston Robertson Stephens
555 California Street
San Francisco, CA 94104
Ladies and Gentlemen:
The undersigned understands that you, as Representatives of the several
underwriters (the "Underwriters"), propose to enter into an Underwriting
Agreement (the "Underwriting Agreement") with Alloy Online, Inc. (the "Company")
providing for the initial public offering (the "Public Offering") by the
Underwriters, including yourselves, of Common Stock of the Company (the "Common
Stock") pursuant to the Company's Registration Statement on Form S-1 to be filed
with the Securities and Exchange Commission on or about March 2, 1999 (the
"Registration Statement").
In consideration of the Underwriters' agreement to purchase and make the
Public Offering of the Common Stock, and for other good and valuable
consideration, receipt of which is hereby acknowledged, the undersigned hereby
agrees, for a period of 180 days after the effective date of the Registration
Statement (the "Lock-Up Period"), not to offer to sell, contract to sell or
otherwise sell, dispose of, loan, pledge or grant any rights with respect to
(collectively, a "Disposition") any shares of Common Stock, any options or
warrants to purchase any shares of Common Stock or any securities convertible
into or exchangeable for shares of Common Stock (collectively, "Securities"),
now owned or hereafter acquired directly by the undersigned or with respect to
which the undersigned has or hereafter acquires the power of disposition,
otherwise than (i) as a bona fide gift or gifts, provided the donee or donees
thereof agree to be bound by this Lock-Up Agreement, (ii) as a distribution to
limited partners or shareholders of the undersigned, provided that the
distributees thereof agree in writing to be bound by the terms of this Lock-Up
Agreement or (iii) with the prior written consent of BancBoston Robertson
Stephens. The foregoing restriction is expressly agreed to preclude the holder
of the Securities from engaging in any hedging or other transaction which is
designed to or
B-2
<PAGE> 32
reasonably expected to lead to or result in a Disposition of Securities during
the Lock-Up Period even if such Securities would be disposed of by someone other
than the undersigned. Such prohibited hedging or other transactions would
include without limitation any short sale (whether or not against the box) or
any purchase, sale or grant of any right (including without limitation any put
or call option) with respect to any Securities or with respect to any security
(other than a broad-based market basket or index) that includes, relates to or
derives any significant part of its value from Securities. Notwithstanding the
foregoing, this Lock-Up Agreement does not prohibit the sale of shares of the
Common Stock by the undersigned to the Underwriters in the Public Offering.
The undersigned also agrees not to make any demand for, or exercise any
right with respect to, the registration of any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock
during the Lock-Up Period, without the prior written consent of BancBoston
Robertson Stephens.
Furthermore, the undersigned hereby agrees and consents to the entry of
stop transfer instructions with the Company's transfer agent against the
transfer of the Securities held by the undersigned except in compliance with
this Lock-Up Agreement. In the event that the Registration Statement shall not
have been declared effective on or before July 31, 1999, this Lock-Up Agreement
shall be of no further force or effect.
Very truly yours,
------------------------------------
(signature)
Name: ______________________________
Address: ___________________________
___________________________
B-3
<PAGE> 33
Accepted as of the date first set forth above:
BancBoston Robertson Stephens
As Representatives of the Several Underwriters
BancBoston Robertson Stephens
By:________________________________
(authorized signatory)
The Company requests that this Lock-Up Agreement be delivered to its counsel,
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. who will forward it to
counsel for the Underwriters, Brobeck, Phleger & Harrison LLP.
B-4
<PAGE> 34
EXHIBIT B
MATTERS TO BE COVERED IN THE OPINION OF COMPANY COUNSEL
(i) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation;
(ii) The Company has the corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus;
(iii) The Company is duly qualified to do business as a foreign corporation
and is in good standing in each jurisdiction, if any, in which the
ownership or leasing of its properties or the conduct of its business
requires such qualification, except where the failure to be so qualified or
be in good standing would not have a Material Adverse Effect.
(iv) The authorized, issued and outstanding capital stock of the Company is
as set forth in the Prospectus under the caption "Capitalization" as of the
dates stated therein, the issued and outstanding shares of capital stock of
the Company have been duly and validly issued and are fully paid and
nonassessable, and, to such counsel's knowledge, will not have been issued
in violation of or subject to any preemptive right, co-sale right,
registration right, right of first refusal or other similar right;
(v) The Firm Shares or the Option Shares, as the case may be, to be issued
by the Company pursuant to the terms of this Agreement have been duly
authorized and, upon issuance and delivery against payment therefor in
accordance with the terms hereof, will be duly and validly issued and fully
paid and nonassessable, and will not have been issued in violation of or
subject to any preemptive right, co-sale right, registration right, right
of first refusal or other similar right.
(vi) The Company has the corporate power and authority to enter into this
Agreement and to issue, sell and deliver to the Underwriters the Shares to
be issued and sold by it hereunder;
(vii) This Agreement has been duly authorized by all necessary corporate
action on the part of the Company;
(viii) The Registration Statement has become effective under the Act and,
to such counsel's knowledge, no stop order suspending the effectiveness of
the Registration Statement has been issued and no proceedings for that
purpose have been instituted or are pending or threatened under the
Securities Act;
B-5
<PAGE> 35
(ix) The 8-A Registration Statement complied as to form in all material
respects with the requirements of the Exchange Act; the 8-A Registration
Statement has become effective under the Exchange Act; and the Firm Shares
or the Option Shares have been validly registered under the Securities Act
and the Rules and Regulations of the Exchange Act and the applicable rules
and regulations of the Commission thereunder;
(x) The Registration Statement and the Prospectus, and each amendment or
supplement thereto (other than the financial statements (including
supporting schedules) and financial data derived therefrom as to which such
counsel need express no opinion), as of the effective date of the
Registration Statement, complied as to form in all material respects with
the requirements of the Act and the applicable Rules and Regulations;
(xi) The information in the Prospectus under the caption "Description of
Capital Stock," to the extent that it constitutes matters of law or legal
conclusions, has been reviewed by such counsel and is a fair summary of
such matters and conclusions; and the forms of certificates evidencing the
Common Stock and filed as exhibits to the Registration Statement comply
with Delaware law;
(xii) The description in the Registration Statement and the Prospectus of
the charter and bylaws of the Company and of statutes are accurate and
fairly present the information required to be presented by the Securities
Act;
(xiii) To such counsel's knowledge, there are no agreements, contracts,
leases or documents to which the Company is a party of a character required
to be described or referred to in the Registration Statement or Prospectus
or to be filed as an exhibit to the Registration Statement which are not
described or referred to therein or filed as required;
(xiv) The performance of this Agreement and the consummation of the
transactions herein contemplated (other than performance of the Company's
indemnification obligations hereunder, concerning which no opinion need be
expressed) will not (a) result in any violation of the Company's charter or
bylaws or (b) to such counsel's knowledge, result in a material breach or
violation of any of the terms and provisions of, or constitute a default
under, any bond, debenture, note or other evidence of indebtedness, or any
lease, contract, indenture, mortgage, deed of trust, loan agreement, joint
venture or other agreement or instrument known to such counsel to which the
Company is a party or by which its properties are bound, or any applicable
statute, rule or regulation known to such counsel or, to such counsel's
knowledge, any order, writ or decree of any court, government or
governmental agency or body having jurisdiction over the Company, or over
any of its properties or operations;
B-6
<PAGE> 36
(xv) No consent, approval, authorization or order of or qualification with
any court, government or governmental agency or body having jurisdiction
over the Company, or over any of its properties or operations is necessary
in connection with the consummation by the Company of the transactions
herein contemplated, except (i) such as have been obtained under the
Securities Act, (ii) such as may be required under state or other
securities or Blue Sky laws in connection with the purchase and the
distribution of the Shares by the Underwriters, (iii) such as may be
required by the National Association of Securities Dealers, LLC and (iv)
such as may be required under the federal or provincial laws of Canada;
(xvi) To such counsel's knowledge, there are no legal or governmental
proceedings pending or threatened against the Company of a character
required to be disclosed in the Registration Statement or the Prospectus,
other than those described therein;
(xvii) To such counsel's knowledge, the Company is not presently (a) in
material violation of its charter or bylaws, or (b) in material breach of
any applicable statute, rule or regulation known to such counsel or, to
such counsel's knowledge, any order, writ or decree of any court or
governmental agency or body having jurisdiction over the Company, or over
its properties or operations; and
(xviii) To such counsel's knowledge, except as set forth in the
Registration Statement and Prospectus, no holders of Company Shares or
other securities of the Company have registration rights with respect to
securities of the Company and, except as set forth in the Registration
Statement and Prospectus, all holders of securities of the Company having
rights known to such counsel to registration of such shares of Company
Shares or other securities, because of the filing of the Registration
Statement by the Company have, with respect to the offering contemplated
thereby, waived such rights or such rights have expired by reason of lapse
of time following notification of the Company's intent to file the
Registration Statement or have included securities in the Registration
Statement pursuant to the exercise of and in full satisfaction of such
rights.
(xix) The Company is not and, after giving effect to the offering and the
sale of the Shares and the application of the proceeds thereof as described
in the Prospectus, will not be, an "investment company" as such term is
defined in the Investment Company Act of 1940, as amended.
(xx) To such counsel's knowledge, the Company owns or possesses sufficient
trademarks, trade names, patent rights, copyrights, licenses, approvals,
trade secrets and other similar rights (collectively, "Intellectual
Property Rights") reasonably necessary to conduct its business as now
conducted; and the expected expiration of
B-7
<PAGE> 37
any such Intellectual Property Rights would not result in a Material
Adverse Effect. The Company has not received any notice of infringement or
conflict with asserted Intellectual Property Rights of others, which
infringement or conflict, if the subject of an unfavorable decision, would
result in a Material Adverse Effect. To such counsel's knowledge, the
Company's discoveries, inventions, products, or processes referred to in
the Registration Statement or Prospectus do not infringe or conflict with
any right or patent which is the subject of a patent application known to
the Company.
In addition, such counsel shall state that such counsel has participated in
conferences with officials and other representatives of the Company, the
Representatives, Underwriters' Counsel and the independent certified public
accountants of the Company, at which such conferences the contents of the
Registration Statement and Prospectus and related matters were discussed, and
although they have not verified the accuracy or completeness of the statements
contained in the Registration Statement or the Prospectus, nothing has come to
the attention of such counsel which leads them to believe that, at the time the
Registration Statement became effective and at all times subsequent thereto up
to and on the First Closing Date or Second Closing Date, as the case may be, the
Registration Statement and any amendment or supplement thereto (other than the
financial statements including supporting schedules and other financial and
statistical information derived therefrom, as to which such counsel need express
no comment) contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, or at the First Closing Date or the Second
Closing Date, as the case may be, the Registration Statement, the Prospectus and
any amendment or supplement thereto (except as aforesaid) contained any untrue
statement of a material fact or omitted to state a material fact necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
B-8
<PAGE> 38
EXHIBIT C
MATTERS TO BE COVERED IN THE OPINION OF UNDERWRITERS' COUNSEL
(i) The [FIRM SHARES] have been duly authorized and, upon issuance and
delivery and payment therefor in accordance with the terms of the
Underwriting Agreement, will be validly issued, fully paid and
non-assessable.
(ii) The Registration Statement complied as to form in all material
respects with the requirements of the Act; the Registration Statement has
become effective under the Act and, to such counsel's knowledge, no stop
order proceedings with respect thereto have been instituted or threatened
or are pending under the Act.
(iii) The 8-A Registration Statement complied as to form in all material
respects with the requirements of the Exchange Act; the 8-A Registration
Statement has become effective under the Exchange Act; and the Firm Shares
or the Option Shares have been validly registered under the Securities Act
and the Rules and Regulations of the Exchange Act and the applicable rules
and regulations of the Commission thereunder;
(iv) The Underwriting Agreement has been duly authorized, executed and
delivered by the Company.
Such counsel shall state that such counsel has reviewed the opinions
addressed to the Representatives from Mintz, Levin, Cohn, Ferris, Glovsky and
Popeo, P.C. and Brobeck, Phleger & Harrison LLP, each dated the date hereof, and
furnished to you in accordance with the provisions of the Underwriting
Agreement. Such opinions appear on their face to be appropriately responsive to
the requirements of the Underwriting Agreement.
In addition, such counsel shall state that such counsel has participated in
conferences with officials and other representatives of the Company, the
Representatives, Underwriters' Counsel and the independent certified public
accountants of the Company, at which such conferences the contents of the
Registration Statement and Prospectus and related matters were discussed, and
although they have not verified the accuracy or completeness of the statements
contained in the Registration Statement or the Prospectus, nothing has come to
the attention of such counsel which leads them to believe that, at the time the
Registration Statement became effective and at all times subsequent thereto up
to and on the First Closing Date or Second Closing Date, as the case may be, the
Registration Statement and any amendment or supplement thereto (other than the
financial statements including
<PAGE> 39
supporting schedules and other financial and statistical information derived
therefrom, as to which such counsel need express no comment) contained any
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not misleading,
or at the First Closing Date or the Second Closing Date, as the case may be, the
Registration Statement, the Prospectus and any amendment or supplement thereto
(except as aforesaid) contained any untrue statement of a material fact or
omitted to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
<PAGE> 1
EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
ALLOY ONLINE, INC.
Alloy Online, Inc. (the "Corporation"), a Delaware corporation, hereby
certifies as follows:
1. The name of the corporation is Alloy Online, Inc. The original name of
the Corporation was Nippon Direct, Inc. and the date of the filing of its
original Certificate of Incorporation with the Secretary of State of Delaware
was January 22, 1996.
2. This Restated Certificate of Incorporation amends, restates and
integrates the provisions of the Certificate of Incorporation, as heretofore
amended or restated, of said Corporation and has been duly adopted in accordance
with the provisions of Sections 242 and 245 of the General Corporation Law of
the State of Delaware pursuant to a resolution adopted by the Board of Directors
of the Corporation and by written consent of stockholders of the Corporation in
accordance with Section 228 of the General Corporation Laws of the State of
Delaware.
3. The text of the Certificate of Incorporation is hereby amended and
restated to read in its entirety as follows:
FIRST: The name of the corporation is:
ALLOY ONLINE, INC.
SECOND: The address, including street, number, city and county of the
registered office of the Corporation in the State of Delaware is 1013 Centre
Road, City of Wilmington, County of New Castle and the name of the registered
agent of the Corporation in the State of Delaware is The Prentice-Hall
Corporation System, Inc.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity or carry on any business for which corporations may be organized under
the Delaware General Corporation Law of the State of Delaware.
FOURTH: The total number of shares of all classes of stock which the
Corporation shall have the authority to issue is 55,000,000 shares, consisting
of 50,000,000 shares of common stock, par value $.01 per share (the "Common
Stock"), and 5,000,000 shares of preferred stock, par value $.01 per share (the
"Preferred Stock").
Each share of Common Stock of the Corporation, par value $.01 per share,
issued and outstanding or held in the treasury of the Corporation is hereby
reclassified and changed into 1.128 fully paid and nonassessable shares of
Common Stock of the Corporation, par value $.01 per share, and each stock
certificate for one or more shares of Common Stock of the Corporation as of the
close of business on the date this amendment becomes effective (the "Effective
Time") shall represent the whole number of shares of Common Stock obtained by
multiplying by 1.128 the number of shares of Common Stock represented by such
certificate.
The following is a statement of the relative powers, designations, special
rights, privileges, qualifications, limitations, restrictions and other matters
pertaining to the common stock and the preferred stock.
<PAGE> 2
A. Common Stock.
------------
1. DIVIDENDS. Subject to the preferential rights, if any, of the
Preferred Stock, the holders of shares of Common Stock shall be entitled to
receive, when and if declared by the Board of Directors, out of the assets of
the Corporation which are by law available therefor, dividends payable either in
cash, in property, or in shares of Common Stock.
2. LIQUIDATION. In the event of any liquidation, dissolution or winding
up of the Corporation, whether voluntary or involuntary, after payment or
provision for payment of the debts and other liabilities of the Corporation and
the amounts to which the holders of any Preferred Stock shall be entitled, the
holders of Common Stock shall be entitled to share ratably in the remaining
assets of the Corporation.
3. VOTING. The holders of the Common Stock are entitled to one vote for
each share held. There shall be no cumulative voting.
B. Preferred Stock
---------------
1. Shares of Preferred Stock may be issued in one or more series at such
time or times and for such consideration as the Board of Directors may
determine.
2. Authority is hereby expressly granted to the Board of Directors to fix
from time to time, by resolution or resolutions providing for the establishment
and/or issuance of any series of Preferred Stock, the designation of such series
and the powers, preferences and rights of the shares of such series, and the
qualifications, limitations or restrictions thereof, to the fullest extent such
authority may be conferred upon the Board of Directors under the General
Corporation Law of the State of Delaware, including, without limitation, the
authority to fix the following:
(a) The distinctive designation and number of shares comprising such
series, which number may (except where otherwise provided by the Board of
Directors in creating such series) be increased or decreased (but not below
the number of shares then outstanding) from time to time by action of the
Board of Directors;
(b) The rate of dividends, if any, on the shares of that series,
whether dividends shall be (i) non-cumulative, (ii) cumulative to the
extent earned or (iii) cumulative (and, if cumulative, from which date or
dates), whether dividends shall be payable in cash, property or rights, or
in shares of the Corporation's capital stock, and the relative rights of
priority, if any, of payment of dividends on shares of that series over
shares of any other series or class;
(c) Whether the shares of that series shall be redeemable and, if so,
the terms and conditions of such redemption, including the date or dates
upon or after which they shall be redeemable, and the amount per share
payable in case of redemption (which amount may vary under different
conditions and at different redemption dates) or the property or rights,
including securities of any other corporation, payable in case of
redemption;
(d) Whether the series shall have a sinking fund for the redemption
or purchase of shares of that series and, if so, the terms and amounts
payable into such sinking fund;
(e) The rights to which the holders of the shares of that series
shall be entitled in the event of the voluntary or involuntary liquidation,
dissolution or winding-up of the
2
<PAGE> 3
Corporation, and the relative rights of priority, if any, of payment of
shares of that series in any such event;
(f) Whether the shares of that series shall be convertible into or
exchangeable for shares of stock of any other class or any other series
and, if so, the terms and conditions of such conversion or exchange,
including the rate or rates of conversion or exchange, the date or dates
upon or after which they shall be convertible or exchangeable, the period
or periods during which they shall be convertible or exchangeable, the
event or events upon or after which they shall be convertible or
exchangeable or at whose option they shall be convertible or exchangeable,
and the method (if any) of adjusting the rates of conversion or exchange in
the event of a stock split, stock dividend, combination of shares or
similar event;
(g) Whether the issuance of any additional shares of such series, or
of any shares of any other series, shall be subject to restrictions as to
issuance, or as to the powers, preferences or rights of any such additional
shares of such series or shares of such other series;
(h) Whether or not the shares of that series shall have voting
rights, the extent of such voting rights on specified matters or on all
matters, the number of votes to which the holder of a share of such series
shall be entitled in respect of such share, whether such series shall vote
generally with the Common Stock on all matters or (either generally or upon
the occurrence of specified circumstances) shall vote separately as a class
or with other series of Preferred Stock; and
(i) Any other preferences, privileges and powers and relative,
participating, optional or other special rights and qualifications,
limitations or restrictions of such series, as the Board of Directors may
deem advisable and as shall not be inconsistent with the provisions of this
Restated Certificate of Incorporation and to the full extent now or
hereafter permitted by the General Corporation Law of the State of
Delaware.
FIFTH: The Corporation is to have perpetual existence.
SIXTH: The following provisions are inserted for the management of the
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its directors and stockholders:
A. The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors. In addition to the powers and
authority expressly conferred upon them by statute or by this Restated
Certificate of Incorporation or the By-Laws of the Corporation as in effect from
time to time, the directors are hereby empowered to exercise all such powers and
do all such acts and things as may be exercised or done by the Corporation.
B. The directors of the Corporation need not be elected by written ballot
unless the By-Laws of the Corporation so provide.
C. Any action required or permitted to be taken by the stockholders of
the Corporation may be effected only at a duly called annual or special meeting
of stockholders of the Corporation and not by written consent.
D. Special meetings of the stockholders may only be called by the Board
of Directors.
3
<PAGE> 4
SEVENTH:
A. Subject to the rights of the holders of shares of any series of
Preferred Stock then outstanding to elect additional directors under specified
circumstances, the number of directors shall be fixed from time to time
exclusively by the Board of Directors pursuant to a resolution adopted by a
majority of the Board of Directors.
B. The Board of Directors of the Corporation shall be divided into three
classes, as nearly equal in number as reasonably possible, with the term of
office of the first class to expire at the 2000 annual meeting of stockholders
or any special meeting in lieu thereof, the term of office of the second class
to expire at the 2001 annual meeting of stockholders or any special meeting in
lieu thereof, and the term of office of the third class to expire at the 2002
annual meeting of stockholders or any special meeting in lieu thereof. At each
annual meeting of stockholders or special meeting in lieu thereof following such
initial classification, directors elected to succeed those directors whose terms
expire shall be elected for a term of office to expire at the third succeeding
annual meeting of stockholders or special meeting in lieu thereof after their
election and until their successors are duly elected and qualified.
C. Subject to the rights of the holders of any series of Preferred Stock
then outstanding, newly created directorships resulting from any increase in the
authorized number of directors or any vacancies in the Board of Directors
resulting from death, resignation, retirement, disqualification, removal from
office or other cause may be filled only by a majority vote of the directors
then in office even though less than a quorum, or by a sole remaining director.
In the event of any increase or decrease in the authorized number of directors,
(i) each director then serving as such shall nevertheless continue as a director
of the class of which he is a member until the expiration of his current term or
his prior death, retirement, removal or resignation and (ii) the newly created
or eliminated directorships resulting from such increase or decrease shall if
reasonably possible be apportioned by the Board of Directors among the three
classes of directors so as to ensure that no one class has more than one
director more than any other class. To the extent reasonably possible,
consistent with the foregoing rule, any newly created directorships shall be
added to those classes whose terms of office are to expire at the latest dates
following such allocation and newly eliminated directorships shall be subtracted
from those classes whose terms of office are to expire at the earliest dates
following such allocation, unless otherwise provided for from time to time by
resolution adopted by a majority of the directors then in office, although less
than a quorum.
D. Advance notice of stockholder nominations for the election of
directors and of business to be brought by stockholders before any meeting of
the stockholders of the Corporation shall be given in the manner provided in the
By-Laws of the Corporation.
EIGHTH: The Board of Directors is expressly empowered to adopt, amend or
repeal By-Laws of the Corporation. Any adoption, amendment or repeal of the
By-Laws of the Corporation by the Board of Directors shall require the approval
of a majority of the Board of Directors. The stockholders shall also have power
to adopt, amend or repeal the By-Laws of the Corporation, provided, that in
addition to any vote of the holders of any class or series of stock of the
Corporation required by law or by this Restated Certificate of Incorporation,
the affirmative vote of the holders of at least seventy percent (70%) of the
voting power of all of the then outstanding shares of the capital stock of the
Corporation entitled to vote generally in the election of directors, voting
together as a single class, shall be required for the stockholders to adopt,
amend or repeal any provision of the By-Laws of the Corporation.
4
<PAGE> 5
NINTH:
A. To the fullest extent permitted by the General Corporation Law of the
State of Delaware as the same now exists or may hereafter be amended, the
Corporation shall indemnify, and advance expenses to, its directors and officers
and to any person who is or was serving at the request of the Corporation as a
director, officer, trustee, employee or agent of another corporation, or of a
partnership, joint venture, trust or other enterprise, if such person was or is
made a party to or is threatened to be made a party to or is otherwise involved
(including, without limitation, as a witness) in any action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that such person is or was a director or officer of the Corporation or is or was
serving at the request of the Corporation as a director, officer, trustee,
employee or agent of another corporation, or of a partnership, joint venture,
trust or other enterprise, including service with respect to an employee benefit
plan, provided, that except with respect to proceedings to enforce rights to
indemnification or as is otherwise required by law, the By-Laws of the
Corporation may provide that the Corporation shall not be required to indemnify,
and advance expenses to, any director, officer or other person in connection
with a proceeding (or part thereof) initiated by such director, officer or other
person, unless such proceeding (or part thereof) was authorized by the Board of
Directors and shall be made only upon delivery to the Corporation of an
undertaking, by or on behalf of such person, to repay all amounts so advanced if
it shall ultimately be determined by final judicial decision from which there is
no further right to appeal that such person is not entitled to be indemnified
for such expenses under this Article NINTH or otherwise. The Corporation, by
action of its Board of Directors, may provide indemnification or advance
expenses to employees and agents of the Corporation or other persons only on
such terms and conditions and to the extent determined by the Board of Directors
in its sole and absolute discretion.
B. The indemnification and advancement of expenses provided by, or
granted pursuant to, this Article NINTH shall not be deemed exclusive of any
other rights to which a person seeking indemnification or advancement of
expenses may be entitled under any By-Law, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in such person's
official capacity and as to action in another capacity while holding such
office.
C. The Corporation shall have the power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, trustee, employee or agent of another corporation, or of
a partnership, joint venture, trust or other enterprise, against any liability
asserted against such person and incurred by such person in any such capacity,
or arising out of such person's status as such, whether or not the Corporation
would have the power to indemnify such person against such liability under this
Article NINTH.
D. The indemnification and advancement of expenses provided by, or
granted pursuant to, this Article NINTH shall, unless otherwise specified when
authorized or ratified, continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such person. The indemnification and rights to
advancement of expenses that may have been provided to an employee or agent of
the Corporation by action of the Board of Directors, pursuant to the last
sentence of paragraph 1 of this Article NINTH, shall, unless otherwise specified
when authorized or ratified, continue as to a person who has ceased to be an
employee or agent of the Corporation and shall inure to the benefit of the
heirs, executors and administrators of such person, after the time such person
has ceased to be an employee or agent of the Corporation, only on such terms and
conditions and to the extent determined by the Board of Directors in its sole
and absolute discretion. No repeal or amendment of this Article NINTH shall
adversely affect any rights of any person pursuant to this Article NINTH which
existed at the time of such repeal or amendment with respect to acts or
omissions occurring prior to such repeal or amendment.
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TENTH: No director shall be personally liable to the Corporation or its
stockholders for any monetary damages for breaches of fiduciary duty as a
director, notwithstanding any provision of law imposing such liability; provided
that this provision shall not eliminate or limit the liability of a director, to
the extent that such liability is imposed by applicable law, (i) for any breach
of the director's duty of loyalty to the Corporation or its stockholders, (ii)
for acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) under Section 174 or successor provisions
of the General Corporation Law of the State of Delaware, or (iv) for any
transaction from which the director derived an improper personal benefit. This
provision shall not eliminate or limit the liability of a director for any act
or omission if such elimination or limitation is prohibited by the General
Corporation Law of the State of Delaware. No amendment to or repeal of this
provision shall apply to or have any effect on the liability or alleged
liability of any director for or with respect to any acts or omissions of such
director occurring prior to such amendment or repeal. If the General Corporation
Law of the State of Delaware is amended to authorize corporate action further
eliminating or limiting the personal liability of directors, then the liability
of a director of the Corporation shall be eliminated or limited to the fullest
extent permitted by the General Corporation Law of the State of Delaware, as so
amended.
ELEVENTH: The Corporation reserves the right to amend or repeal any
provision contained in this Restated Certificate of Incorporation in the manner
prescribed by the General Corporation Law of the State of Delaware and all
rights conferred upon stockholders are granted subject to this reservation,
provided that in addition to the vote of the holders of any class or series of
stock of the Corporation required by law or by this Restated Certificate of
Incorporation, the affirmative vote of the holders of shares of voting stock of
the Corporation representing at least seventy percent (70%) of the voting power
of all of the then outstanding shares of the capital stock of the Corporation
entitled to vote generally in the election of directors, voting together as a
single class, shall be required to (i) reduce the number of authorized shares of
Common Stock or the number of authorized shares of Preferred Stock set forth in
Article FOURTH, or (ii) amend, alter or repeal, or adopt any provision
inconsistent with, Articles SIXTH, SEVENTH, EIGHTH, NINTH, TENTH, and this
Article ELEVENTH of this Restated Certificate of Incorporation.
TWELFTH: Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of the General Corporation Law of the State of
Delaware or on the application of trustees in dissolution or of any receiver or
receivers appointed for this Corporation under the provisions of Section 279 of
the General Corporation Law of the State of Delaware, order a meeting of the
creditors or class of creditors, and/or of the stockholders or class of
stockholders of this Corporation, as the case may be, to be summoned in such
manner as the said court directs. If a majority in number representing
three-fourths (3/4) in value of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this Corporation, as the case may
be, agree to any compromise or arrangement and to any reorganization of this
Corporation as consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of this Corporation, as the case may be, and also on this
Corporation.
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IN WITNESS WHEREOF, the Corporation has caused this Restated Certificate of
Incorporation to be signed by its duly authorized officer this day of
, 1999. -----
- -------------
ALLOY ONLINE, INC.
By:
-------------------------------
Name:
Title:
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EXHIBIT 3.2
ALLOY ONLINE, INC.
RESTATED BYLAWS
ARTICLE I - STOCKHOLDERS
Section 1. Annual Meeting. An annual meeting of the stockholders, for
the election of directors to succeed those whose terms expire and for the
transaction of such other business as may properly come before the meeting,
shall be held at such place, on such date, and at such time as the Board of
Directors shall fix each year.
Section 2. Special Meetings. Subject to the rights of the holders of
any class or series of preferred stock of the Corporation, special meetings of
stockholders of the Corporation may be called only by the Board of Directors
pursuant to a resolution adopted by a majority of the total number of directors
authorized. Special meetings of the stockholders may be held at such place
within or without the State of Delaware as may be stated in such resolution.
Section 3. Notice of Meetings. Written notice of the place, date, and
time of all meetings of the stockholders shall be given, not less than ten (10)
nor more than sixty (60) days before the date on which the meeting is to be
held, to each stockholder entitled to vote at such meeting, except as otherwise
provided herein or required by law (meaning, here and hereinafter, as required
from time to time by the Delaware General Corporation Law or the Certificate of
Incorporation of the Corporation, as amended and restated from time to time).
When a meeting is adjourned to another place, date or time, written notice need
not be given of the adjourned meeting if the place, date and time thereof are
announced at the meeting at which the adjournment is taken; provided, however,
that if the date of any adjourned meeting is more than thirty (30) days after
the date for which the meeting was originally noticed, or if a new record date
is fixed for the adjourned meeting, written notice of the place, date, and time
of the adjourned meeting shall be given in conformity herewith. At any adjourned
meeting, any business may be transacted which might have been transacted at the
original meeting.
Section 4. Quorum. At any meeting of the stockholders, the holders of a
majority of all of the shares of the stock entitled to vote at the meeting,
present in person or by proxy, shall constitute a quorum for all purposes,
unless or except to the extent that the presence of a larger number may be
required by law. Where a separate vote by a class or classes is required, a
majority of the shares of such class or classes present in person or represented
by proxy shall constitute a quorum entitled to take action with respect to that
vote on that matter. If a quorum shall fail to attend any meeting, the chairman
of the meeting or the holders of a majority of the shares of stock entitled to
vote who are present, in person or by proxy, may adjourn the meeting to another
place, date, or time.
Section 5. Organization. The Chairman of the Board of Directors or, in
his or her absence, such person as the Board of Directors may have designated
or, in his or her absence, the Chief Executive Officer of the Corporation or, in
his or her absence, the President or, in his or her absence such person as may
be chosen by the holders of a majority of the shares entitled to vote
<PAGE> 2
who are present, in person or by proxy, shall call to order any meeting of the
stockholders and act as chairman of the meeting. In the absence of the Secretary
of the Corporation, the secretary of the meeting shall be such person as the
chairman of the meeting appoints.
Section 6. Conduct of Business. The Chairman of the Board of Directors
or his or her designee or, if neither the Chairman of the Board nor his or her
designee is present at the meeting, then a person appointed by a majority of the
Board of Directors, shall preside at, and act as chairman of, any meeting of the
stockholders. The chairman of any meeting of stockholders shall determine the
order of business and the procedures at the meeting, including such regulation
of the manner of voting and the conduct of discussion as he or she deems to be
appropriate.
Section 7. Notice of Stockholder Business and Nominations.
A. Annual Meetings of Stockholders. Nominations of persons for election
to the Board of Directors and the proposal of business to be considered by the
stockholders may be made at an annual meeting of stockholders (a) pursuant to
the Corporation's notice of meeting, (b) by or at the direction of the Board of
Directors or (c) by any stockholder of the Corporation who was a stockholder of
record at the time of giving of notice provided for in this Section, who is
entitled to vote at the meeting and who complies with the notice procedures set
forth in this Section.
B. Special Meetings of Stockholders. Only such business shall be
conducted at a special meeting of stockholders as shall have been brought before
the meeting pursuant to the notice of meeting given pursuant to Section 2 above.
Nominations of persons for election to the Board of Directors may be made at a
special meeting of stockholders at which directors are to be elected (a) by or
at the direction of the Board of Directors or (b) provided that the Board of
Directors has determined that directors shall be elected at such meeting, by any
stockholder of the Corporation who is a stockholder of record at the time of
giving of notice of the special meeting, who shall be entitled to vote at the
meeting and who complies with the notice procedures set forth in this Section.
C. Certain Matters Pertaining to Stockholder Business and Nominations.
(1) For nominations or other business to be properly brought before an
annual meeting by a stockholder or for nominations to be properly brought before
a special meeting, (i) the stockholder must have given timely notice thereof in
writing to the Secretary of the corporation, (ii) in the case of other business
to be brought before an annual meeting, such other business must otherwise be a
proper matter for stockholder action, (iii) if the stockholder, or the
beneficial owner on whose behalf any such proposal or nomination is made, has
provided the corporation with a Solicitation Notice, as that term is defined
below in this paragraph (C)(1) relating thereto, such stockholder or beneficial
owner must, in the case of a proposal, have delivered a proxy statement and form
of proxy to holders of at least the percentage of the corporation's voting
shares required under applicable law to carry any such proposal, or in the case
of a nomination or nominations, have delivered a proxy statement and form of
proxy to holders of at least a percentage of the corporation's voting shares
reasonably believed by such stockholder or beneficial owner to be sufficient to
elect the nominee or nominees proposed to be nominated by such stockholder, and
must, in either case, have included with the proxy statement the Solicitation
Notice and (iv) if no Solicitation Notice relating thereto has been timely
provided
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pursuant to this Section, the stockholder or beneficial holder proposing such
business or nomination must not have solicited a number of proxies sufficient to
have required the delivery of such a Solicitation Notice under this Section. To
be timely, a stockholder's notice pertaining to an annual meeting shall be
delivered to the Secretary at the principal executive offices of the corporation
not later than the close of business on the forty-fifth (45th) day nor earlier
than the close of business on the seventy-fifth (75th) day prior to the first
anniversary of the preceding year's mailing date for stockholder proxy
materials; provided, however, that in the event that the date of the annual
meeting is more than thirty (30) days before or more than sixty (60) days after
the date of the annual meeting in the preceding year, or if an annual meeting
was not held in the preceding year, notice by the stockholder to be timely must
be so delivered by the later of (a) the close of business on the ninetieth
(90th) day prior to date of such stockholders' meeting or (b) the close of
business on the tenth (10th) day following the day on which public announcement
of the date of such meeting is first made by the corporation. The stockholder's
notice shall set forth: (a) as to each person whom the stockholder proposes to
nominate for election or reelection as a director, all information relating to
such person that is required to be disclosed in solicitations of proxies for
election of directors, or is otherwise required, in each case, pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") (including such person's written consent to being named in the
proxy statement as a nominee and to serving as a director if elected); (b) as to
any other business that the stockholder proposes to bring before an annual
meeting, a brief description of the business desired to be brought before the
annual meeting, the reasons for conducting such business at the annual meeting
and any material interest in such business of such stockholder and the
beneficial owner, if any, on whose behalf the proposal is made; (c) as to the
stockholder giving the notice, (i) the name and address of such stockholder, as
it appears on the corporation's books, (ii) the class and number of shares of
the corporation that are owned beneficially and held of record by such
stockholder and such beneficial owner; and (d) whether either such stockholder
or the beneficial owner intends to deliver a proxy statement and form of proxy
to holders of, in the case of a proposal, at least the percentage of the
corporation's voting shares required under applicable law to carry the proposal
or, in the case of a nomination or nominations, to holders of at least a
percentage of the corporation's voting shares reasonably believed by such
stockholder or beneficial owner to be sufficient to elect such nominee or
nominees (an affirmative statement of such intent, a "Solicitation Notice"). A
stockholder shall also comply with all applicable requirements of the Exchange
Act of 1934 (or any successor provision), and the rules and regulations
thereunder with respect to the matters set forth in these By-Laws. Nothing in
this Section C(1) shall be deemed to affect any rights of the stockholders to
request inclusion of proposals in the corporation's proxy statement pursuant to
Rule 14a-8 under the Exchange Act.
(2) Notwithstanding anything in the second sentence of paragraph (C)(1)
of this Section 7 to the contrary, in the event that the number of directors to
be elected to the Board of Directors of the corporation is increased and there
is no public announcement by the corporation naming all of the nominees for
director or specifying the size of the increased Board of Directors at least
fifty-five (55) days prior to the first anniversary of the preceding year's
mailing date for stockholder proxy materials (or, if the annual meeting is held
more than thirty (30) days before or sixty (60) days after the date of the
annual meeting in the preceding year, or if an annual meeting was not held in
the preceding year, at least one hundred (100) days prior to the date of such
stockholders' meeting,) a stockholder's notice required by this Section shall
also be considered
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timely, but only with respect to nominees for any new positions created by such
increase, if it shall have been delivered to the Secretary at the principal
executive office of the corporation not later than the close of business on the
tenth (10th) day following the day on which such public announcement is first
made by the corporation.
(3) In the event the corporation calls a special meeting of
stockholders for the purpose of electing one or more directors to the Board of
Directors, any such stockholder may nominate a person or persons (as the case
may be), for election to such position(s) as specified in the corporation's
notice of meeting, if the stockholder's notice required by paragraph (C)(1) of
this Section 7 shall be delivered to the Secretary at the principal executive
offices of the corporation by the later of (a) the close of business on the
ninetieth (90th) day prior to such special meeting or (b) the close of business
on the tenth (10th) day following the day on which public announcement is first
made of the date of the special meeting and of the nominees proposed by the
Board of Directors to be elected at such meeting.
D. General.
(1) Only such persons who are nominated in accordance with the
procedures set forth in this Section 7 shall be eligible to serve as directors
and only such business shall be conducted at a meeting of stockholders as shall
have been brought before the meeting in accordance with the procedures set forth
in this Section 7. Except as otherwise provided by law or these By-Laws, the
chairman of the meeting shall have the power and duty to determine whether a
nomination or any business proposed to be brought before the meeting was made or
proposed, as the case may be, in accordance with the procedures set forth in
this Section 7 and, if any proposed nomination or business is not in compliance
herewith, to declare that such defective proposal or nomination shall be
disregarded.
(2) For purposes of this Section 7, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service or in a document publicly filed by the
Corporation with the Securities and Exchange Commission pursuant to Section 13,
14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this Section 7, a
stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth herein. Nothing in this Section 7 shall be deemed to affect any rights (i)
of stockholders to request inclusion of proposals in the Corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act or (ii) of the holders
of any series of Preferred Stock to elect directors under specified
circumstances.
Section 8. Proxies and Voting. At any meeting of the stockholders,
every stockholder entitled to vote may vote in person or by proxy authorized by
an instrument in writing or by a transmission permitted by law filed in
accordance with the procedure established for the meeting. Any copy, facsimile
telecommunication or other reliable reproduction of the writing or transmission
created pursuant to this Section 8 may be substituted or used in lieu of the
original writing or transmission for any and all purposes for which the original
writing or transmission could be used, provided that such copy, facsimile
telecommunication or other
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reproduction shall be a complete reproduction of the entire original writing or
transmission. All voting, including on the election of directors but excepting
where otherwise required by law, may be by voice vote. Any vote not taken by
voice shall be taken by ballots, each of which shall state the name of the
stockholder or proxy voting and such other information as may be required under
the procedure established for the meeting. The Corporation may, and to the
extent required by law, shall, in advance of any meeting of stockholders,
appoint one or more inspectors to act at the meeting and make a written report
thereof. The Corporation may designate one or more persons as alternate
inspectors to replace any inspector who fails to act. If no inspector or
alternate is able to act at a meeting of stockholders, the person presiding at
the meeting may, and to the extent required by law, shall, appoint one or more
inspectors to act at the meeting. Each inspector, before entering upon the
discharge of his duties, shall take and sign an oath faithfully to execute the
duties of inspector with strict impartiality and according to the best of his
ability. Except as otherwise provided in the terms of any class or series of
Preferred Stock of the Corporation, all elections at any meeting of stockholders
shall be determined by a plurality of the votes cast, and except as otherwise
required by law, all other matters determined by stockholders at a meeting shall
be determined by a majority of the votes cast affirmatively or negatively.
Section 9. No Action Without Meeting. Any action required or permitted
to be taken by the stockholders of the Corporation may be effected only at a
duly called annual or special meeting of stockholders of the Corporation and may
not be effected by written consent.
Section 10. Stock List. A complete list of stockholders entitled to
vote at any meeting of stockholders, arranged in alphabetical order for each
class of stock and showing the address of each such stockholder and the number
of shares registered in his or her name, shall be open to the examination of any
such stockholder, for any purpose germane to the meeting, during ordinary
business hours for a period of at least ten (10) days prior to the meeting,
either at a place within the city where the meeting is to be held, which place
shall be specified in the notice of the meeting, or if not so specified, at the
place where the meeting is to be held. The stock list shall also be kept at the
place of the meeting during the whole time thereof and shall be open to the
examination of any such stockholder who is present. Such list shall
presumptively determine the identity of the stockholders entitled to vote at the
meeting and the number of shares held by each of them.
ARTICLE II - BOARD OF DIRECTORS
Section 1. General Powers, Number, Election, Tenure and Qualification.
A. The business and affairs of the Corporation shall be managed by or
under the direction of its Board of Directions.
B. Subject to the rights of the holders of any series of Preferred
Stock then outstanding to elect additional directors under specified
circumstances, the number of directors shall be fixed from time to time
exclusively by the Board of Directors pursuant to a resolution adopted by a
majority of the Board.
C. The Board of Directors of the Corporation shall be divided into
three classes, as nearly equal in number as reasonably possible, with the term
of office of the first class to expire at the annual meeting of stockholders or
any special meeting in lieu thereof in 1999, the term of office
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of the second class to expire at the annual meeting of stockholders or any
special meeting in lieu thereof in 2000, and the term of office of the third
class to expire at the annual meeting of stockholders or any special meeting in
lieu thereof in 2001. At each annual meeting of stockholders or special meeting
in lieu thereof following such initial classification, directors elected to
succeed those directors whose terms expire shall be elected for a term of office
to expire at the third succeeding annual meeting of stockholders or special
meeting in lieu thereof after their election and until their successors are duly
elected and qualified.
Section 2. Vacancies and Newly Created Directorships. Subject to the
rights of the holders of any series of Preferred Stock then outstanding, newly
created directorships resulting from any increase in the authorized number of
directors or any vacancies in the Board of Directors resulting from death,
resignation, retirement, disqualification, removal from office or other cause
may be filled only by a majority vote of the directors then in office even
though less than a quorum, or by a sole remaining director. In the event of any
increase or decrease in the authorized number of directors, (i) each director
then serving as such shall nevertheless continue as a director of the class of
which he is a member until the expiration of his current term or his prior
death, retirement, removal or resignation and (ii) the newly created or
eliminated directorships resulting from such increase or decrease shall if
reasonably possible be apportioned by the Board of Directors among the three
classes of directors so as to ensure that no one class has more than one
director more than any other class. To the extent reasonably possible,
consistent with the foregoing rule, any newly created directorships shall be
added to those classes whose terms of office are to expire at the latest dates
following such allocation and newly eliminated directorships shall be subtracted
from those classes whose terms of office are to expire at the earliest dates
following such allocation, unless otherwise provided for from time to time by
resolution adopted by a majority of the directors then in office, although less
than a quorum. In the event of a vacancy in the Board of Directors, the
remaining directors, except as otherwise provided by law, may exercise the
powers of the full Board of Directors until the vacancy is filled.
Section 3. Resignation and Removal. Any director may resign at any time
upon written notice to the Corporation at its principal place of business or to
the Chief Executive Officer, President or Secretary. Such resignation shall be
effective upon receipt unless it is specified to be effective at some other time
or upon the happening of some other event. Subject to the rights of the holders
of any series of Preferred Stock then outstanding, any director, or the entire
Board of Directors, may be removed from office at any time only for cause. A
director may be removed for cause by the holders of a majority of the shares of
the Corporation then entitled to vote at an election of a director and only
after a reasonable notice and opportunity to be heard before the stockholders.
Section 4. Regular Meetings. Regular meetings of the Board of Directors
shall be held at such place or places, on such date or dates, and at such time
or times as shall have been established by the Board of Directors and publicized
among all directors. A written notice of each regular meeting shall not be
required.
Section 5. Special Meetings. Special meetings of the Board of Directors
may be called by the Chairman of the Board of Directors, if any, the Board of
Directors or the President and shall be held at such place, on such date, and at
such time as they or he or she shall fix. Notice of the place, date, and time of
each such special meeting shall be given to each director by whom it
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is not waived by mailing written notice not less than three (3) days before the
meeting or orally, by telegraph, telex, cable or telecopy given not less than
twenty-four (24) hours before the meeting. Unless otherwise indicated in the
notice thereof, any and all business may be transacted at a special meeting.
Section 6. Quorum. At any meeting of the Board of Directors, a majority
of the total number of members of the Board of Directors shall constitute a
quorum for all purposes. If a quorum shall fail to attend any meeting, a
majority of those present may adjourn the meeting to another place, date, or
time, without further notice or waiver thereof.
Section 7. Action by Consent. Unless otherwise restricted by the
Certificate of Incorporation or these By-Laws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all members of the Board or committee, as the
case may be, consent thereto in writing, and the writing or writings are filed
with the minutes of proceedings of the Board or committee.
Section 8. Participation in Meetings By Conference Telephone. Members
of the Board of Directors, or of any committee thereof, may participate in a
meeting of such Board or committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other and such participation shall constitute presence in
person at such meeting.
Section 9. Conduct of Business. At any meeting of the Board of
Directors, business shall be transacted in such order and manner as the Board
may from time to time determine, and all matters shall be determined by the vote
of a majority of the directors present, except as otherwise provided herein or
required by law.
Section 10. Powers. The Board of Directors may, except as otherwise
required by law, exercise all such powers and do all such acts and things as may
be exercised or done by the Corporation, including, without limiting the
generality of the foregoing, the unqualified power:
(1) To declare dividends from time to time in accordance with law;
(2) To purchase or otherwise acquire any property, rights or
privileges on such terms as it shall determine;
(3) To authorize the creation, making and issuance, in such form
as it may determine, of written obligations of every kind,
negotiable or non-negotiable, secured or unsecured, to borrow
funds and guarantee obligations, and to do all things
necessary in connection therewith;
(4) To remove any officer of the Corporation with or without
cause, and from time to time to devolve the powers and duties
of any officer upon any other person for the time being;
(5) To confer upon any officer of the Corporation the power to
appoint, remove and suspend subordinate officers, employees
and agents;
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(6) To adopt from time to time such stock, option, stock purchase,
bonus or other compensation plans for directors, officers,
employees and agents of the Corporation and its subsidiaries
as it may determine;
(7) To adopt from time to time such insurance, retirement, and
other benefit plans for directors, officers, employees and
agents of the Corporation and its subsidiaries as it may
determine; and,
(8) To adopt from time to time regulations, not inconsistent with
these By-Laws, for the management of the Corporation's
business and affairs.
Section 11. Compensation of Directors. Directors, as such, may receive,
pursuant to a resolution of the Board of Directors, fixed fees and other
compensation for their services as directors, including, without limitation,
their services as members of committees of the Board of Directors.
ARTICLE III - COMMITTEES
Section 1. Committees of the Board of Directors. The Board of
Directors, by a vote of a majority of the Board of Directors, may from time to
time designate committees of the Board, with such lawfully delegable powers and
duties as it thereby confers, to serve at the pleasure of the Board and shall,
for those committees and any others provided for herein, elect a director or
directors to serve as the member or members, designating, if it desires, other
directors as alternate members who may replace any absent or disqualified member
at any meeting of the committee. Any such committee, to the extent provided in
the resolution of the Board of Directors, shall have and may exercise all the
powers and authority of the Board of Directors in the management of the business
and affairs of the Corporation, and may authorize the seal of the Corporation to
be affixed to all papers which may require it; but no such committee shall have
the power or authority in reference to amending the Certificate of
Incorporation, adopting an agreement of merger or consolidation, recommending to
the stockholders the sale, lease or exchange of all or substantially all of the
Corporation's property and assets, recommending to the stockholders a
dissolution of the Corporation or a revocation of a dissolution, or amending the
By-Laws of the Corporation. Any committee so designated may exercise the power
and authority of the Board of Directors to declare a dividend, to authorize the
issuance of stock or to adopt a certificate of ownership and merger pursuant to
Section 253 of the Delaware General Corporation Law if the resolution which
designates the committee or a supplemental resolution of the Board of Directors
shall so provide. In the absence or disqualification of any member of any
committee and any alternate member in his or her place, the member or members of
the committee present at the meeting and not disqualified from voting, whether
or not he or she or they constitute a quorum, may by unanimous vote appoint
another member of the Board of Directors to act at the meeting in the place of
the absent or disqualified member.
Section 2. Conduct of Business. Each committee may determine the
procedural rules for meeting and conducting its business and shall act in
accordance therewith, except as otherwise provided herein or required by law.
Adequate provision shall be made for notice to members of all meetings;
one-third (1/3) of the members of any committee shall constitute a quorum unless
the
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committee shall consist of one (1) or two (2) members, in which event one (1)
member shall constitute a quorum; and all matters shall be determined by a
majority vote of the members present. Action may be taken by any committee
without a meeting if all members thereof consent thereto in writing, and the
writing or writings are filed with the minutes of the proceedings of such
committee.
ARTICLE IV - OFFICERS
Section 1. Enumeration. The officers of the Corporation shall consist
of a President, a Treasurer, a Secretary and such other officers as the Board of
Directors or the Chairman of the Board may determine, including, but not limited
to, a Chairman of the Board of Directors, a Chief Executive Officer, and one or
more Vice Presidents, Assistant Treasurers and Assistant Secretaries.
Section 2. Election. The Chairman of the Board, if any, the President,
the Treasurer and the Secretary shall be elected annually by the Board of
Directors at their first meeting following the annual meeting of the
stockholders. The Board of Directors or the Chairman of the Board, if any, may,
from time to time, elect or appoint such other officers as it or he or she may
determine, including, but not limited to, one or more Vice Presidents, Assistant
Treasurers and Assistant Secretaries.
Section 3. Qualification. The Chairman of the Board, if any, and any
Vice Chairman appointed to act in the absence of the Chairman, if any, shall be
elected by and from the Board of Directors, but no other officer need be a
director. Two or more offices may be held by any one person. If required by vote
of the Board of Directors, an officer shall give bond to the Corporation for the
faithful performance of his or her duties, in such form and amount and with such
sureties as the Board of Directors may determine. The premiums for such bonds
shall be paid by the Corporation.
Section 4. Tenure and Removal. Each officer elected or appointed by the
Board of Directors shall hold office until the first meeting of the Board of
Directors following the next annual meeting of the stockholders and until his or
her successor is elected or appointed and qualified, or until he or she dies,
resigns, is removed or becomes disqualified, unless a shorter term is specified
in the vote electing or appointing said officer. Each officer appointed by the
Chairman of the Board, if any, shall hold office until his or her successor is
elected or appointed and qualified, or until he or she dies, resigns, is removed
or becomes disqualified, unless a shorter term is specified by any agreement or
other instrument appointing such officer. Any officer may resign by giving
written notice of his or her resignation to the Chairman of the Board, if any,
the President, or the Secretary, or to the Board of Directors at a meeting of
the Board, and such resignation shall become effective at the time specified
therein. Any officer elected or appointed by the Board of Directors may be
removed from office with or without cause by vote of a majority of the
directors. Any officer appointed by the Chairman of the Board, if any, may be
removed with or without cause by the Chairman of the Board.
Section 5. Chairman of the Board. The Chairman of the Board, if any,
shall preside at all meetings of the Board of Directors and stockholders at
which he or she is present and shall have such authority and perform such duties
as may be prescribed by these By-Laws or from time to time be determined by the
Board of Directors. The Chairman of the Board shall also have the power and
authority to determine the compensation and duties of all officers, employees
and agents
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<PAGE> 10
of the Corporation and shall have the power and authority to sign all stock
certificates, contracts and other instruments of the Corporation which are
authorized.
Section 6. President. Except for meetings at which the Chief Executive
Officer or the Chairman of the Board, if any, presides, the President shall, if
present, preside at all meetings of stockholders, and if a director, at all
meetings of the Board of Directors. The President shall, subject to the control
and direction of the Chief Executive Officer and the Board of Directors, have
and perform such powers and duties as may be prescribed by these By-Laws or from
time to time be determined by the Chief Executive Officer or the Board of
Directors. The President shall have power to sign all stock certificates,
contracts and other instruments of the Corporation which are authorized. In the
absence of a Chief Executive Officer, the President shall be the chief executive
officer of the Corporation and shall, subject to the direction of the Board of
Directors, have general supervision and control of its business and shall have
general supervision and direction of all of the officers, employees and agents
of the Corporation.
Section 7. Chief Executive Officer. The Chief Executive Officer shall
be the chief executive officer of the Corporation and shall, subject to the
direction of the Board of Directors, have general supervision and control of its
business. Unless otherwise provided by resolution of the Board of Directors, in
the absence of the Chairman of the Board, if any, the Chief Executive Officer
shall preside at all meetings of the stockholders and, if a director, meetings
of the Board of Directors. The Chief Executive Officer shall have general
supervision and direction of all of the officers, employees and agents of the
Corporation.
Section 8. Vice Presidents. The Vice Presidents, if any, in the order
of their election, or in such other order as the Board of Directors may
determine, shall have and perform the powers and duties of the President (or
such of the powers and duties as the Board of Directors may determine) whenever
the President is absent or unable to act. The Vice Presidents, if any, shall
also have such other powers and duties as may from time to time be determined by
the Board of Directors.
Section 9. Treasurer and Assistant Treasurers. The Treasurer shall,
subject to the control and direction of the Board of Directors, have and perform
such powers and duties as may be prescribed in these By-Laws or be determined
from time to time by the Board of Directors. All property of the Corporation in
the custody of the Treasurer shall be subject at all times to the inspection and
control of the Board of Directors. The Treasurer shall have the responsibility
for maintaining the financial records of the Corporation. The Treasurer shall
make such disbursements of the funds of the Corporation as are authorized and
shall render from time to time an account of all such transactions and of the
financial condition of the Corporation. Unless otherwise voted by the Board of
Directors, each Assistant Treasurer, if any, shall have and perform the powers
and duties of the Treasurer whenever the Treasurer is absent or unable to act,
and may at any time exercise such of the powers of the Treasurer, and such other
powers and duties, as may from time to time be determined by the Board of
Directors.
Section 10. Secretary and Assistant Secretaries. The Board of Directors
shall appoint a Secretary and, in his or her absence, an Assistant Secretary.
The Secretary or, in his or her absence, any Assistant Secretary, shall attend
all meetings of the directors and shall record all votes of the Board of
Directors and minutes of the proceedings at such meetings. The Secretary or, in
his
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<PAGE> 11
or her absence, any Assistant Secretary, shall notify the directors of their
meetings, and shall have and perform such other powers and duties as may from
time to time be determined by the Board of Directors. If the Secretary or an
Assistant Secretary is elected but is absent from any meeting of directors, a
temporary Secretary may be appointed by the directors at the meeting
Section 11. Bond. If required by the Board of Directors, any officer
shall give the Corporation a bond in such sum and with such surety or sureties
and upon such terms and conditions as shall be satisfactory to the Board of
Directors, including without limitation a bond for the faithful performance of
the duties of his office and for the restoration to the Corporation of all
books, papers, vouchers, money and other property of whatever kind in his or her
possession or under his control and belonging to the Corporation.
Section 12. Action with Respect to Securities of Other Corporations.
Unless otherwise directed by the Board of Directors, the President, the
Treasurer or any officer of the Corporation authorized by the President shall
have power to vote and otherwise act on behalf of the Corporation, in person or
by proxy, at any meeting of stockholders of or with respect to any action of
stockholders of any other corporation in which this Corporation may hold
securities and otherwise to exercise any and all rights and powers which this
Corporation may possess by reason of its ownership of securities in such other
corporation.
ARTICLE V - STOCK
Section 1. Certificates of Stock. Each stockholder shall be entitled to
a certificate signed by, or in the name of the Corporation by the Chairman of
the Board of Directors, or the President or a Vice President, and by the
Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary,
certifying the number of shares owned by him, her or it. Any or all of the
signatures on the certificate may be by facsimile.
Section 2. Transfers of Stock. Transfers of stock shall be made only
upon the transfer books of the Corporation kept at an office of the Corporation
or by transfer agents designated to transfer shares of the stock of the
Corporation. Except where a certificate is issued in accordance with Section 4
of this Article of these By-Laws, an outstanding certificate for the number of
shares involved shall be surrendered for cancellation before a new certificate
is issued therefor.
Section 3. Record Date. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders, or
to receive payment of any dividend or other distribution or allotment of any
rights or to exercise any rights in respect of any change, conversion or
exchange of stock or for the purpose of any other lawful action, the Board of
Directors may fix a record date, which record date shall not precede the date on
which the resolution fixing the record date is adopted and which record date
shall not be more than sixty (60) nor less than ten (10) days before the date of
any meeting of stockholders, nor more than sixty (60) days prior to the time for
such other action as hereinbefore described; provided, however, that if no
record date is fixed by the Board of Directors, the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day next preceding the day on which notice is
given or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held, and, for determining
stockholders entitled
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<PAGE> 12
to receive payment of any dividend or other distribution or allotment of rights
or to exercise any rights of change, conversion or exchange of stock or for any
other purpose, the record date shall be at the close of business on the day on
which the Board of Directors adopts a resolution relating thereto. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
Section 4. Lost, Stolen or Destroyed Certificates. In the event of the
loss, theft or destruction of any certificate of stock, another may be issued in
its place pursuant to such regulations as the Board of Directors may establish
concerning proof of such loss, theft or destruction and concerning the giving of
a satisfactory bond or bonds of indemnity.
Section 5. Regulations. The issue, transfer, conversion and
registration of certificates of stock shall be governed by such other
regulations as the Board of Directors may establish.
Section 6. Interpretation. The Board of Directors shall have the power
to interpret all of the terms and provisions of these By-Laws, which
interpretation shall be conclusive.
ARTICLE VI - NOTICES
Section 1. Notices. Except as otherwise specifically provided herein or
required by law, all notices required to be given to any stockholder, director,
officer, employee or agent shall be in writing and may in every instance be
effectively given by hand delivery to the recipient thereof, by depositing such
notice in the mail, postage paid, or by sending such notice by courier service,
prepaid telegram or mailgram, or telecopy, cable, or telex. Any such notice
shall be addressed to such stockholder, director, officer, employee or agent at
his or her last known address as the same appears on the books of the
Corporation. The time when such notice is received, if hand delivered, or
dispatched, if delivered through the mail or by courier, telegram, mailgram,
telecopy, cable, or telex shall be the time of the giving of the notice.
Section 2. Waiver of Notice. A written waiver of any notice, signed by
a stockholder, director, officer, employee or agent, whether before or after the
time of the event for which notice is to be given, shall be deemed equivalent to
the notice required to be given to such stockholder, director, officer, employee
or agent. Neither the business nor the purpose of any meeting need be specified
in such a waiver. Attendance of a director or stockholder at a meeting without
protesting prior thereto or at its commencement the lack of notice shall also
constitute a waiver of notice by such director or stockholder.
ARTICLE VII -INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 1. Right to Indemnification. Each person who was or is made a
party or is threatened to be made a party to or is otherwise involved
(including, without limitation, as a witness) in any action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that he is or was a director or an officer of the Corporation or is or was
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, or of a partnership, joint venture, trust or other
enterprise, including service with respect to an employee benefit plan
(hereinafter an "Indemnitee"), whether the basis of such proceeding is
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<PAGE> 13
alleged action in an official capacity as a director, officer, employee or agent
or in any other capacity while serving as a director, officer, employee or
agent, shall be indemnified and held harmless by the Corporation to the fullest
extent authorized by the Delaware General Corporation Law, as the same exists or
may hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits the Corporation to provide broader
indemnification rights than such law permitted the Corporation to provide prior
to such amendment), against all expense, liability and loss (including
attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts
paid in settlement) reasonably incurred or suffered by such Indemnitee in
connection therewith; provided, however, that, except as provided in Section 3
of this Article with respect to proceedings to enforce rights to indemnification
or as otherwise required by law, the Corporation shall not be required to
indemnify or advance expenses to any such Indemnitee in connection with a
proceeding (or part thereof) initiated by such Indemnitee unless such proceeding
(or part thereof) was authorized by the Board of Directors of the Corporation.
Section 2. Right to Advancement of Expenses. The right to
indemnification conferred in Section 1 of this Article shall include the right
to be paid by the Corporation the expenses (including attorney's fees) incurred
in defending any such proceeding in advance of its final disposition; provided,
however, that, if the Delaware General Corporation Law requires, an advancement
of expenses incurred by an Indemnitee in his capacity as a director or officer
(and not in any other capacity in which service was or is rendered by such
Indemnitee, including, without limitation, service to an employee benefit plan)
shall be made only upon delivery to the Corporation of an undertaking, by or on
behalf of such Indemnitee, to repay all amounts so advanced if it shall
ultimately be determined by final judicial decision from which there is no
further right to appeal that such Indemnitee is not entitled to be indemnified
for such expenses under this Section 2 or otherwise. The rights to
indemnification and to the advancement of expenses conferred in Sections 1 and 2
of this Article shall be contract rights and such rights shall continue as to an
Indemnitee who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of the Indemnitee's heirs, executors and administrators.
Any repeal or modification of any of the provisions of this Article shall not
adversely affect any right or protection of an Indemnitee existing at the time
of such repeal or modification.
Section 3. Right of Indemnitees to Bring Suit. If a claim under Section
1 or 2 of this Article is not paid in full by the Corporation within sixty (60)
days after a written claim has been received by the Corporation, except in the
case of a claim for an advancement of expenses, in which case the applicable
period shall be twenty (20) days, the Indemnitee may at any time thereafter
bring suit against the Corporation to recover the unpaid amount of the claim. If
successful in whole or in part in any such suit, or in a suit brought by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking, the Indemnitee shall also be entitled to be paid the expenses of
prosecuting or defending such suit. In (i) any suit brought by the Indemnitee to
enforce a right to indemnification hereunder (but not in a suit brought by the
Indemnitee to enforce a right to an advancement of expenses) it shall be a
defense that, and (ii) in any suit brought by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the Corporation
shall be entitled to recover such expenses upon a final adjudication that, the
Indemnitee has not met any applicable standard for indemnification set forth in
the Delaware General Corporation Law. Neither the failure of the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the
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<PAGE> 14
commencement of such suit that indemnification of the Indemnitee is proper in
the circumstances because the Indemnitee has met the applicable standard of
conduct set forth in the Delaware General Corporation Law, nor an actual
determination by the Corporation (including its Board of Directors, independent
legal counsel, or its stockholders) that the Indemnitee has not met such
applicable standard of conduct, shall create a presumption that the Indemnitee
has not met the applicable standard of conduct or, in the case of such a suit
brought by the Indemnitee, be a defense to such suit. In any suit brought by the
Indemnitee to enforce a right to indemnification or to an advancement of
expenses hereunder, or brought by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking, the burden of proving that the
Indemnitee is not entitled to be indemnified, or to such advancement of
expenses, under this Article or otherwise shall be on the Corporation.
Section 4. Non-Exclusivity of Rights. The rights to indemnification and
to the advancement of expenses conferred in this Article shall not be exclusive
of any other right which any person may have or hereafter acquire under any
statute, the Corporation's Certificate of Incorporation as amended and restated
from time to time, these By-Laws, any agreement, any vote of stockholders or
disinterested directors or otherwise.
Section 5. Insurance. The Corporation may maintain insurance, at its
expense, to protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law.
Section 6. Indemnification of Employees and Agents of the Corporation.
The Corporation may, to the extent authorized from time to time by the Board of
Directors, grant rights to indemnification and to the advancement of expenses to
any employee or agent of the Corporation to the fullest extent of the provisions
of this Article with respect to the indemnification and advancement of expenses
of directors and officers of the Corporation.
ARTICLE VIII - CERTAIN TRANSACTIONS
Section 1. Transactions with Interested Parties. No contract or
transaction between the Corporation and one or more of its directors or
officers, or between the Corporation and any other corporation, partnership,
association, or other organization in which one or more of its directors or
officers are directors or officers, or have a financial interest, shall be void
or voidable solely for this reason, or solely because the director or officer is
present at or participates in the meeting of the Board or committee thereof
which authorizes the contract or transaction or solely because the votes of such
director or officer are counted for such purpose, if:
(1) The material facts as to his or her relationship or interest
and as to the contract or transaction are disclosed or are
known to the Board of Directors or the committee, and the
Board or committee in good faith authorizes the contract or
transaction by the affirmative votes of a majority of the
disinterested directors, even though the disinterested
directors be less than a quorum; or
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<PAGE> 15
(2) The material facts as to his or her relationship or interest
and as to the contract or transaction are disclosed or are
known to the stockholders entitled to vote thereon, and the
contract or transaction is specifically approved in good faith
by vote of the stockholders; or
(3) The contract or transaction is fair as to the Corporation as
of the time it is authorized, approved or ratified, by the
Board of Directors, a committee thereof, or the stockholders.
Section 2. Quorum. Common or interested directors may be counted in
determining the presence of a quorum at a meeting of the Board of Directors or
of a committee which authorizes the contract or transaction.
ARTICLE IX - MISCELLANEOUS
Section 1. Facsimile Signatures. In addition to the provisions for use
of facsimile signatures elsewhere specifically authorized in these By-Laws,
facsimile signatures of any officer or officers of the Corporation may be used
whenever and as authorized by the Board of Directors or a committee thereof.
Section 2. Corporate Seal. The Board of Directors may provide a
suitable seal, containing the name of the Corporation, which seal shall be in
the charge of the Secretary. If and when so directed by the Board of Directors
or a committee thereof, duplicates of the seal may be kept and used by the
Treasurer or by an Assistant Secretary or Assistant Treasurer.
Section 3. Reliance upon Books, Reports and Records. Each director,
each member of any committee designated by the Board of Directors, and each
officer of the Corporation shall, in the performance of his or her duties, be
fully protected in relying in good faith upon the books of account or other
records of the Corporation and upon such information, opinions, reports or
statements presented to the Corporation by any of its officers or employees, or
committees of the Board of Directors so designated, or by any other person as to
matters which such director or committee member reasonably believes are within
such other person's professional or expert competence and who has been selected
with reasonable care by or on behalf of the Corporation.
Section 4. Fiscal Year. Except as otherwise determined by the Board of
Directors from time to time, the fiscal year of the Corporation shall end on the
last day of January of each year.
Section 5. Time Periods. In applying any provision of these By-Laws
which requires that an act be done or not be done a specified number of days
prior to an event or that an act be done during a period of a specified number
of days prior to an event, calendar days shall be used, the day of the doing of
the act shall be excluded, and the day of the event shall be included.
Section 6. Pronouns. Whenever the context may require, any pronouns
used in these By-Laws shall include the corresponding masculine, feminine or
neuter forms.
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<PAGE> 16
ARTICLE X - AMENDMENTS
These By-Laws may be amended or repealed by the affirmative vote of a
majority of the whole Board of Directors or by the stockholders by the
affirmative vote of seventy percent (70%) of the outstanding voting power of the
then-outstanding shares of capital stock of the Corporation, entitled to vote
generally in the election of directors, at any meeting at which a proposal to
amend or repeal these By-Laws is properly presented.
16
<PAGE> 1
ALLOY(TM) ONLINE, INC.
NUMBER SHARES
AO
INCORPORATED UNDER THE LAWS OF SEE REVERSE FOR
THE STATE OF DELAWARE CERTAIN DEFINITIONS
THIS CERTIFIES that CUSIP 019855 10 5
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK,
PAR VALUE $.01 PER SHARE, OF
- ------------------------------- ALLOY ONLINE, INC. -----------------------------
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney, upon surrender of this certificate properly
endorsed.
This certificate is not valid until countersigned and registered by the
Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signature of
its duly authorized officers.
Dated
ALLOY ONLINE, INC.
CORPORATE
SEAL
1996
DELAWARE
*
/s/ Samuel A. Graadess /s/ Matthew C. Diamond
SECRETARY CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD
OF DIRECTORS
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE> 2
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT --________________ Custodian _________________
(Cust) (Minor)
under Uniform Gifts to Minors
Act________________
(State)
Additional abbreviations may also be used though not in the above list.
For Value Received, _____________________hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
_________________________________________
_________________________________________
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ Shares
of the capital stock represented by the within Certificate, and do hereby
constitute and appoint
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated _________________________________
________________________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH
THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE
IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT
OR ANY CHANGE WHATEVER.
SIGNATURE(S) GUARANTEED:________________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN
AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE> 1
Alloy Online, Inc. has omitted from this Exhibit 10.3 portions of the Agreement
for which Alloy Online, Inc. has requested confidential treatment from the
Securities and Exchange Commission. The portions of the Agreement for which
confidential treatment has been requested have been filed separately with the
Securities and Exchange Commission. Such omitted portions have been marked
with an asterisk.
EXHIBIT 10.3
AGREEMENT BETWEEN
HARRISON FULFILLMENT SERVICES, INC.
AND
ALLOY DESIGNS, INC.
JULY 23, 1997
<PAGE> 2
TABLE OF CONTENTS
Section Page
- ------- ----
1. APPOINTMENT...............................................................1
2. SERVICES..................................................................2
3. SERVICE LEVELS............................................................2
4. PLACE OF PERFORMANCE......................................................2
5. FEES AND CHARGES..........................................................3
6. PAYMENTS..................................................................5
7. IMPREST FUND..............................................................6
8. FORECASTS.................................................................7
9. SPECIAL SERVICES..........................................................9
11. RISK OF LOSS............................................................12
12. TAXES...................................................................13
13. MONETARY DEFAULT........................................................13
14. OTHER DEFAULTS..........................................................14
15. FORCE MAJEURE...........................................................14
16. TERM AND TERMINATION....................................................15
17. REPRESENTATIONS AND WARRANTIES..........................................16
18. COVENANTS OF THE COMPANY................................................18
19. INDEMNITY & LIABILITY...................................................19
20. INSURANCE...............................................................20
21. COMPLIANCE WITH LAWS....................................................20
22. RECORD INSPECTION.......................................................20
23. CONFIDENTIALITY.........................................................21
24. NOTICES.................................................................21
25. ASSIGNMENT..............................................................22
26. AMENDMENTS..............................................................23
27. GOVERNING LAW...........................................................23
28. ARBITRATION.............................................................23
29. COMPUTER PROGRAMS.......................................................24
30. BUSINESS DAY............................................................24
31. RELATIONSHIP............................................................24
32. HEADINGS................................................................25
33. SEVERABILITY............................................................25
34. NO WAIVER...............................................................25
35. FULL AGREEMENT..........................................................25
36. COUNTERPARTS............................................................26
Exhibit A - Services..........................................Attached
- Attachment 1 - Sample Report Package Contents.....Attached
Exhibit B - Service Levels....................................Attached
Exhibit C - Start-Up Services.................................Attached
i
<PAGE> 3
Exhibit D - Transaction Rates.................................Attached
Exhibit E - Sales Tax Jurisdictions...........................Attached
Exhibit F - Company's Certificate of Insurance................Attached
Exhibit G - HFS's Certificate of Insurance....................Attached
Schedule 1 - HFS Representation and Warranty Exceptions.......Attached
Schedule 2 - Company Representation and Warranty Exceptions...Attached
ii
<PAGE> 4
FULFILLMENT SERVICES AGREEMENT
This Fulfillment Services Agreement (the "AGREEMENT") dated as of July 23,
1997, by and between Harrison Fulfillment Services, Inc., a Tennessee
corporation ("HFS"), and Alloy Designs, Inc., a Delaware corporation (the
"COMPANY").
W I T N E S S E T H
WHEREAS, the Company has a direct marketing program for the sale of various
merchandise sold through the Alloy Catalog (respectively, the "MERCHANDISE" and
the "CATALOG"); and
WHEREAS, HFS is a provider of various services to the direct response
industry, including, but not limited to, order entry; data processing; inbound
and outbound telemarketing; customer service; pick, pack and ship; order
fulfillment; warehousing and storage; and returns processing, and HFS will
provide some or all of these services to the Company as more particularly
described herein (the "SERVICES"); and
WHEREAS, the Company desires that HFS provide Services in connection with
the operation of its direct response business and HFS desires to provide such
Services to the Company.
NOW, THEREFORE, in consideration of the mutual promises and conditions
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto hereby agree as
follows:
1. APPOINTMENT.
The Company hereby appoints HFS as the primary provider of Services in
connection with the Catalog upon the terms and conditions set forth in this
Agreement.
<PAGE> 5
2. SERVICES.
During the Term and subject to the terms hereof, HFS shall provide to the
Company the Services set forth in EXHIBIT A hereto.
3. SERVICE LEVELS.
Certain of the Services set forth in EXHIBIT A are subject to the Service
Levels set forth in EXHIBIT B (the "SERVICE LEVELS"). Such Service Levels
define certain minimum standards of performance which HFS shall maintain in
the rendering of the Services so long as the Company is not in Default (as
defined in Section 14 hereof) hereunder. However, in circumstances in which
this Agreement does not stipulate a certain Service Level to determine the
minimum standard of performance HFS shall maintain with respect to any
particular Service, HFS and the Company shall jointly agree upon the scope
of HFS's obligations regarding such Service, and, in any event, HFS shall
use its reasonable best efforts to provide the highest service levels
reasonably possible under the circumstances. HFS shall deliver reports to
the Company on a weekly basis to enable the Company to determine whether
HFS is meeting the Service Levels.
4. PLACE OF PERFORMANCE.
The Services shall be performed at HFS's place of business in Chattanooga,
Tennessee and at such other business locations as HFS may maintain from
time to time; provided, however, that HFS shall not be precluded from
out-sourcing certain Services, if necessary, on a temporary basis to
providers which HFS determines to be reasonably acceptable so long as HFS
remains primarily responsible for the providing of such out-sourced
Services at the Service Levels. HFS will use its reasonable best efforts to
notify the Company of its intent to utilize outsource providers prior to
commencing any outsourcing.
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5. FEES AND CHARGES.
In consideration for performance of the Services during the Term (as
defined hereinafter), the Company shall pay to HFS the following fees and
charges:
(a) INITIAL START-UP FEE. The Company has paid HFS an initial start-up fee
of $[ ]* (the "INITIAL START-UP FEE") in consideration of the start-up
services agreed upon by the parties hereto as set forth in EXHIBIT C (the
"START-UP SERVICES").
(b) TRANSACTION FEES. (i) The Company shall pay HFS transaction fees
("TRANSACTION FEES") at the transaction rates set forth in EXHIBIT D, as
such rates may be adjusted from time to time by the C.P.I. Adjustment and
Forecast Adjustment described below (the "TRANSACTION RATES");
(ii) The Transaction Rates shall be subject to adjustment as follows:
A. The Transaction Rates shall be increased annually, effective
January 1, 1998 and on January 1 of each year thereafter during the Term,
by an amount equal to the percentage increase in the Urban Wage Earners and
Clerical Workers-South-All Items consumer price index published by the U.S.
Department of Labor for the most recent twelve (12) month period for which
statistics are available on such dates determined by comparing such index
to the index quoted for the immediately prior twelve month period (the
"C.P.I. ADJUSTMENT").
B. From and after the expiration of the sixth calendar month
following the date that the first mailing of Catalogs is launched (the
"FIRST MAILING"), the Transaction Rates shall also be subject to adjustment
(the "FORECAST ADJUSTMENT") as follows:
1. In the event that the number of phone orders, items shipped
or units received (each a "COMPONENT") during any calendar month varies
above or below the amount forecasted for such Component in the applicable
Quarterly Forecast (or a Revised Quarterly Forecast which has been
delivered to HFS by no later than least fifteen
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(15) days prior to the commencement of such month) by more than ten percent
(10%) but less than twenty-five percent (25%), then the Transaction Rates
for such month shall be increased by ten percent (10%).
2. In the event that a Component level during any calendar
month varies above or below the amount forecasted for such Component in the
applicable Quarterly Forecast (or a Revised Quarterly Forecast which has
been delivered to HFS by no later than least fifteen (15) days prior to the
commencement of such month) by more than twenty-five percent (25%), then
the Transaction Rates for such month shall be increased by twenty percent
(20%). The "First Mailing" shall be deemed to have been launched on the
date that the preponderant portion of the catalogs shall have been mailed
from the printer for distribution to consumers.
C. The Transaction Rates assume two lines per order and two item
units per shipment. Additional charges will apply for more than two lines
per order or more than two item units per shipment.
(c) SPECIAL SERVICES FEES. If the Company requests that HFS provide
Special Services (as defined and discussed in Section 9 hereinafter), the
Company shall pay HFS such amount in respect of such Special Services as
shall be agreed between the Company and HFS, which amount may include
charges for setting up the required Special Service as well as for the
performance thereof (the "SPECIAL SERVICES FEES").
(d) CLOSE DOWN FEE. Upon any termination, including termination for
Default as provided for in Sections 13 and 14, the Company shall pay
termination charges relating to all close-down activities for all
deprogramming for the HFS computer system and for such other activities as
shall be agreed upon between HFS and the Company (the "CLOSE DOWN FEE"),
including such activities as removal of Merchandise from racks, packing for
shipment (if necessary), preparing freight documents for shipment to the
Company's designated destination and loading on the trucks of the Company's
designated carrier, together with the cost of any necessary supplies. The
Company shall have the right to specify whether any required labor shall be
performed on regular time or an overtime
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basis. [All close down activities shall be completed within thirty (30)
days following termination. ]
6. PAYMENTS.
(a) INITIAL START-UP FEE. The initial start-up fee has been paid prior to
the date of this Agreement.
(b) TRANSACTION FEES. HFS shall, on a weekly basis, issue to the Company
an invoice for estimated transaction fees (the "ESTIMATED TRANSACTION
AMOUNT") in the amount equal to the product of (i) the number of orders
taken by HFS during that week (the "PROCESSED ORDERS") and (ii) $[ ]* per
order (the "ASSUMED PER ORDER PRICE"). Such invoice shall be due and
payable within ten (10) Business Days. Commencing January 1, 1998, the
Assumed Per Order Price for any calendar quarter shall be adjusted on a
quarterly basis to reflect the greater of (i) the actual average
Transaction Fee per order or (ii) the forecasted average Transaction Fee
per order set forth in the Quarterly Forecast (as defined in Section 8
hereinafter) for the current calendar quarter. HFS shall, on a monthly
basis, issue to the Company an invoice setting forth the difference between
the Estimated Transaction Fees paid during the previous month and the
actual Transaction Fees incurred in respect of Services performed by HFS
(the "ACTUAL TRANSACTION FEES") during the prior month. Any payments owing
to HFS pursuant to such reconciliation of the Estimated Transaction Amount
with the Actual Transaction Fees shall be due and payable within ten (10)
Business Days following receipt of such invoice issued by HFS. If at the
end of the applicable month there is a balance due the Company, HFS shall
offset such balance against the following month's invoice.
(c) SPECIAL SERVICES FEES. Special Services Fees shall be due and payable
by the Company as agreed between the Company and HFS.
(d) CLOSE DOWN FEE. Upon any termination, HFS will issue to the Company an
invoice for the reasonably estimated Close Down Fee (except for that
portion of the Close Down Fee relating to telecommunication charges and
costs addressed hereinbelow), and
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such invoices shall be due and payable no later than ten (10) Business Days
from the date of such invoice. After completion of the close-down
activities, HFS shall submit a final adjusted bill to the Company
reflecting agreed charges pursuant to Section 5(d) hereof and an
appropriate credit or charge with respect to any difference from the
previously invoiced amount, and HFS or the Company, as applicable, shall
pay within ten (10) Business Days any resulting amount owing to the other
that is not otherwise credited. HFS shall not be required to release any of
the Company assets in HFS's possession (other than customer billing and
order history) prior to payment in full of the Close Down Fee (except for
the portion of the Close Down Fee relating to charges and costs of AT&T
and/or such other telecommunications carrier used by HFS ); provided,
however, that the Company shall be allowed to substitute collateral
acceptable to HFS in place of Company assets in HFS's possession. The
portion of the Close Down Fee relating to the transfer of portable 800
numbers and estimated cost for calls not billed will be reconciled and
billed monthly until all such telephone activity has been billed. These
billings shall be payable on a net ten (10) day basis.
7. IMPREST FUND.
At all times during the term of this Agreement, the Company shall maintain
with HFS an imprest fund (the "IMPREST FUND") sufficient to cover certain
expenses paid by HFS on behalf of the Company, including all UPS, U.S.P.S.,
common carrier and other delivery service shipping costs, packing
materials, stationery and other similar expenses, and HFS shall pay such
expenses therefrom so long as and to the extent that a balance remains
therein. The Company and HFS shall agree in advance upon which costs and
charges are to be paid from the Imprest Fund, it being understood that such
list of charges may change from time to time according to the Company's
business needs and HFS's operations. The Imprest Fund shall (at a minimum)
be funded by the Company on a weekly basis to bring the balance of the fund
to an amount which would cover forecasted expenses for the ensuing two (2)
week period after taking into consideration such factors as forecasted
order volume, seasonality and other applicable factors. If the Imprest Fund
is insufficient to cover such expenses, HFS may, in its sole discretion:
(a) upon request
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<PAGE> 10
of the Company, pay the expenses and immediately invoice the Company for
the amount of expenses incurred plus a fifteen percent (15%) mark-up and
such invoice amount shall be payable within ten (10) Business Days of
receipt; or (b) following ten (10) Business Days after providing the
Company with written notice of insufficient funds in the Imprest Fund (and
the Imprest Fund has not during such time been restored in full), not pay
the expenses, and if HFS so elects not to pay the expenses, it shall have
no liability whatsoever for any losses or liabilities incurred by the
Company for such nonpayment. HFS shall provide the Company with a weekly
statement setting forth the balance of, and accounting for disbursements
from, the Imprest Fund.
8. FORECASTS.
The parties acknowledge that orders for Merchandise may not be uniform from
month to month as a result of various factors, including the seasonal
nature of the demand for Merchandise and circulation plans and mailing
schedules which reflect such seasonality and which are subject to constant
changes, and that the inability of the Company to accurately predict the
volume of orders to be processed or the inventory to be received and
warehoused on a weekly basis may have a detrimental effect on HFS's ability
to provide the Services in accordance with the Service Levels.
The Company recognizes and understands the importance of keeping HFS
informed at all times of forecasted order volumes, schedule changes, fast
and slow selling items, Merchandise or vendor problems and all other
material business issues which might have an effect upon the performance by
HFS of its obligations hereunder and shall provide HFS with reasonable
notice after the Company is aware of any changes in any such forecasted
items. Specifically, but without limiting the generality of the foregoing,
the Company agrees as follows:
(a) The Company shall deliver to HFS a complete set of projections on or
before November 15, 1997 for the partial 1998 calendar year commencing on
the first day following the expiration of the sixth month following the
First Mailing and thereafter at least three months prior to the
commencement of each successive calendar year thereafter
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<PAGE> 11
during the Term in respect of such calendar year, covering the operation of
its business for such calendar year, including, by month and quarter, mail
dates and quantities mailed, the forecasted number of telephone orders and
mail orders, the forecasted number of units received and shipped,
forecasted initial fill rates, forecasted inventory levels in dollars and
units, the Forecasted Inventory Turn, inbound telephone contacts-to-total
orders ratio, talk time per contact, the number of catalog requests, the
estimated returns percentage, the number of items per order and the number
of outbound telephone contacts and correspondence per order (such
projections being hereinafter referred to as the "ANNUAL FORECASTS").
(b) Four (4) weeks prior to the first day of each calendar quarter,
commencing with the first calendar quarter after the expiration of the
sixth month following the First Mailing, the Company shall deliver to HFS a
complete set of projections covering the operation of its business for the
next succeeding two calendar quarters, including, by week, mail dates and
quantities mailed, the forecasted number of telephone orders and mail
orders and forecasted inventory in dollars and units to be shipped each
week, forecasted initial fill rates, inbound telephone contacts to total
orders ratio, talk time per contact, the number of catalog requests, the
estimated returns percentage, the number of items per order, the number of
outbound telephone contacts and correspondence per order (such quarterly
projections being hereinafter referred to as the "QUARTERLY FORECASTS").
(c) The Company shall deliver to HFS a revised Quarterly Forecast (a
"REVISED QUARTERLY FORECAST") whenever it believes that any business
condition of which it is aware may have the effect of changing any item of
the previous Quarterly Forecast furnished to HFS. In the event that the
Company experiences an increase in telephone calls for any week of more
than ten percent (10%) over projected telephone calls for such week, as set
forth in any applicable Quarterly Forecast (or a Revised Quarterly Forecast
which has been delivered to HFS at least four (4) weeks prior to such
week), and has not advised HFS in writing at least four (4) weeks prior to
the week that the Company experiences such increase in telephone call
volume that such increase is forecasted, then HFS shall use its reasonable
best efforts but be under no obligation to meet those Service
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Levels directly or indirectly affected by telephone call volume for so long
as the Company's telephone call volume exceeds by more than ten percent
(10%) the call volume projected on the most recent Quarterly Forecast or
Revised Quarterly Forecast.
(d) The information contained in Quarterly Forecasts, Revised Quarterly
Forecasts and Annual Forecasts provided by the Company to HFS shall be
reasonably related to and consistent with the actual operating history of
the Company, subject to deviations therefrom as reasonably required by
changes in circumstances.
9. SPECIAL SERVICES.
The Company may at any time during the Term hereof request HFS to perform
services on its behalf not covered by this Agreement or to change any
Service Level ("SPECIAL SERVICES"). The Company shall notify HFS in writing
of its particular requirements with respect to such Special Services, and
HFS shall use its best efforts to comply with such requirements provided
that the written notification is given in a timely manner and the
requirements and procedures are reasonable and not economically burdensome.
HFS shall charge the Company for such Special Services such amount as set
forth in Section 5(c) hereof or, with respect to any upselling services to
be performed by HFS, at an agreed upon rate or amount, as applicable.
10. INVENTORY
Merchandise inventory shall be handled and processed as follows:
(a) The Company shall, at its own expense, supply HFS at its places of
business in Chattanooga, Tennessee, or such other places of business
designated by HFS, and maintain there, an inventory of Merchandise which
the Company reasonably believes is adequate in the ordinary course of
business to fill orders received for its Merchandise in line with its
Quarterly Forecasts or Revised Quarterly Forecasts. HFS shall use its
reasonable best efforts to preserve and maintain Merchandise received for
the Company in good and marketable condition.
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(b) HFS shall use its reasonable best efforts but is under no obligation
to receive Merchandise on behalf of the Company unless the Company has
transmitted to HFS, at least two (2) Business Days prior to the receipt of
such Merchandise, a copy of the purchase order by which the Company ordered
such Merchandise, or all requisite details of the purchase order to permit
HFS to identify the Merchandise as that of the Company.
(c) For inbound shipments, the Company shall advise its vendors that motor
carriers must contact HFS at least one (1) Business Day prior to delivery
and make a delivery appointment prior to arrival. Inbound shipments
arriving at an HFS warehouse without one Business Day's prior notice may be
refused or delayed depending on the space and manpower available at the
time of arrival. Each inbound shipment must have a packing slip and each
carton must be marked with the purchase order number and SKU number.
(d) For purposes of this Agreement, "PROBLEM MERCHANDISE" means
Merchandise shipped to HFS which in its sole reasonable discretion cannot
be processed by HFS without imposing an unreasonable hardship on HFS. For
illustrative purposes and without limiting the definition thereof, Problem
Merchandise shall include all Merchandise which (i) arrives with
insufficient paperwork, (ii) is delivered to HFS in the absence of a
delivery appointment or (iii) is faulty or damaged. HFS shall use its best
efforts to comply with the Company's written instructions regarding
handling and disposing of Problem Merchandise as set forth in the Service
Levels on EXHIBIT B and shall submit to the Company a report of Problem
Merchandise within two (2) Business Days of having received it. HFS shall
not include Problem Merchandise in the inventory of items available for
shipment to customers. The Company acknowledges that Problem Merchandise
cannot be stored indefinitely and that all Problem Merchandise shall be
removed within thirty (30) days of HFS notifying the Company of all
specific details relevant to the reasons for the classification of the
Merchandise as Problem Merchandise. HFS has the right to dispose of the
Problem Merchandise by returning the Merchandise to the Company on a
freight collect basis (provided that the Company has not provided HFS with
other directions within thirty (30) days following notice of such specific
details) or taking any other actions which are reasonable under the
circumstances; provided,
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however, that HFS shall follow the Company's reasonable directions with
respect to any other disposition (at the Company's expense) of the Problem
Merchandise.
(e) HFS acknowledges and the Company agrees that the Company shall be
solely responsible for selecting, purchasing, paying for and arranging for
the shipment to HFS of Merchandise, and HFS agrees that it shall not have
and shall not represent that it has any authority to undertake any of such
activities on the Company's behalf.
(f) In the event that items shipped by HFS to customers are damaged or
lost in shipment, HFS agrees to notify the Company, store damaged and
returned Merchandise pending inspection by the carrier and file tracers for
the lost shipments and claims for damaged and lost shipments which
originated from HFS.
(g) HFS reserves the right to refuse, without liability of any kind,
acceptance of Merchandise which, because of its condition, might cause, in
HFS's reasonable sole judgment, infestation, contamination, or damage to
the warehouse facility or to other goods in the custody of HFS. HFS shall
notify the Company of its refusal to accept any such Merchandise and the
reason for its refusal within two (2) Business Days of such refusal. If HFS
believes that any Merchandise has caused or may cause damage to the
warehouse facility or to any other goods in the custody of HFS or has
characteristics which make its storage illegal, HFS, after giving
reasonable notice to the Company, may dispose of the Merchandise in any
lawful manner and will incur no liability by reason of such disposal, and
the Company shall pay HFS any costs incurred by HFS in connection with such
disposal.
(h) All Merchandise in the possession of HFS shall be and remain the
exclusive property of the Company except as noted in Sections 13, 16 and 18
herein, and HFS acknowledges and agrees that it shall acquire no right,
title or interest in or to any Merchandise by reason of this Agreement
except as set forth in Sections 13, 16 and 18 herein. HFS shall not
transfer, assign, exchange, lease, encumber, pledge, or create a security
interest in or otherwise dispose of the Merchandise and shall not subject
the
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Merchandise to attachment, levy, or seizure by or on behalf of any creditor
of HFS, except as set forth in Sections 13, 16 and 18 hereof.
11. RISK OF LOSS.
(a) All risk of loss and damage to Merchandise from any cause prior to
receipt by HFS into, and from and after the removal by common carrier from,
the inventory at the HFS facility shall be borne by the Company. HFS shall
reimburse the Company at the Company's net Merchandise cost (i) [ ]* of all
Inventory Shrinkage which is equal to or less than [ ]*, (ii) [ ]* of all
Inventory Shrinkage which exceeds [ ]* but is equal to or less than [ ]*,
and (iii) [ ]* of all Inventory Shrinkage which exceeds [ ]*. For purposes
of this Agreement "INVENTORY SHRINKAGE" means the quotient which results
from dividing (A) the cumulative Variance (as defined below) between the
value of the Merchandise inventory as determined from the perpetual
inventory report on the requisite Count Date (as defined below) and the
value of the Merchandise inventory based upon a physical inventory or cycle
count (exclusive of markdowns and price adjustments) by (B) the total
Merchandise inventory receipts processed by HFS during the prior twelve
(12) months (or if such Count Date occurs prior to the first anniversary of
the date of the first mailing of the Catalog, the denominator of such
quotient shall be an amount equal to twelve (12) times the average monthly
Merchandise inventory receipts prior to such Count Date). For purposes of
this Section 11(a), "VARIANCE" shall mean the difference between the value
of the Merchandise inventory as determined from the perpetual inventory
report on any Count Date and the value of the Merchandise inventory
established by a cycle count or physical inventory on such date (the "COUNT
DATE"). The value of any adjustment made at any time to the perpetual
inventory report shall be added to or subtracted from, as the case may be,
the Variance for the purpose of calculating Inventory Shrinkage. HFS shall
make reasonable efforts to take reasonable care of the Merchandise
inventory.
(b) Notwithstanding anything contained herein to the contrary, the parties
acknowledge that HFS shall not be required to make any collection efforts
on the
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Company's behalf and shall share no risk with respect to any failure of the
Company to collect on any order.
12. TAXES.
All fees, costs, charges and other amounts payable to HFS hereunder for
Services rendered by HFS to the Company are exclusive of applicable taxes,
if any, which (other than income taxes of HFS) are the responsibility of
the Company. In addition, HFS shall calculate for each customer sale all
applicable sales taxes based on information supplied by the Company.
Attached hereto as EXHIBIT E is a list prepared by the Company of all
jurisdictions in which the Company is required to collect sales taxes,
which the Company shall promptly update as required to keep such
information current during the term of this Agreement, and the Company
shall be solely responsible for the accuracy of such information. All sales
tax funds and the accompanying forms shall be transmitted by the Company to
the appropriate state authorities. The Company shall be responsible for the
collection and payment of all sales taxes, the preparation and filing of
all sales tax documentation and the compliance with all sales tax laws. HFS
shall have no such responsibilities for payment or collection of any such
taxes unless otherwise required by law in which event payment thereof shall
be timely made. The Company shall indemnify HFS for all claims, suits,
actions, debts, damages, costs, charges and expenses, including court costs
and attorneys' fees, incurred by HFS due to the Company's failure to
properly and timely file and pay applicable sales, use and tangible
personal property taxes.
13. MONETARY DEFAULT.
If the Company defaults on the payment of any fees, charges, invoices or
other amounts due to HFS, except and only for portions of invoices disputed
in good faith by the Company, HFS shall (i) charge a finance charge of 1.5%
per month of such past due fees, charges, invoices or other amounts and
(ii) if such default is continuing, upon ten (10) days prior written notice
stop providing Services and performing its obligations under this Agreement
and/or terminate this Agreement. Amounts disputed in good faith by the
Company and the reasons therefor shall be reported to HFS in writing within
twenty one
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(21) days of receipt of the applicable invoice. HFS and the Company agree
to work diligently to resolve the dispute within thirty (30) days of the
receipt of such written notice by HFS. Once such dispute is resolved and to
the extent the Company owes any amount to HFS, if payment of such amount is
not made to HFS within ten (10) Business Days of the resolution of such
dispute, HFS will have the right to stop providing Services and/or
terminate this Agreement whereupon HFS shall have the right to institute
foreclosure proceedings against the Merchandise inventory or such other
collateral held by it and securing unpaid amounts owing to HFS under this
Agreement as well as any other rights available to HFS under the Uniform
Commercial Code.
14. OTHER DEFAULTS.
If either the Company or HFS believes the other party is in breach of any
of its non-monetary obligations under this Agreement due to any reason
other than force majeure, the party believing that such a breach by the
other party has occurred shall give written notice to the other party
specifying the nature of the breach (any such breach and any default in
payment under Section 13 hereof are sometimes referred to herein as a
"DEFAULT"). Such breaching party shall have fifteen (15) Business Days in
which to cure such breach or, if such breach cannot be completely cured
within fifteen (15) Business Days, a reasonable time to cure such breach as
long as the breaching party is diligently pursuing the cure of the breach;
provided, however, that with respect to a material breach relating to the
taking of telephone orders, the processing of mail orders, the receiving of
Merchandise into inventory or timely delivery of Merchandise to common
carriers for shipment, HFS shall have seven (7) days to cure such breach
or, if such breach cannot be completely cured within seven (7) days, a
reasonable time to cure such breach so long as the HFS is diligently
pursuing the cure of the breach.
15. FORCE MAJEURE.
Neither HFS nor the Company shall be liable for any delay or failure in
performance under this Agreement or interruption of service resulting,
directly or indirectly, from acts of God, civil or military authority, act
of public enemies, war, accidents, fire, explosions,
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earthquakes, floods, the elements, strikes or any similar cause beyond the
reasonable control of such party (a "FORCE MAJEURE"), so long as, following
the cessation of such cause, such party uses its reasonable efforts to
resume its performance hereunder. If HFS is unable to perform the Services
due to a Force Majeure, then HFS may out-source Services on a temporary
basis pursuant Section 4 hereof.
16. TERM AND TERMINATION.
(a) TERM. The initial term of this Agreement shall commence on August 1,
1997 (the "COMMENCEMENT Date") and shall expire on July 31, 2000 unless
earlier terminated in accordance with this Section or elsewhere in this
Agreement (the "INITIAL TERM"). This Agreement shall automatically be
renewed for one year terms commencing after the expiration of the Initial
Term and, thereafter, after the expiration of any renewal term unless HFS
or the Company provides the other with at least one hundred twenty (120)
days prior written notice of its election to terminate this Agreement at
the end of the then current term (the Initial Term and all renewal terms
are collectively referred to as the "TERM"). In addition to any other
rights which HFS may have under this Agreement or as a matter of law, in
the event of termination by either the Company or HFS, HFS shall be
entitled to all amounts owing to it under this Agreement and may hold the
Company assets and Merchandise in its possession until all sums owed to HFS
by the Company pursuant to this Agreement are paid to HFS; provided,
however, that the Company shall be allowed to substitute collateral
acceptable to HFS in place of Company assets in HFS's possession.
(b) EARLY TERMINATION.
(i) MONETARY DEFAULT. HFS shall have the termination rights described
in Section 13 hereof.
(ii) NON-MONETARY DEFAULT. If there occurs a non-monetary Default by a
party under this Agreement that is not cured within the applicable time
periods set forth in
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Section 14 hereof, then the non-defaulting party may terminate this
Agreement upon not less than forty-five (45) days prior written notice.
(iii) BANKRUPTCY. Either party may terminate this Agreement, effective
immediately upon giving written notice if the other party files a petition
in bankruptcy or files for a reorganization or for the appointment of a
receiver or trustee of all or substantially all of such party's property,
or makes an assignment or petitions for or enters into an arrangement for
the benefit of creditors, or if a petition in bankruptcy is filed against
the other party which is not discharged within ninety (90) days thereafter.
(iv) FORCE MAJEURE. In the event that following a Force Majeure, HFS
(with out-sourcing) is unable to perform at the Service Levels for a period
in excess of twenty (20) Business Days, the Company shall have the right to
terminate this Agreement.
(v) OTHER COMPANY TERMINATION RIGHTS. The Company shall have the
right to terminate this Agreement by providing HFS with written notice
thereof at least ninety (90) days prior to the second anniversary of the
Commencement Date in the event that the parties have not agreed upon
revised Transaction Rates prior to the date of such notice.
17. REPRESENTATIONS AND WARRANTIES.
(a) HFS AND THE COMPANY. HFS and the Company each hereby individually
represent and warrant that: (i) it has the full authority and legal right
to carry out the terms of this Agreement; (ii) the terms of this Agreement
will not violate the terms of any agreement, contract or other instrument
to which it is a party and no consent or authorization of any other person,
firm or corporation is a condition precedent to this Agreement; (iii) it
has taken all action necessary to authorize the execution and delivery of
this Agreement; and (iv) this Agreement is a legal, valid, and binding
obligation of HFS and the Company, as the case may be, enforceable in
accordance with its terms, except as limited by bankruptcy and other laws
of general application relating to or affecting the enforcement of
creditors' rights.
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(b) HFS. HFS hereby warrants and represents that, except to the extent set
forth in SCHEDULE 1:
(i) to its knowledge, HFS is in compliance in all material respects
with all applicable laws relating to employment and employment practices,
terms and conditions of employment, wages and hours and occupational safety
and health and is not engaged in any unfair labor practice within the
meaning of any applicable law; there is no unfair labor practice, charge or
complaint or any other matter against or involving HFS pending or, to the
knowledge of the HFS, threatened before any labor relations board (or
equivalent agency having jurisdiction), any court of law or any arbitration
board; there is no labor strike, dispute, slowdown, or stoppage actually
pending or, to its knowledge, threatened against HFS; and HFS has not
experienced any organized work stoppage or other labor difficulty; and
(ii) there are no disputes with underwriters under HFS's insurance
policies; each such policy is valid and enforceable in accordance with its
terms and is in full force and effect; there exists no Default by HFS under
any such policy, and there has been no misrepresentation or inaccuracy in
any application therefor, which Default, misrepresentation or inaccuracy
would give the insurer the right to terminate such policy, binder or
fidelity bond or to refuse to pay a claim thereunder; and HFS has received
no notice of cancellation or non-renewal of any such policy.
(c) THE COMPANY. The Company hereby warrants and represents that except as
otherwise set forth on SCHEDULE 2:
(i) it has, to the best of its knowledge, and will use its best
efforts to continue to have for the Term of this Agreement, all necessary
authority from all of the corporations, partnerships and individuals whose
products are offered for sale in any of the Company's catalogs, to use
their trademarks, service marks and other intellectual property for the
purposes of conducting the Company's business. The Company's business as
conducted or as currently proposed to be conducted does not and will not,
to the best of the Company's knowledge, cause the Company to infringe or
violate any
17
<PAGE> 21
patents, trademarks, service marks, trade names, copyrights, licenses,
trade secrets or other intellectual property rights of any other person or
entity.
(ii) it owns the initial Merchandise inventory free and clear of all
liens, restrictions, claims, charges, security interests or other
encumbrances of any nature whatsoever, including any chattel mortgages,
conditional sales contracts, collateral security arrangements and other
title or interest retention arrangements (a "LIEN").
18. COVENANTS OF THE COMPANY.
(a) CATALOG AND ORDER BLANK NOTATIONS. Unless otherwise agreed upon by the
parties, the Company shall conspicuously note in the Catalog and in all
order blanks separate telephone numbers for telemarketing and customer
service or an alternative mutually agreeable to the parties. In addition,
for all editions subsequent to the first Catalog edition, the Company shall
maintain two (2) colored blocks on the back of each Catalog and on the
order blanks within which an account number and a source code number (i.e.,
one number per block ) can be printed.
(b) LIENS. The Company hereby grants to HFS a first priority security
interest in the Merchandise held from time to time by HFS to secure the
obligations of the Company hereunder; provided, however, that HFS agrees to
release such security interest upon the reasonable request of the Company
in the event that the Company provides HFS collateral in substitution
therefore which is acceptable to HFS in HFS's sole discretion. The Company
shall execute all documents reasonably requested by HFS's legal counsel for
the perfection of such security interest. The Company shall not grant any
Lien to any third party on any Merchandise inventory without the prior
written consent of HFS which will not be unreasonably withheld.
19. INDEMNITY & LIABILITY.
(a) HFS agrees to indemnify and hold the Company harmless against any and
all claims, suits, actions, debts, damages, costs, charges, and expenses,
including without limitation court costs and reasonable attorneys' fees),
which the Company may at any
18
<PAGE> 22
time incur by reason of a material breach of this Agreement by HFS (a
"COMPANY LOSS"); provided, however, that any Company Loss that is covered
by either party's insurance shall be limited to applicable insurance
proceeds; and further provided that the Company shall not be entitled to
payment in respect of any Company Loss resulting from a claim not covered
in whole or in part by either party's insurance except to the extent that
Company Losses exceed $25,000 in the aggregate and then in an aggregate
amount not to exceed the aggregate Transaction Fees payable for the
calendar quarter in which the Default occurs.
(b) The Company agrees to indemnify and hold HFS harmless against any and
all claims (including claims by third party providers engaged by the
Company), suits, actions, debts, damages, costs, charges, and expenses,
including without limitation court costs and reasonable attorneys fees,
which HFS may at any time incur by reason of (i) a defect or claimed defect
in any Merchandise or (ii) a material breach of this Agreement by the
Company (an "HFS LOSS") other than a monetary Default covered by Section 13
hereof; provided, however, that HFS shall not be entitled to payment in
respect of any HFS Loss except to the extent that HFS Losses exceed $25,000
in the aggregate.
(c) The indemnifications set forth in Sections 19(a) and 19(b) shall apply
only to claims made against the respective indemnified party by third
parties. Either party hereto seeking indemnification by the other pursuant
to Section 19(a) or 19(b) shall promptly notify the other party of any
indemnifiable claim, and indemnifying party shall have the right to select
counsel and control the defense of the claim.
(d) Notwithstanding any other provision of this Agreement, neither party
shall be liable to the other for any lost profits, loss of goodwill or any
other special, incidental or consequential damages of any nature whatsoever
to the extent that any claims relating thereto are not payable from
insurance proceeds.
19
<PAGE> 23
20. INSURANCE.
The Company agrees to maintain insurance, at its sole cost and expense,
against loss or damage by fire or other casualty to the Company's inventory
on the premises of HFS, and against any claims and liability growing out of
either product liability, advertising liability or trademark or service
mark, patent or copyright infringement, and to list HFS as an additional
insured thereunder. Such insurance will be maintained with insurers
qualified to do business in the state of Tennessee. Attached hereto, as
EXHIBIT F, is a Certificate of Insurance for the Company reflecting such
coverage.
HFS shall not be responsible for the provision or maintenance of any
insurance coverage for the Merchandise or other inventory or for the
Company or its subsidiaries or respective businesses, products, goods and
property. HFS agrees to maintain at all times during the Term insurance
coverage at the levels set forth in the Certificate of Insurance for HFS
attached hereto as EXHIBIT G.
21. COMPLIANCE WITH LAWS.
The Company and HFS shall comply with all laws, rules and regulations,
whether local, state, or federal, applicable to the sale of Merchandise and
to the providing of Services, but only to the extent such laws, rules and
regulations are applicable to it, including without limitation the
applicable postal regulations and the Federal Trade Commission Rules on
Mail Order Merchandise.
22. RECORD INSPECTION.
The Company or its agents shall, during normal business hours, have the
right to inspect the Merchandise located at HFS's place of business, and
the Company shall, during normal business hours, have the right to inspect
the books and records of HFS pertaining to Merchandise and the Services
rendered by HFS to the Company pursuant to this Agreement.
20
<PAGE> 24
23. CONFIDENTIALITY.
(a) In the course of its performance of this Agreement, it is anticipated
that HFS and the Company will come into possession of certain proprietary
information belonging to the other, including but not limited to (i) in the
case of the Company, marketing records, merchandising records, customer
records and mailing lists and (ii) in the case of HFS, its financial
condition, cost structures, allocation and pass through procedures,
staffing levels, systems information and general business plans (all such
information relating to the Company or HFS being "CONFIDENTIAL INFORMATION"
and the party to whom such Confidential Information relates being the
"PROPRIETARY PARTY"). HFS and the Company agree that each will not, during
the Term hereof or thereafter, willfully or through gross negligence
divulge, furnish, disclose, or make accessible to any third party any of
the other's Confidential Information unless otherwise instructed by the
Proprietary Party in writing; provided, however, that Confidential
Information shall not include any information which (i) at the time of
disclosure by the other party or thereafter is generally available to and
known by the public other than as a result of its disclosure by such party,
(ii) was available to the other party on a non-confidential basis from a
source other than the Proprietary Party, provided that such source is not
bound by a confidentiality agreement, or contractual or fiduciary
obligation with the Proprietary Party, or (iii) has been independently
acquired or developed by the other party without violating any obligations
under this Agreement, or of any other agreement between the Company and HFS
or by which either party is bound for the benefit of the other party.
(b) HFS agrees that the Company's mailing list will not be made available
for use by HFS, its affiliates or anyone else without the Company's
specific prior written permission for each occurrence of such use
24. NOTICES.
Any and all notices and all communication provided for in this Agreement
shall be given in writing. Such notices and other communications shall be
deemed given when received, when delivered by hand, by confirmed facsimile
transmission or when
21
<PAGE> 25
deposited in the United States Mail, Registered or Certified, with proper
postage prepaid, and addressed as follows:
(a) If to HFS:
Harrison Fulfillment Services, Inc.
P.O. Box 23057
2515 East 43rd Street
Chattanooga, TN 37422-3057
Attn: Bruce G. Godfray, President
Facsimile: (615) 867-8495
with a copy to:
Witt, Gaither & Whitaker, P.C.
1100 American National Bank Building
Chattanooga, TN 37402
Attn: Ralph M. Killebrew, Jr.
Facsimile: (615) 266-4138
(b) If to the Company:
Alloy Designs, Inc.
444 Washington Blvd. Suite 6549
Jersey City, NJ 07310
Attn: Sam Gradess
Facsimile: (201) 420-1907
or to such other address as HFS or the Company may designate to the other
in writing.
25. ASSIGNMENT.
This Agreement shall inure to the benefit of and be binding upon the
parties and their successors and permitted assigns. This Agreement may not
be assigned by either party without the prior written consent of the other
party; provided, however, that, it may be assigned to any person, firm or
corporation which purchases all or substantially all of the assets of
either party or to any person, firm or corporation into which or with which
either party consolidates or merges.
22
<PAGE> 26
26. AMENDMENTS.
This Agreement shall not be modified or amended except by a written
agreement signed by authorized representatives of HFS and the Company.
27. GOVERNING LAW.
This Agreement has been entered into and shall be governed, construed, and
interpreted in accordance with the laws of the State of Tennessee without
reference to any conflicts of law principles.
28. ARBITRATION.
(a) Any controversy or claim arising out of or relating to this Agreement
or the breach thereof, whether common law or statutory, shall be settled
exclusively by arbitration in Chattanooga, Tennessee, using in either case
the American Arbitration Association. The arbitration shall be heard before
three arbitrators, one to be chosen by the Company, one to be chosen by
HFS, and the third to be chosen by those two arbitrators.
(b) The arbitrators shall apply the internal law of Tennessee in
determining the rights, obligations, and liabilities of the parties. The
arbitrators shall not have the power to alter, modify, amend, add to or
subtract from any term or provision to this Agreement, nor to grant
injunctive relief, including interim relief, of any nature. Such injunctive
relief may be pursued by HFS or the Company, as the case may be, from the
federal and state courts of the state of Tennessee. The availability of
such relief shall depend upon proofs and showings required under the
applicable law. In all other respects, the commercial rules of the American
Arbitration Association shall govern the arbitration. Judgment on the award
of the arbitrators may be entered by any court having jurisdiction to do
so, and the parties to the Agreement hereby irrevocably consent and submit
to the personal jurisdiction of the federal and state courts of the State
of Tennessee for this purpose as well as for any and all other purposes in
connection with this Agreement.
23
<PAGE> 27
(c) The failure or refusal of either party to submit to arbitration as
provided in this Agreement shall constitute a breach of this Agreement. If
judicial action is commenced in order to compel arbitration, and if
arbitration is in fact compelled, the party that shall have resisted
arbitration shall be required to pay to the other party all costs and
expenses, including reasonable attorneys' fees, that it incurs in
compelling arbitration. All other fees and charges of the American
Arbitration Association shall be borne as the arbitrators shall determine
in their award.
29. COMPUTER PROGRAMS.
The Company acknowledges that all computer programs used by HFS in
connection with the performance of its obligations under this Agreement are
the property of HFS (including but not limited to those developed by HFS
and modifications or new programs developed by HFS for the Company) and the
Company has no rights or interests whatsoever in such programs: provided,
however, that the Company is the owner of the data contained in such
programs which relate to the Merchandise and the sale thereof and HFS shall
provide such data to the Company or its representative in mutually
acceptable formats.
30. BUSINESS DAY.
For purposes hereof, "BUSINESS DAY" shall mean any day other than (1) a
Saturday or Sunday or (2) a day when the Federal Reserve Bank of Atlanta is
not open.
31. RELATIONSHIP.
Nothing contained in this Agreement shall be construed to imply a joint
venture, partnership or principal/agent relationship between the parties,
except where specifically provided for in this Agreement, and then only for
the limited purposes thereof. Except as specifically set forth herein,
neither party by virtue of this Agreement shall have any right, power or
authority to act or create any obligations, express or implied on behalf of
or for the use of any other party, and HFS and the Company shall not be
obligated, separately or jointly, to any third party by virtue of this
Agreement.
24
<PAGE> 28
32. HEADINGS.
The headings and section numbers appearing in this Agreement are inserted
only as a matter of convenience and in no way define, limit, construe or
otherwise describe the scope or intent of the sections of this Agreement.
33. SEVERABILITY.
If any one or more provisions of this Agreement shall be invalid, illegal
or unenforceable in any respect, the validity, legality and enforceability
of the remaining provisions contained herein shall not in any way be
affected or impaired; provided, however, that in such case the parties
agree to use their best efforts to achieve the purpose of the invalid
provision by a new legally valid provision.
34. NO WAIVER.
No failure or delay on the part of any party in the exercise of any right
hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of any such right preclude any other or further exercise
thereof or of any other right. All rights and remedies under this Agreement
are cumulative to, and not exclusive of, any rights or remedies otherwise
available.
35. FULL AGREEMENT.
This Agreement, and any exhibits and addenda attached hereto, contain and
embody the entire agreement of the parties hereto, and no representations,
inducements, or agreements, oral or otherwise made at any time between the
parties or with any third party relating to the subject matter hereof which
are not contained in this Agreement or in the exhibits or addenda, if any,
shall be of any force or effect.
36. COUNTERPARTS.
This Agreement may be executed in one or more counterparts, all of which
taken together shall be deemed one original.
25
<PAGE> 29
IN WITNESS WHEREOF, the Company has executed this Agreement effective the
date first above written and HFS has executed and accepted this Agreement
effective the same date.
COMPANY:
ALLOY DESIGNS, INC.
By: /s/ Sam Gradess
-----------------
Name: Sam Gradess
Title: Corporate Secretary
HFS:
HARRISON FULFILLMENT SERVICES, INC.
By: /s/ Bruce Godfray
-----------------
Name: Bruce Godfray
Title: President
26
<PAGE> 30
ALLOY DESIGNS, INC.
EXHIBIT A
SERVICES
--------
The Services shall include the following services plus any Special Services
and other services for which the parties shall have agreed upon the Transaction
Fees or other Fees therefor:
1. Access to, and interface with the HFS proprietary order entry fulfillment
system (the "SYSTEM").
2. Order Entry.
A. Telephone.
B. Mail.
C. Faxed orders.
D. Internet orders.
3. Respond to all order and non-order inquiries.
4. Open and sort mail.
5. Prepare and make bank deposits into accounts maintained solely in the name
of ______________________. All payments received by HFS from customers of
the Company are to be payable to the order of the Company and deposited
directly into such accounts.
6. Answer customer service telephone inquiries and resolve customer problems
during days and hours of operation specified in EXHIBIT B:
7. Make staff available for merchandise and catalog training at the Company's
reasonable request.
8. Make available to the Company an agreed set of reports and information (the
"Reports") (Attachment 1 to this Exhibit) via a telecommunications link at
such times and at such schedule as the parties shall agree (the "REPORTS
SCHEDULE").
9. Receive merchandise against purchase orders provided by the Company either
electronically or by hard copy as agreed between the parties.
A. Sign for the number of cartons received.
27
<PAGE> 31
B. Perform quantity checks, quality assurance checks and inspection.
a. Non-problem merchandise: process into active, reserve or
backorder status
b. Problem Merchandise:
1. Segregate
2. Notify Company, in such form and at such times as agreed
between the parties.
10. Pick/Pack/Ship Backordered Merchandise according to specifications set
forth by the Company.
11. Pick/Pack/Ship Active or Reserve Merchandise according to specifications
set forth by the Company.
12. Write Gift Cards.
13. Gift wrap.
14. Insert additional materials (package inserts) into outbound shipments per
Company's instructions.
15. Process customer exchanges.
16. Process Customer returns:
A. Receive returned Merchandise.
B. Inspect returned Merchandise.
C. Process returned Merchandise in accordance with mutually agreed upon
specifications with respect to (i) refurbishment, (ii) holding it
pending receipt of RA number, (iii) returning it to active or reserve
inventory, and (iv) setting it aside for liquidated or special
handling.
D. Notify Company of returned Merchandise in such form and such times as
agreed between the parties.
17. Fulfill Catalog Requests according to the Company's specifications.
18. Provide warehouse security.
19. Batch and process credit orders to Credit Card Processor at times as
specified by HFS to meet Service Levels. Deposit receipts to Company
designated accounts.
28
<PAGE> 32
20. Maintain and operate a Drop Ship program as agreed between the parties.
21. Apply policies and procedures for catalog fulfillment operation as agreed
between the Company and HFS.
22. On behalf of the Company, make payments from the Imprest Fund for invoices
approved by the Company for fulfillment related expenses.
23. Generate refund checks and credit card credits in accordance with the
Company's written instructions.
24. Issue gift certificates, discount coupons or other purchase incentives in
accordance with the Company's lawful written instructions.
25. Maintain sales tax schedules in accordance with the Company's lawful
written instructions.
26. Create and dispatch customer notices in accordance with legal requirements
or the Company's lawful written instructions.
27. Maintain customer file records on tape and remit such files to the
Company's service bureau or other parties in accordance with the Company's
lawful written instructions.
28. Maintain a backup and "disaster recovery" system and procedures in
accordance with HFS specifications. On an annual basis, perform tests of
these systems and procedures to Company satisfaction.
29. Provide new program start-up services as agreed between the parties.
30. Provide close-down services as described herein.
31. Provide for computer programming and system design on a mutually agreed
upon basis.
32. Weekly performance measurement of all activities listed in EXHIBIT B.
33. Weekly performance measurements of (i) abandon rate for calls in queue
between 20 and 45 seconds (after new telephone software implementation) and
(ii) percent of incoming calls that go on hold/that go into queue.
34. Respond to credit card charge backs after such charge backs are forwarded
to HFS by the Company.
35. Screen incoming checks for potential fraud. (It being understood that HFS
shall have no liability for failure to detect any such fraud.)
36. Establish e-mail based and web page based catalog request and order
fulfillment mechanisms.
29
<PAGE> 33
ALLOY DESIGNS, INC.
ATTACHMENT 1 TO EXHIBIT A
SAMPLE REPORT PACKAGE
CONTENTS
REPORT # TITLE FREQUENCY
- -------- ----- ---------
5030R1 Order/Shipment Analysis Daily
1010R1 Accum. Order/Shipment Analysis Daily
1240R1 Media File Listing Daily
1260R1 Source Code Total Response Analysis Daily
10Y0R1 Purchase Orders with Receipts Daily
11W0R1 Reports Analysis As required
11D0R1 Order Profit Analysis Daily
11L0R1 Purchase Order Requirements Weekly
1030R1 Summary Backorder Status Weekly
10W0R1 True Back Order Report Daily
11A0R1 Return/Exchange Analysis by Item Weekly/monthly
1080R1 Daily Sales & Cash Control Daily
20R0R1 Order Summary Weekly
20S0R1 Shipment Summary by Document Type Monthly
2010R1 Perpetual Inventory Monthly
4800R1 Inventory Transaction Register Weekly
1530R1-R3 Check Register Weekly
20P9R1 Sales Tax Report Monthly
30
<PAGE> 34
ALLOY DESIGNS, INC.
EXHIBIT B
SERVICE LEVELS
TELEMARKETING AND CUSTOMER SERVICE - will operate order entry on a 24 hour
basis seven (7) days per week except that if customers call between the hours of
12:00 midnight and 8:00 a.m. daily or on Christmas Eve or Christmas Day such
calls will be electronically prompted and answered.
It is HFS's policy to have all incoming customer calls answered by an
associate (except as noted above). However, HFS reserves the right to "block"
calls during certain peak hours of peak days.
<TABLE>
<CAPTION>
TRANSACTION TYPE NON PEAK DAYS PEAK DAYS
---------------- ------------- ---------
<C> <C> <C>
1. Abandon rate for calls in queue greater than 45 sec. less than [ ]*% less than [ ]*%
2. Average time to answer less than [ ]* sec. less than [ ]* sec.
3. In stock order shipment from index (index
4. = clean order by noon) less than [ ]* hrs less than [ ]* hrs.
5. Mdse. dock to inspect (index = clean
6. receipt by noon) less than [ ]* hrs. less than [ ]* hrs.
7. Mdse inspect to stock (index = clean
8. receipt by noon) less than [ ]* hrs. less than [ ]* hrs.
9. Returns processing to monetary trans
10. (index = receipt by noon) less than [ ]* hrs. less than [ ]* hrs.
11. Mail orders through entry (index =
12. clean receipt by noon) less than [ ]* hrs. less than [ ]* hrs.
13. Non order mail inquires (index =
14. clean inquiries received by noon) less than [ ]* hrs. less than [ ]* hrs.
15. Catalog request mailed (index =
16. clean receipt by noon) less than [ ]* hrs. less than [ ]* hrs.
</TABLE>
Peak Days shall be deemed to be the Company's eighty (80) highest telephone
order volume days during a calendar year as determined from the Annual Forecast
for such year as updated by Quarterly Forecasts and Revised Quarterly Forecasts,
provided that any such Revised Quarterly Forecast shall have been received by
HFS at least four (4) weeks prior to such Peak Day. Abandon rate for calls in
queue for a day shall be determined by dividing the number of Abandoned Calls
experienced in a day by the total calls entered into the system on such day. An
"Abandoned Call" means an incoming call with respect to which the caller hangs
up at least 45 seconds after the call enters the system. The average time to
answer is the time which
31
<PAGE> 35
commences when the call is entered in the HFS telephone switch and ends upon
commencement of call handling.
32
<PAGE> 36
ALLOY DESIGNS, INC.
EXHIBIT C
START-UP SERVICES
33
<PAGE> 37
ALLOY DESIGNS, INC.
EXHIBIT D
TRANSACTION RATES
34
<PAGE> 38
ALLOY DESIGNS, INC.
EXHIBIT D
TRANSACTION RATES
<TABLE>
<CAPTION>
--------------------------------------------------------
this sheet sent to alloy Alloy
Transaction Rates
--------------------------------------------------------
- -------------------------------------
revised date 07/23/97 7/23/97 12:04 PM
revised time 12:00 PM
- -------------------------------------
<S> <C> <C>
-------------------
MINIMUM INVOICE FIRST YEAR $ [ ]*
-------------------
MINIMUM INVOICE SECOND YEAR $ [ ]*
-------------------
MINIMUM INVOICE THIRD YEAR $ [ ]*
- ------------------------------------------------------------------------------------------------------------------
SYSTEM DEVELOPMENT AND START UP Basic Fulfillment System Set up $ [ ]* 80 hours
-------------------
Compare Systems and Develop detailed designed (Systems $ [ ]* 40 hours
Requirements Documents)
-------------------
Customized Software Changes and File Conversions (Data $ [ ]* per hour
Base Creation/Selection)
(Detailed costing to be estimated from systems
requirements document)
- ------------------------------------------------------------------------------------------------------------------
FEES
- ------------------------------------------------------------------------------------------------------------------
ORDERS Phone orders (includes two (2) line items/Order) $ [ ]* each
(Assumes 4 minute call)
-------------------
Phone Order Call Time in excess of a monthly average
of 240 seconds per call will be billed at a rate of $.[ ]* per second.
-------------------
Mail orders (includes two 2) lines times/order $ [ ]*
-------------------
review order time in 90 days from Transmittal orders (includes two (2) line $ [ ]* each
start up (first orders) items/order)(Email or Web)
-------------------
each
-------------------
Additional line item per order $ [ ]* each
-------------------
Credit card Authorization $ [ ]* each
-------------------
Check/Cash/Money Order processing $ [ ]* each
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
SHIPMENTS Shipments (ups, usps) (includes two (2) unit $ [ ]* each
items/shipment)
-------------------
Shipments of freighted items (per shipment) $ [ ]* each
-------------------
Additional line items per shipment $ [ ]* each
-------------------
Drop ship items $ [ ]* each
-------------------
Create Automated Shipment Invoices (Automated From $ [ ]* each
Negative Option Order Files)
-------------------
Drop shipment Confirmation (Confirms order and creates $ [ ]* each
AR)
-------------------
Guaranteed same-day shipment (optional) $ [ ]* each
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
RECEIVING/STOCKING Receiving/inspecting $ [ ]* each
-------------------
Stocking/recording into inventory $ [ ]* each
-------------------
Inventory storage Reserve Warehouse (Calculated from $ [ ]* per cubic foot/m
peak day of month on actual space utilized)
-------------------
Inventory Storage Active Pick (Calculated on cubic foot $ [ ]* per cubic foot/m
of pick location)
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 39
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
RETURNS/EXCHANGES Returns Electronic $ [ ]* each
-------------------
Returns to Harrison Fulfillment Services $ [ ]* each
-------------------
Exchange processing $ [ ]* each
-------------------
Returns/Exchanges on freighted items additional $ [ ]* each
-------------------
Return to sender $ [ ]* each
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
CALL TAGS/TRACERS UPS call tags $ [ ]* each
-------------------
Tracers $ [ ]* each
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
GIFTS Gift Wrap $ [ ]* each
-------------------
Gift Cards $ [ ]* each
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
CUSTOMER SERVICE Marketing lead calls (inbound) (Assumes 3 min calls) $ [ ]* each
-------------------
Non-order calls (inbound) (Assumes 3 min call) $ [ ]* each
-------------------
In bound Catalog Request (assumes 1.5 min call) $ [ ]* each
(separate 800 number needed)
-------------------
Inbound Catalog Request Voice mail Transcription $ [ ]* each
(separate 800 number needed)
-------------------
Requests are transcribed from
voice mail and keyed into
system Includes mailing the
catalog request
-------------------
Non-order calls (outbound) (Assumes 3 min call) $ [ ]* each
-------------------
Customer Service Call Time in excess of a monthly
average of 130 seconds will be billed at a rate of
$[ ]* per second. Inbound Catalog Request Call Time
in excess of a monthly average of 90 seconds per
call will be billed at rate of $[ ]* per second.
-------------------
Remote Monitoring $ [ ]* hour
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
MAIL ROOM Non-order Correspondence $ [ ]* each
-------------------
Customer Service Research (Chargebacks, NSF or Returned $ [ ]* each
Checks)
-------------------
Catalog Request Mail $ [ ]* each
-------------------
Fax transmissions $ [ ]* each
-------------------
Copies $ [ ]* each
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
FIXED FEES Dedicated Services Management Fee (DSG) $ [ ]*
-------------------
Weekly Administrative fee First Year $ [ ]* week
-------------------
Weekly Administrative fee Second Year $ [ ]* week
-------------------
Weekly Administrative fee Third Year $ [ ]* week
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
ACCOUNTS RECEIVABLE BILLING Invoices Manual (institutional purchase order billing) $ [ ]* each
-------------------
Credit card statement processing (manual) $ [ ]* each
-------------------
Credit card automated processing (Authorizations $ [ ]* each
payments)
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
PRINT MAIL Marketing lead package (announcement/advances) $ [ ]* each
-------------------
Monthly news letters $ [ ]* each
-------------------
Automated Statement/past due notices $ [ ]* each
-------------------
Automated FTC Notices and Correspondence $ [ ]* each
-------------------
Automated Shipments Invoices $ [ ]* each
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
BANKING Lock Box Check processing US (regular) $ [ ]* each
-------------------
Lock Box Check processing CAN (us funds) $ [ ]* each
-------------------
Canadian Checks drawn on Canadian Bank $ [ ]* each
-------------------
PO Box Rental $ [ ]* per year
-------------------
Returned Checks/Recleared Checks and Cash Payments $ [ ]* each
-------------------
Research $ [ ]* per request
-------------------
Deposits and Deposits balancing $ [ ]* each
----------------------------------------------------------------------------
FDIC DDA Maintenance $ [ ]* monthly
-------------------
Additional DDA Statements $ [ ]* each
-------------------
Foreign collection Expense $ [ ]* each
-------------------
Wire Transfers (debit) $ [ ]* each
-------------------
ASH transfers (debit) $ [ ]* each
-------------------
</TABLE>
2
<PAGE> 40
<TABLE>
<CAPTION>
<S> <C> <C>
These fees are based on charges by the Federal Reserve,
FDIC and/or other depository Institutions and are
subject to change when the respective expense is
changed. You will be notified promptly of any changes
in prices for these services.
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
OPTIONAL SERVICES Optional Services:
-------------------
Weekly Customer Satisfaction Survey: $ [ ]* per month
-------------------
Survey Insertion into shipment Report
analysis compilation & distribution
Weekly report provided to client and
reviewed by HFS management team Plus
postage and supplies cost
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
INTERACTIVE VOICE RESPONSE (Interactive Voice Response Scriptings):
-------------------
1 to 5,000 $ [ ]* per minute
-------------------
5,001 to 10,000 $ [ ]* per minute
-------------------
10,001 to 20,000 $ [ ]* per minute
-------------------
20,001 to 30,000 $ [ ]* per minute
-------------------
30,001+ $ [ ]* per minute
-------------------
Above IVR equipment rates are charged on per minute $ [ ]* per call
basis
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
SPECIAL PROJECTS FEES Special Projects Fees:
Special projects include physical
inventory, customer
service/telemarketing operator
training special inventory processing
(assembly, rework, refurbishment,
etc.)
and close down service.
All special projects are estimated by
HFS and must be approved in writing by
client before project commencement.
Labor PER HOUR
-------------------
Office, Regular $ [ ]* hour
-------------------
Office, Overtime $ [ ]* hour
-------------------
Office, Sunday/Holiday $ [ ]* hour
-------------------
Warehouse/Regular $ [ ]* hour
-------------------
Warehouse/Overtime $ [ ]* hour
-------------------
Warehouse/Sunday/Holiday $ [ ]* hour
-------------------
Supervisory, Regular $ [ ]* hour
-------------------
Supervisory, Overtime $ [ ]* hour
-------------------
Supervisory, Sunday/Holiday $ [ ]* hour
-------------------
Consulting Services $ [ ]* hour
-------------------
Executive Consulting Services $ [ ]* day
Approved HFS travel [ ]*
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
DATA BASE SELECTION Initial Customer file/order file load per thousand $ [ ]* per thousand
records
-------------------
Selection Table Set Up (Source Codes) (output id) $ [ ]*
-------------------
Test Selection With no Output $ [ ]*
-------------------
Live Execution of Data Base $ [ ]*
-------------------
Build Negative Option Order File $ [ ]*
-------------------
Interface to third party data base and drop shippers $ [ ]*
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
DATA PROCESSING Data processing support $ [ ]* order
-------------------
Computer programming services $ [ ]* per hour
-------------------
Computer script changes (report distribution changes, $ [ ]* per hour
tape set-up, job changes, etc.)
-------------------
Orders transmitted via Email (Base rate) $ [ ]*
-------------------
Orders transmitted via Web page (Base rate) $ [ ]* per month
-------------------
Email and Web Page Price Ranges (cost per order)
0 to 5000 Per Month $ [ ]* each
-------------------
5001 to 10,000 Per Month $ [ ]* each
-------------------
10,001 to 20,000 Per Month $ [ ]* each
-------------------
20,001 to 30,000 Per Month $ [ ]* each
-------------------
30,001 to > Per Month $ [ ]* each
-------------------
</TABLE>
3
<PAGE> 41
<TABLE>
<CAPTION>
<S> <C> <C>
Data Storage:
-------------------
Record storage fees - House file account record with $ [ ]* per month
inactivity > 12 months
-------------------
Order record (includes supplementary detail records) $ [ ]* per month
completed > 12 months
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
OTHER Other:
-------------------
Supplies $ [ ]*
-------------------
Materials $ [ ]*
-------------------
Stationary $ [ ]*
-------------------
Special Packaging Materials $ [ ]*
-------------------
Postage and Courier $ [ ]*
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS Remote communications lines and hardware $ [ ]*
-------------------
Telephone hardware (Voicemail Catalog Request) $ [ ]* each line
-------------------
(This rate is calculated by dividing the peak hour in a
month by 60 calls per hour)
-------------------
Telephone hardware (orders) $ [ ]* each line
-------------------
(This rate is calculated by dividing the peak hour in a
month by 15 calls per hour)
-------------------
Outbound long distance usage $ [ ]* hour
-------------------
Toll free 800 usage (WATS charges) $ [ ]* hour
-------------------
Canadian toll free usage (WATS charges) Costs varies on usage and
province
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
ASSUMPTIONS The following assumptions were made in
compiling the transaction rates:
Orders
(Positive Option) [ ]*
----------------
Telephone Percent [ ]%* Non-Order Call [ ]%*
outs
----------------
Mail Percentage [ ]%* Non-Order Call in [ ]%*
----------------
Transmittal Percent [ ]%* Catalog Request [ ]%*
Phone
----------------
Shipments per order [ ]* Non-Order [ ]%*
correspondence
----------------
Items per order [ ]* Call Tags [ ]%*
----------------
Return/exchanges [ ]%* Tracers [ ]%*
----------------
Returns Electronic [ ]%* Drop Ship % [ ]%*
----------------
Receiving [ ]%*
----------------
Gift Wrap Percentage [ ]%* Catalog Request [ ]%*
Mail
----------------
Gift Wrap Percentage [ ]%* Advances (Neg. [ ]%*
Option)
----------------
The pricing was developed to these base assumptions and is subject
to change if the assumptions change.
Transaction rates are double for the following holidays:
Christmas Eve, Christmas Day, New Year's Day, Memorial Day
Easter, July 4th, Labor day, Thanksgiving
APPROVED CARRIERS Approved Carriers: UPS, USPS, RPS, FEDX
Non Approved Carriers: Airborne Express, Burlington
Any Business Partner non-approved carriers will result in an
additional charge of $[ ]* a shipment
Any Business Partner requesting freight shipments will be charged a
per-shipment charge.
</TABLE>
<PAGE> 42
ALLOY DESIGNS, INC.
EXHIBIT E
SALES TAX JURISDICTIONS
35
<PAGE> 43
ALLOY DESIGNS, INC.
EXHIBIT F
COMPANY'S
CERTIFICATE OF INSURANCE
36
<PAGE> 44
ALLOY DESIGNS, INC.
EXHIBIT G
HFS'
CERTIFICATE OF INSURANCE
37
<PAGE> 45
ALLOY DESIGNS, INC.
SCHEDULE 1
HFS REPRESENTATION AND WARRANTY EXCEPTIONS
None
38
<PAGE> 46
ALLOY DESIGNS, INC.
SCHEDULE 2
COMPANY REPRESENTATION AND WARRANTY EXCEPTIONS
39
<PAGE> 1
Alloy Online, Inc. has omitted from this Exhibit 10.6 portions of the Agreement
for which Alloy Online, Inc. has requested confidential treatment from the
Securities and Exchange Commission. The portions of the Agreement for which
confidential treatment has been requested have been filed separately with the
Securities and Exchange Commission. Such omitted portions have been marked with
an asterisk.
EXHIBIT 10.6
[iName LOGO] CONFIDENTIAL
Agreement between Alloy Designs, Inc.
and iName, a Division of GlobeComm, Inc.
Agreement made this 19th day of June, 1998 ("Effective Date") by and between
Alloy ("Alloy"), a Delaware corporation with a principal place of business at
115 W. 30th St., Suite 304, New York, NY 10001and iName, a division of
GlobeComm, Inc., a Delaware corporation having its principal place of business
at 11 Broadway, Suite 660, New York, NY 10004 ("iName").
1.0 TERM
1.1 TERM. The Term of this Agreement shall be for a period of six
(6) months commencing on the Effective Date, with automatic
successive six (6) month renewals. Either party may cancel
this Agreement with written notice thirty (30) days prior to
the start of any new term.
1.2 CONTINUATION OF SERVICE. In the event this Agreement expires
or terminates, iName will continue to provide support services
for individuals who have registered for Alloy's Alloymail.com
e-mail service ("Users") during a 60-day transitionary period,
unless a shorter transitionary period is mutually agreed upon.
During such transitionary period iName shall transfer all User
data to Alloy or a third party chosen by Alloy to enable Alloy
or such third party to continue providing comparable email
service to these Users.
2.0 iNAME COMMITMENTS
2.1. EMAIL TRANSFER: iName will receive and incorporate all Alloy
existing Users' email addresses and passwords and all Inbox
mail from such Users.
2.2. DESIGN AND OPERATION OF EMAIL SITE. iName shall design with
Alloy's input and final approval a fully co-branded web site
offering email services ("Email Site") for Alloy which shall
have the "look and feel" of the Alloyonline(TM) Web Site
("Alloy Site") with the appropriate iName logo, trademark and
copyright notices. The Email Site shall be hosted on iName's
servers and shall integrate with the Alloy Site such that
Internet users signing up for email services at the Email Site
("Users") will be able to seamlessly travel between the Alloy
Site and the Email Site.
2.3. INFRASTRUCTURE. The Email Site shall be hosted on iName's
state-of-the-art fully redundant, multi-homed server network.
2.4. EMAIL SITE FEATURES. The Email Site shall have: i) a
fully-automated registration area where Users can sign-up for
web-based email services; ii) a log-in portal where Users can
access their accounts; iii) personalized web mail box
accounts; iv) an automated email customization center allowing
Users flexibility to modify personal information and customize
their email functionality at any time; v) an automated
customer support center; and vi) an area where Users can
sign-up for additional value-added email services. The Alloy
Site navigation bar will appear
1 of 5
<PAGE> 2
[iName LOGO] CONFIDENTIAL
throughout the Email Site enabling Users to access the Alloy
Site from their web mail box and other sections of the Email
Site.
2.5. EMAIL SERVICES. Users will have access to web-based email upon
signup, allowing them to send and receive email from the Email
Site.
2.6. VALUE-ADDED SERVICES. Users shall have the option of
purchasing or subscribing to additional value-added email
services as soon as they are available to other users in the
iName partner network including, but not limited to, email
forwarding, POP email services, email to fax, email to pager,
email virus scanning, email vacation notices, and language
translation.
2.7. EMAIL ADDRESS. Users will be able to signup for an email
address at the domain name alloymail.com
2.8. CONTRACTUAL RESPONSIBILITY. iName shall enter into contractual
relationships with Users for the provision of Email Services.
iName shall be solely responsible for the billing and
collection of revenues relating to Email Services. iName shall
ensure in its terms and conditions that Users understand that
iName, and not Alloy, is responsible for all obligations with
respect to the support of Email Services. To the extent that
Alloy subsequently assumes responsibility for operating the
service Alloy will assume contractual obligation for the Users
future email services and indemnify iName in a manner similar
to iName's indemnification herein for faults occurring while
Alloy or its designated party is running the service.
2.9. LOGIN PORTAL. iName will provide an email login portal to
Alloy that Alloy can place on the pages of the Alloy Site.
2.10. ACCEPTABLE USE POLICY. iName will strictly enforce the
Acceptable Use Policy contained in the iName Service Agreement
which prohibits the sending of unsolicited or harassing
emails.
2.11. CUSTOMER SUPPORT. iName, and not Alloy, shall be solely
responsible for providing support services to Users. Support
services shall include, but are not limited to:
ONLINE SUPPORT: iName shall maintain up-to-date support
information at the Email Site and offer Users automated
support technology including but not limited to personalized
email client setup screens and an automatic password
generation facility.
TELEPHONE SUPPORT: iName shall provide telephone customer
support during iName's normal business hours.
EMAIL SUPPORT: iName shall provide customer support via email
seven days per week.
2.12. USERREGISTRATION DATA. iName shall provide Alloy via email
with its choice of weekly or daily real-time reports
containing registration data for all Users who sign-up for
service at the Email Site. Such data transfer typically takes
2 - 4
2 of 5
<PAGE> 3
[iName LOGO] CONFIDENTIAL
weeks to implement from the launch date but once implemented
all historic data will be transferred along with the current
ongoing data. iName shall not sell or otherwise provide User
contact information or data specifically identifying any User
to any third party without the express written permission of
Alloy.
2.13. PRIVACY. iName shall not monitor or disclose the contents of
Users' private communications unless required to do so by law
or in the good faith belief that such action is necessary to
protect and defend iName's rights or property, or under
exigent circumstances to protect the personal safety of its
customers or the public.
3.0 ALLOY COMMITMENTS
3.1 LINKS. Alloy shall place on the Alloy Site a prominent link to
the Email Site including but not limited to an email log-in
portal on the home page "above the fold" and a "Free Email"
button on the Alloy Site navigation bar.
4.0 ECONOMICS
4.1 SET-UP FEE. In consideration for iName building the Email
Site, Alloy shall pay iName a set-up fee of [ ]* dollars
($[ ]*) following launch of the Email Site.
4.2 NET ADVERTISING FEES. iName shall be responsible for the sale
of the banner inventory at the Email Site. At Alloy's option,
it can elect to assume responsibility for selling the banner
advertising inventory. If it makes such election it will allow
iName to complete ad programs previously sold prior to such
date. If excess banner advertising inventory remains, it shall
be used to promote the Email Site and the Alloy Site in
similar proportion. In addition, either party may sell
non-banner advertising or sponsorships on the Email Site,
provided that all such other advertising or sponsorships shall
be subject to the approval of the other party, which shall not
be unreasonable withheld. "Net Advertising Fees" shall be
defined as the gross amounts actually collected by either
iName or Alloy for the sale of advertising, minus the amount
of sales and agency commissions (not to exceed [ ]*%), credits
and refunds. Subject to Section 4.4, all Net Advertising Fees
shall be calculated monthly and split [ ]* between iName and
Alloy. The shared Net Advertising Fees and Net Advertising
Fees receivable shall be reported by the collecting party to
the non-collecting party 30 days following the end of each
month. Net Advertising Fees will be paid to the non-collecting
party within 30 days at the end of each quarter.
4.3 NET SERVICES REVENUE. In addition to sharing Net Advertising
Fees [ ]*, iName will split [ ]* with Alloy all Net
Services Revenue iName collects from the Email Site Subject to
Section 4.4. "Net Services Revenue" is defined as revenue
collected from the sale of Value-Added Email Services and any
other services at the Email Site by iName, less any User
credits or refunds and any iName direct out-of-pocket costs to
unaffiliated third parties in connection with such services.
Net Services Revenue shall be calculated monthly and paid 30
days following the end of each month.
4.4 ALLOY PAYMENTS. Alloy will pay to iName a monthly fee of
[ ]* dollars ($[ ]*) for operating the Email Site. All Net
Advertising Fees and Net Services
3 of 5
<PAGE> 4
[iName LOGO] CONFIDENTIAL
Revenue generated in a month up to $[ ]* will first be paid
to Alloy as reimbursement for the monthly fee. Any amounts
over and above $[ ]* generated in a month will be split
[ ]* between iName and Alloy as described in Sections 4.2
and 4.3. Alloy's payments to iName will be due on a quarterly
basis on the 15th day of the second month of the quarter and
will cover the three months of the quarter.
4.5 PAYMENTS. All payments due shall be made 30 days after the end
of each month during the Term for payments accrued during such
month. With all payments, the paying party shall provide the
recipient party with reports containing information reasonably
satisfactory to the recipient to verify the paying party's
compliance with the provisions of this Section 4.0.
4.6 RIGHT TO AUDIT. The parties agree to allow each other to
perform audits of its records to determine compliance with its
obligations pursuant to this Section 4.0, provided that the
individual conducting the audit and the party requesting the
audit agree not to disclose any confidential information
revealed in the course of the audit. Any audit shall be
conducted during regular business hours at the offices of the
party being audited and shall not unreasonably interfere with
its business activities. Audits may be performed no more
frequently than twice per year and the party requesting the
audit shall give the other at least thirty (30) days' prior
written notice of each audit.
5.0 GENERAL
5.1 INDEMNIFICATION. iName shall defend, hold harmless, and
indemnify Alloy from any claims, losses, and expenses,
including reasonable attorney's fees, arising out of iName's
failure to comply with its obligations under this Agreement,
provided that Alloy promptly notifies iName of any iName
failures of which Alloy has knowledge. iName shall not be
responsible hereunder for costs, expenses, or settlements
incurred directly by Alloy after obtaining knowledge of
iName's failure and before notifying iName of same and giving
iName reasonable time to correct such failures where
reasonably feasible.
5.2 USER DATA OWNERSHIP. iName agrees that all User information
obtained through the Email site, which shall include, but not
be limited to, User Name, User address, and other User
demographic information ("User Data"), is and shall remain
the sole and exclusive property of Alloy, and as such iName
will not use or disclose the User Data without the express
written permission of Alloy for any purpose, including but
not limited to developing and/or improving any service to any
marketer primarily serving the teen market, including but
not limited to Wet Seal/Contempo Casuals, Claire's Stores
(Just Nikki), Delia's, Fulcrum Direct (Zoe), HMB Publishing
(Moxiegirl), Airshop, or Girlfriends L. A.
In the event this Agreement expires or terminates iName will
transfer to Alloy or Alloy's designated third party all User
Data in iName's possession at such time in accordance with the
process described in Section 1.2 of this Agreement. Upon
request from Alloy, iName will destroy any and all copies of
the User Data, provided that Alloy agrees to preserve its
record of such User Data for no less than four (4) years
following such destruction, and provide copies of any and all
such User Data to iName or a designated third party in the
event a need for such User Data arises out of legal
obligation. In the event that Alloy is unable to provide the
user Data as set forth due to its failure to preserve it,
Alloy shall be liable for any damages incurred by iName due to
it not being able to meet its legal obligations to produce the
User Data, and shall indemnify, defend and hold harmless iName
for any related claims or liability.
5.3 EXCLUSIVITY. Both parties agree not to carry knowingly on any
web property under its control linking to the Email Site, nor
on the Email Site itself, any advertising in any form,
including but not limited to banners, portals, links, buttons,
sponsorship pages, or promotions, from the following email
service competitors of iName: Hotmail, WhoWhere, MailExcite,
YahooMail, ProntoMail, BigFoot, Netcenter Mail, NetAddress,
USA.net, or Juno and from the following Alloy competitors
primarily serving the teen market: Wet Seal/Comptempo
Casuals, Claire's Stores (Just Nikki), Delia's, Fulcrum Direct
(Zoe), HMB Publishing (Moxiegirl), Airshop, or Girlfriends
L.A.
4 of 5
<PAGE> 5
[iName LOGO] CONFIDENTIAL
Alloy shall have the right to terminate this agreement in its
sole discretion in the event that iName enters into an
agreement to provide e-mail services to and/or to develop
and/or to improve any service to the following Alloy
competitors primarily serving the teen market: Wet
Seal/Contempo Casuals, Claire's Stores (Just Nikki), Delia's,
Fulcrum Direct (Zoe), HMB Publishing (Moxiegirl), Airshop, or
Girlfiends L.A.
5.4 ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement, and supersedes any and all prior agreements between
the parties. The Agreement may be amended only by a writing
signed by both parties.
5.5 EXECUTION BY FACSIMILE. An executed copy of this Agreement
transmitted via facsimile by the executing party and received
via facsimile by the other party shall have the same legal
force as an executed original version of this Agreement.
5.6 NO AGENCY RELATIONSHIP. The relationship created by this
Agreement is that of independent contractor. Nothing in this
Agreement shall be construed to make either party the partner,
agent, employee or representative of the other or grant any
third party any rights hereunder. Neither party has authority
to make any warranties or incur any liabilities or obligations
on behalf of or binding on the other party.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their duly authorized representatives as of the Effective Date.
ALLOY DESIGNS, INC. iNAME, A DIVISION OF GLOBECOMM, INC.
By: /s/ Matt C. Diamond By: /s/ Gary Millin
------------------- ---------------
Name: Matt C. Diamond Name: Gary Millin
Title: President Title: President
Date: 8/28/98 Date: 8/26/98
5 of 5
<PAGE> 1
EXHIBIT 10.7
ONESOFT CORPORATION ALLOY DESIGNS, INC.
ALLOY ONLINE, INC. HAS OMITTED FROM THIS EXHIBIT 10.7 PORTIONS OF THE AGREEMENT
FOR WHICH ALLOY ONLINE, INC. HAS REQUESTED CONFIDENTIAL TREATMENT FROM THE
SECURITIES AND EXCHANGE COMMISSION. THE PORTIONS OF THE AGREEMENT FOR WHICH
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED HAVE BEEN FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION. SUCH OMITTED PORTIONS HAVE BEEN MARKED WITH
AN ASTERISK.
SERVICES AGREEMENT CONTRACT NUMBER 2001-801
- --------------------------------------------------------------------------------
THIS AGREEMENT, is entered into on February 9, 1999 between ONESOFT CORPORATION
(hereinafter "OneSoft" having an office at 7010 Little River Turnpike, Suite
410, Annandale, VA 22003, and ALLOY DESIGNS, INC. (hereinafter "Alloy"), with
its principal office at 115 West 30th Street, Suite 304, New York, NY 10001.
WHEREAS, OneSoft is a service provider; and
WHEREAS, OneSoft thereby offers managed information and communication services
and facilities for its customers under the definitions, terms and conditions set
forth in this Agreement, and as in Scope(s) of Work that may from time to time
be attached, incorporated and/or amended hereto; and
WHEREAS, Alloy will utilize OneSoft's services and its facilities, and will
compensate OneSoft for said services as provided for and defined under this
Agreement and as in Scope(s) of Work that may from time to time be attached,
incorporated and/or amended hereto.
NOW THEREFORE, in consideration of the terms, mutual promises and agreements
contained herein, the parties do hereby agree as follows:
COMMERCE
1. OneSoft will work to integrate the AlloyOnline.com, or its successor,
order and inventory data transactions with the Harrison Fulfillment Center
(hereinafter HFS) systems by providing and accepting files to and from HFS at a
frequency specified by Alloy. OneSoft understands that Alloy is committed to
this initiative and will have the influence to make available the HFS management
and staff necessary to complete this initiative in an efficient manner.
2. OneSoft Commerce Server(TM) product business application objects support
flexible product display, shopping cart processing, and order processing.
OneSoft will work with Alloy to provide direction and additional alternatives or
modifications to these objects so that Alloy has the flexibility needed to
present product offerings effectively to its consumers.
3. OneSoft will provide additional order notification to Alloyonline.com
customers via email and on-line. Once an order is placed, customers will be
notified via email that their order is being processed. In order for customers
to check their order online they will need to create an account and log into
that account. OneSoft will set up such accounts at the direction of Alloy.
1
<PAGE> 2
ONESOFT CORPORATION ALLOY DESIGNS, INC.
CHAT
1. OneSoft's Java-based chat application currently provides administrative
monitoring and other features that are enabled when users and administrators are
logged into the system. OneSoft will provide more instruction and documentation
regarding the current features and functionality as requested by Alloy.
2. The Chat interface can be customized as necessary to meet the requirements
of the AlloyOnline.com users. OneSoft will work with Alloy to provide the
interface and features to this application that best meet the goals of Alloy,
subject to reasonable commercial limitations.
3. Celebrity Chat has been mocked-up per Alloy's requirements. This
functionality will be available for Alloy to use for its Celebrity chat events.
Additional monitoring functionality will be added to the Java Chat application
in the coming weeks and months.
COMMUNITY FUNCTIONALITY / PERSONALIZATION
1. OneSoft will work with Alloy to determine the way in which users will
register and log into their AlloyOnline.com accounts. Once Alloy is comfortable
with the user account creation and log in procedures, account registration and
authentication features of OneSoft's software will be activated.
2. OneSoft will work with Alloy to determine the type of user and content
profile data required to support personalized product offerings and
advertisements on the AlloyOnline.com system. Once users and content have been
profiled, OneSoft will activate personalization features of OneSoft's product to
serve targeted ads and product offerings.
3. OneSoft will work with Alloy to identify the business rules around
personalization functionality. OneSoft will also collaborate with third party
vendors to support additional personalization processing. Once the requirements
are defined, it will be implemented through attached Scopes of Work to this
Agreement. [
]*. Alloy will benefit directly from this.
CO-LOCATION
1. OneSoft will allocate up to [ ]* MB of Internet connectivity bandwidth for
the AlloyOnline.com system. At current and forecasted usage levels, this amount
of connectivity will provide fast access and distribution of AlloyOnline.com
system data. Should AlloyOnline.com require additional connectivity due to
increasing system requests, OneSoft will notify Alloy and, subject to Alloy's
consent, adjust the amount of required connectivity and associated service
pricing accordingly through attached Scopes of Work to this Agreement.
2. OneSoft will provide monthly AlloyOnline.com system traffic statistic
reports by page and section to Alloy's reasonable specifications.
3. OneSoft will provide tape management and backup services to Alloy's
reasonable specifications for the AlloyOnline.com system.
4. OneSoft will provide 24/7 monitoring of the AlloyOnline.com systems.
SERVICE/COST AGREEMENT
1. Alloy will pay $[ ] per month as a fixed fee.
2. This Services Agreement will be for a period of one (1) year from the date
of its execution.
3. OneSoft will provide maintenance to ensure that the above functionality is
working correctly and to acceptable commercial standards.
2
<PAGE> 3
ONESOFT CORPORATION ALLOY DESIGNS, INC.
4. In the event of non-renewal of this Service Agreement, OneSoft will use
reasonable best efforts to ensure the non-disruptive, safe and secure
transfer of user data.
5. OneSoft will provide Alloy 25 hours of "special project" time per month.
6. Alloy will retain sole, exclusive and continuing rights to all data within
its site(s) which shall include, but not be limited to, User name, User
address, and other User demographic information.
7. OneSoft will retain rights to all software object and source code that it
provides and creates (all third-party software provided by Alloy will of
course remain as Alloy Designs property).
ADDITIONAL SERVICES
OneSoft shall remain available to perform modifications and updates to the
System on a time and material basis. Such additional services will be available
as follows:
* Alloy shall inform OneSoft of a desired change or modification and OneSoft
will complete a project change request form with an estimate as to the
level of effort and fee.
* Alloy will sign the form to approve OneSoft to perform the work.
For example and illustration purposes only:
* As Alloy's site traffic increases and OneSoft's attention to analyze
system bottlenecks and to recommend system scalability.
* Alloy informs OneSoft and requests the changes.
* OneSoft reviews the system issues and calculates the level of effort to
scale the system then provides Alloy with the written project change
request form.
* Alloy decides to proceed by executing the form and returning it to OneSoft.
* OneSoft performs the services.
CONFIDENTIAL INFORMATION
1. ACKNOWLEDGMENT OF CONFIDENTIALITY. EACH PARTY HEREBY ACKNOWLEDGES THAT IT
MAY BE EXPOSED TO CONFIDENTIAL INFORMATION BELONGING TO OR SUPPLIED BY THE
OTHER PARTY OR RELATING TO ITS AFFAIRS INCLUDING, WITHOUT LIMITATION,
SOFTWARE, BUSINESS PLANS AND PROCEDURES, THE TERMS OF THIS AGREEMENT, THE
CLIENT GUIDE, AND OTHER CONFIDENTIAL INFORMATION (HEREINAFTER REFERRED TO
AS "CONFIDENTIAL INFORMATION"). CONFIDENTIAL INFORMATION DOES NOT INCLUDE
(a) INFORMATION ALREADY KNOWN OR INDEPENDENTLY DEVELOPED BY THE RECIPIENT
OUTSIDE THE SCOPE OF THIS PROJECT; (b) INFORMATION IN THE PUBLIC DOMAIN
THROUGH NO WRONGFUL ACT OF THE RECIPIENT, OR (c) INFORMATION RECEIVED BY
THE RECIPIENT FROM A THIRD PARTY WHO WAS FREE TO DISCLOSE IT.
2. COVENANT NOT TO DISCLOSE. WITH RESPECT TO THE OTHER PARTY'S
CONFIDENTIAL INFORMATION, AND EXCEPT AS EXPRESSLY AUTHORIZED HEREIN OR AS
REQUIRED BY A COURT OF COMPETENT JURISDICTION, THE RECIPIENT HEREBY AGREES
THAT DURING THE TERM HEREOF, AND AT ALL TIMES THEREAFTER, IT SHALL
COMMERCIALIZE OR DISCLOSE SUCH CONFIDENTIAL INFORMATION TO ANY PERSON OR
ENTITY, EXCEPT TO EMPLOYEES HAVING A "NEED TO KNOW" (AND WHO ARE THEMSELVES
BOUND BY SIMILAR NONDISCLOSURE RESTRICTIONS), AND TO SUCH OTHER RECIPIENTS
AS THE OTHER PARTY MAY APPROVE IN WRITING. IN NO EVENT SHALL EITHER PARTY
ATTEMPT TO DECOMPILE, DISASSEMBLE OR REVERSE ENGINEER THE OTHER PARTY'S
CONFIDENTIAL OR PROPRIETARY INFORMATION AND ANY INFORMATION DISCOVERED IN
VIOLATION OF THIS PROVISION SHALL BE TREATED AS CONFIDENTIAL INFORMATION
BELONGING EXCLUSIVELY TO THE OTHER PARTY. EACH PARTY SHALL USE AT LEAST THE
SAME DEGREE OF CARE IN SAFEGUARDING THE OTHER PARTY'S CONFIDENTIAL
INFORMATION AS IT USES IN SAFEGUARDING ITS OWN CONFIDENTIAL INFORMATION,
BUT IN NO EVENT SHALL LESS THAN DUE DILIGENCE AND CARE BE EXERCISED.
CHOICE OF LAW
THIS AGREEMENT SHALL BE INTERPRETED, GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE SUBSTANTIVE LAWS OF THE COMMONWEALTH OF VIRGINIA, EXCLUSIVE
OF ITS CHOICE OF LAW RULES. ANY PROCEEDING OR DISPUTE RELATING TO THIS AGREEMENT
OR THE TRANSACTIONS CONTEMPLATED HEREBY, SHALL BE INITIATED AND MAINTAINED IN
THE COURT SYSTEM OF SAID DESIGNATED STATE.
3
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ONESOFT CORPORATION ALLOY DESIGNS, INC.
WARRANTY DISCLAIMER
ONESOFT MAKES NO WARRANTY, EXPRESS OR IMPLIED, WITH RESPECT TO THE
SERVICES RENDERED OR THE RESULTS OBTAINED FROM ONESOFT'S WORK, INCLUDING WITHOUT
LIMITATION ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE. IN NO EVENT SHALL ONESOFT OR ITS SUPPLIERS BE LIABLE FOR: (1) ANY
DIRECT, INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES, EVEN IF ADVISED
OF THE POSSIBILITY THEREOF, AND REGARDLESS OF WHETHER ANY CLAIM IS BASED UPON
ANY AGREEMENT, NEGLIGENCE, WARRANTY, STRICT LIABILITY OR OTHER LEGAL OR
EQUITABLE THEORY; OR (2) ANY AMOUNTS OF DIRECT DAMAGES IN EXCESS OF THE
AGGREGATE OF THE FEES RECEIVED BY ONESOFT FROM ALLOY HEREUNDER, NOTWITHSTANDING
ANY FAILURE OF ESSENTIAL PURPOSES OF ANY LIMITED REMEDY.
LIABILITIES
ONESOFT SHALL NOT BE LIABLE FOR ANY AMOUNT EXCEEDING THE AMOUNT PAID BY
ALLOY FOR SERVICES DURING THE THIRTY (30) DAYS PRIOR TO THE EVENT GIVING RISE TO
THE ALLEGED CLAIM. EXCEPT FOR INDEMNIFICATION CLAIMS OR DISCLOSURE OF
CONFIDENTIAL INFORMATION, NEITHER PARTY SHALL BE LIABLE, WHETHER IN CONTRACT OR
TORT LAW (INCLUDING NEGLIGENCE) OR OTHERWISE, FOR ANY INDIRECT, INCIDENTAL OR
CONSEQUENTIAL DAMAGES (INCLUDING LOST SAVINGS, PROFIT OR BUSINESS INTERRUPTION
EVEN IF NOTIFIED IN ADVANCE OF SUCH POSSIBILITY) ARISING OUT OF, OR PERTAINING
TO THE SUBJECT MATTER OF THIS AGREEMENT, AND/OR ANY SCOPE(S) OF WORK ATTACHED
HERETO.
MODIFICATION, WAIVER & MISCELLANEOUS
This document, as well as other Scope(s) of Work that may be legally
attached hereto in the future, which are hereby incorporated by reference in
their entirety, constitute the entire agreement between the parties with respect
to the subject matter hereof, and supersede all other communications, whether
written or oral. This Agreement, and/or any Scope(s) of Work attached hereto,
may be modified or amended only by a writing signed by both parties, which may
be in the form of a Scope of Work. Any provision hereof found by a tribunal of
competent jurisdiction to be illegal or unenforceable shall be automatically
conformed to the minimum requirements of law and all other provisions shall
remain in full force and effect. Waiver of any provision hereof in one instance
shall not preclude enforcement thereof on future occasions. Headings are for
reference purposes only and have no substantive effect.
IN WITNESS WHEREOF, for adequate consideration and intending to be legally
bound, the parties hereto have caused this Agreement to be executed by their
duly authorized representatives.
ONESOFT CORPORATION ALLOY DESIGNS, INC.
By: By:
- --------------------------------- ----------------------------------
Name: Name:
- --------------------------------- ----------------------------------
Title: Title:
- --------------------------------- ----------------------------------
Date: Date:
- --------------------------------- ----------------------------------
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EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated March 5, 1999 (and to all references to our firm) included in or made a
part of this registration statement.
ARTHUR ANDERSEN LLP
New York, New York
May 7, 1999
