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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended April 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number: 0-26023
ALLOY ONLINE, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3310676
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
115 West 30th Street, #201, New York, NY 10001
(Address of Principal Executive Offices)
(Zip Code)
Registrant's telephone number, including area code: (212) 244-4307
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of May 31, 1999, the registrant had 14,231,774 shares of common stock,
$.01 par value per share, outstanding. All share numbers referenced in this
quarterly report reflect a 1.128-for-1 stock split of all outstanding shares of
Common Stock effected by the Company on May 13, 1999.
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ALLOY ONLINE, INC.
CONTENTS
PART I - FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Financial Statements
Balance Sheets, April 30, 1999 (unaudited) and January 31, 1999... 3
Statements of Operations, Three Months Ended April 30, 1999
(unaudited) and April 30, 1998 (unaudited)...................... 4
Statements of Cash Flows, Three Months Ended April 30,
1999 (unaudited) and April 30, 1998 (unaudited)................. 5
Notes to Financial Statements (unaudited)......................... 6
Item 2. Management's Discussion and Analysis of Financial Condition.......
and Results of Operations....................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................. 16
Item 2. Changes in Securities and Use of Proceeds......................... 16
Item 3 Defaults Upon Senior Securities................................... 16
Item 4. Submission of Matters to a Vote of Security Holders............... 16
Item 5. Other Information................................................. 17
Item 6. Exhibits and Reports on Form 8-K.................................. 17
SIGNATURES................................................................... 18
EXHIBIT INDEX................................................................ 19
EXHIBIT 27 - Financial Data Schedule......................................... 20
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ALLOY ONLINE, INC.
Balance Sheets
ASSETS
January 31, April 30,
1999 1999
----------- -----------
CURRENT ASSETS: (Audited) (Unaudited)
Cash and cash equivalents (includes
restricted cash of $182,000 and
$176,000 at January 31, 1999 and
April 30, 1999, respectively) $ 2,983,283 $ 3,994,817
Accounts receivable, net 145,476 141,722
Stock subscription receivable 2,500,000 --
Inventories, net 810,354 614,418
Other current assets 458,687 788,283
----------- -----------
TOTAL CURRENT ASSETS 6,897,800 5,539,240
Property and equipment, net 178,017 305,075
Deferred financing costs, net 125,851 112,367
Deferred registration costs -- 377,015
Other assets 205,387 447,784
----------- -----------
TOTAL ASSETS $ 7,407,055 $ 6,781,481
=========== ===========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,558,477 $ 2,843,526
Current portion of capital lease
obligation 73,178 80,863
----------- -----------
TOTAL CURRENT LIABILITIES 1,631,655 2,924,389
Promissory notes, net of unamortized
discount 3,945,122 4,062,637
Capital lease obligation, less current
portion 40,218 24,558
Series A Convertible redeemable preferred
stock; $.01 par value; 1,678,286 shares
authorized; 1,487,843 shares issued and
outstanding 4,836,387 4,844,246
----------- -----------
STOCKHOLDERS' (DEFICIT) EQUITY:
Common Stock; $.01 par value; 11,500,000
shares authorized; 8,479,727 and
8,842,208 shares issued and
outstanding, respectively 84,797 88,422
Additional paid-in capital 5,441,012 6,194,422
Accumulated deficit (8,347,241) (10,649,022)
Deferred compensation (224,895) (708,171)
----------- -----------
TOTAL STOCKHOLDERS' (DEFICIT) EQUITY (3,046,327) (5,074,349)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
(DEFICIT) EQUITY $ 7,407,055 $ 6,781,481
=========== ===========
The accompanying notes are an integral part of these financial statements
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ALLOY ONLINE, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
For the three months
ended April 30,
1998 1999
----------- -----------
NET MERCHANDISE REVENUES $ 1,352,390 $ 2,391,477
SPONSORSHIP AND OTHER REVENUES 1,037 162,791
----------- -----------
TOTAL REVENUES 1,353,427 2,554,268
COST OF GOODS SOLD 905,824 1,248,857
----------- -----------
GROSS PROFIT 447,603 1,305,411
----------- -----------
OPERATING EXPENSES:
Selling and marketing 1,517,655 2,610,052
General and administrative 264,781 918,848
----------- -----------
TOTAL OPERATING EXPENSES 1,782,436 3,528,900
----------- -----------
LOSS FROM OPERATIONS (1,334,833) (2,223,489)
INTEREST INCOME (EXPENSE), NET 22,067 (78,292)
----------- -----------
NET LOSS $(1,312,766) $(2,301,781)
=========== ===========
NET LOSS PER COMMON SHARE: (NOTE 4)
Basic $ (.15) $ (.27)
=========== ===========
Diluted $ (.15) $ (.26)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 8,479,727 8,711,878
=========== ===========
Diluted 8,953,880 8,953,880
=========== ===========
The accompanying notes are an integral part of these financial statements
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ALLOY ONLINE, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
For the three months
ended April 30
1998 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,312,766) $(2,301,781)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 2,083 27,565
Amortization of deferred financing costs -- 31,944
Compensation charge for issuance of options 45,000 284,095
Accrued interest on promissory notes -- 102,201
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (4,177) 3,754
Inventories, net (344,344) 195,936
Other current assets (403,950) (329,596)
Other assets (108,336) (5,926)
Increase in:
Accounts payable and accrued expenses 756,605 1,285,048
----------- -----------
Net cash used in operating activities (1,369,885) (706,760)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (12,019) (135,062)
Purchase of domain name and mailing list -- (250,000)
----------- -----------
Net cash used in investing activities (12,019) (385,062)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred registration costs -- (377,015)
Net proceeds from stock subscription
receivable -- 2,496,964
Payments of capital lease obligation (7,552) (16,593)
----------- -----------
Net cash provided by financing activities (7,552) 2,103,356
----------- -----------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (1,389,456) 1,011,534
CASH AND CASH EQUIVALENTS, beginning of period 2,320,548 2,983,283
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 931,092 $ 3,994,817
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITY:
Purchase of computer equipment under
capital lease $ 107,253 $ 6,033
=========== ===========
Exercise of stock options -- 3,625
=========== ===========
Deferred compensation -- $ 767,371
=========== ===========
The accompanying notes are an integral part of these financial statements
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ALLOY ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS
1. FINANCIAL STATEMENT PRESENTATION
The accompanying financial statements have been prepared by Alloy
Online, Inc. ("Alloy"), without audit. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary
to present fairly the financial position, results of operations and cash
flows at April 30, 1999 and for all periods presented have been made.
The results of operations for the period ended April 30, 1999 are not
necessarily indicative of the operating results for a full year.
Certain information and footnote disclosures prepared in accordance with
general accepted accounting principles and normally included in the
financial statements have been condensed or omitted. It is suggested
that these financial statements and notes be read in conjunction with
the financial statements and notes related to the Company's fiscal year
ended January 31, 1999 included in Alloy's Registration Statement on
Form S-1 (Registration No. 333-74159) declared effective by the
Securities and Exchange Commission on May 13, 1999.
2. BUSINESS
Alloy was incorporated in the State of Delaware on January 22, 1996 and
is a leading Web site serving the unique interests and tastes of the
high growth Generation Y (10 to 24 year olds) marketplace. 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.
3. STOCK OPTIONS
In the three month period ended April 30, 1999, options to purchase
84,600 shares of common stock were granted to three employees of Alloy.
These options will become exercisable over a period from two months to
four years from the date of grant. The exercise price of each option was
$0.60 per share.
The total compensatory cost associated with the granting of these
options is $767,000, as calculated pursuant to Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees". Of
this amount, $270,000 has been recognized as compensation expense during
the three months ended April 30, 1999, in accordance with the vesting
provisions of these options. The remaining $497,000 has been included in
deferred compensation and will be charged to expense in accordance with
the vesting provisions of these options as the employee services are
performed.
Additionally, options to purchase 362,481 shares of Alloy's common stock
were exercised during the three months ended April 30, 1999. These
options had a weighted average exercise price of $.67 per share.
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ALLOY ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS
4. NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net
loss per share:
THREE MONTHS ENDED
APRIL 30,
-----------------------
1998 1999
---- ----
Numerator:
Net loss $ (1,312,766) $(2,301,781)
Accretion of preferred stock -- (10,895)
------------ -----------
Net loss available to common
stockholders $ (1,312,766) $(2,312,676)
Denominator:
Basic weighted average shares
outstanding 8,479,727 8,711,878
Nominal issuances of stock
options 474,153 242,002
------------ -----------
Diluted weighted average shares
outstanding 8,953,880 8,953,880
============ ===========
Basic net loss per share $ (.15) $ (.27)
============ ===========
Diluted net loss per share $ (.15) $ (.26)
============ ===========
Alloy has applied the provisions of SFAS No. 128, "Earnings Per Share"
in the above calculations. 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. Accordingly, the impact
of the 84,600 options to purchase Alloy's common stock granted during
the three months ended April 30, 1999 has been included in the
computation for all periods presented.
The Series A Convertible Redeemable Preferred Stock that is convertible
into 1,678,286 shares of Alloy's common stock, as well as 517,261
warrants to purchase Alloy's common stock have been excluded from the
above calculations as the impact of their inclusion would be
anti-dilutive.
5. 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 (the
"Offering"). Additionally, in April 1999, Alloy's stock option plan was
amended to reserve up to 4,000,000 shares of Common Stock for issuance
under the plan, upon and subject to the consummation of the Offering.
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ALLOY ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS
In April 1999, Alloy restated its Certificate of Incorporation such
that, subject to the consummation of the Offering, 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. In May 1999, Alloy effected a 1.128-for-1 common stock split. 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 stock split discussed herein.
In May 1999, Alloy issued 3,700,000 shares of its common stock and
received approximately $50.2 million in proceeds, net of underwriting
discounts and expenses, upon the successful completion of the Offering.
Upon the consummation of the Offering, the Series A Convertible
Redeemable Preferred Stock was converted into 1,678,286 shares of common
stock. After the closing of the Offering on May 19, 1999, Alloy repaid
in full principal and accrued interest totaling $4,212,000 on
outstanding promissory notes issued in May 1998.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
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. In May 1999, we issued 3,700,000
shares of common stock in our initial public offering (the "Offering") and
received approximately $50.2 million in net proceeds, after deduction of
underwriter's commissions and discounts and expenses related to the Offering.
We incurred net losses of approximately $118,000 for the fiscal year
ended January 31, 1997, $1.9 million for the fiscal year ended January 31, 1998,
$6.4 million for the fiscal year ended January 31, 1999 and $2.3 million for the
fiscal quarter ended April 30, 1999. The net losses 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.
RESULTS OF OPERATIONS
The following table sets forth the statement of operations data for the
periods indicated as a percentage of revenues. Any trends reflected by the
following table may not be indicative of future results.
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THREE MONTHS ENDED APRIL 30,
----------------------------
1998 1999
---- ----
Net merchandise revenues 99.9% 93.6%
Sponsorship and other revenues 0.1 6.4
----- -----
Total revenues 100.0 100.0
Cost of goods sold 66.9 48.9
----- -----
Gross profit 33.1 51.1
Operating expenses:
Selling and marketing 112.1 102.1
General and administrative 19.6 36.0
----- -----
Total operating expenses 131.7 138.1
----- -----
Loss from operations (98.6) (87.0)
Interest income (expense), net 1.6 (3.1)
----- -----
Net loss (97.0)% (90.1)%
===== =====
COMPARISON OF THREE MONTHS ENDED APRIL 30, 1998 AND 1999
Revenues
Merchandise Revenues. Net merchandise revenues increased 76.8% from $1.4
million in the three months ended April 30, 1998 to $2.4 million in the three
months ended April 30, 1999. The increase in merchandise sales in the three
months ended April 30, 1999 was due primarily to the significant increase in
orders driven by our expanded database of Generation Y buyers and prospects to
which we marketed in the quarter.
Sponsorship and Other Revenues. Sponsorship and other revenues amounted
to $163,000 in the three months ended April 30, 1999 as compared to immaterial
revenues in the three months ended April 30, 1998. Programs to take advantage of
the increased number of visitors to our Web site and our introduction of new
online services did not begin generating material revenue until the third
quarter of fiscal 1998.
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 37.9% from $906,000 in the three months ended April 30,
1998 to $1.2 million in the three months ended April 30, 1999. The increase in
cost of goods sold was due primarily to the increase in product sales volume.
Alloy's gross profit as a percentage of total revenues increased from 33.1% in
the three months ended April 30, 1998 to 51.1% in the three months ended April
30, 1999 due to strong retail demand for our merchandise offerings, tight
inventory control and growing high margin sponsorship and other revenues.
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; and expenses related to the development, maintenance and marketing of our
Web site. These expenses increased 72.0% from $1.5 million in the three months
ended April 30, 1998 to $2.6 million in the three months ended April 30, 1999
due to the increased costs incurred in marketing to our expanded database,
increased Web site promotion and development, and the hiring of selling and
marketing staff which included a $117,000 non-cash charge in the three months
ending April 30, 1999 related to issued stock options. As a percentage of total
revenues, our selling and marketing expenses declined from 112.1% in three
months ended April 30, 1998 to 102.1% in the three months ended April 30, 1999.
Improved efficiencies in our fulfillment operations due to our renegotiated
fulfillment services contract and the increased percentage of orders and catalog
requests coming through our Web site offset increased expenditures on Internet
advertising programs and sales and marketing personnel.
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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 management personnel, as well as support services and professional
service fees. These expenses increased 247.0% from $265,000 in the three months
ended April 30, 1998 to $919,000 in the three months ended April 30, 1999. As a
percentage of total revenues, our general and administrative expenses increased
from 19.6% in the three months ended April 30, 1998 to 36.0% in the three months
ended April 30, 1999. The increase in general and administrative expenses was
driven by an increase in compensation expense for additional personnel to handle
our growing business, together with expenses incurred in anticipation of
becoming a public company, such as professional fees and public relations costs.
Compensation expense for the three months ending April 30, 1999 included a
$167,000 non-cash charge related to issued stock options. 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 $1.3 million in the
three months ending April 30, 1998 to $2.2 million in the three months ending
April 30, 1999.
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 $22,000 in the three months
ending April 30, 1998 due to our cash balances resulting from previous common
stock offerings. In the three months ending April 30, 1999, we incurred net
interest expense of $78,000 due to the interest expense resulting from our
issuance of promissory notes in May 1998, which exceeded our interest earned on
cash balances held.
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. Through April 30, 1999, we received approximately $13 million in
net proceeds from the sale of common stock, convertible preferred stock and
promissory notes. At April 30, 1999, we had approximately $4.0 million in cash
and cash equivalents. In May 1999, we raised approximately $50.2 million in net
proceeds upon the closing of the Offering. Our principal commitments at April 30
consisted of accounts payable and 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 $1.4 million in the three
months ended April 30, 1998 and $707,000 in the three months ended April 30,
1999. The principal use of cash in both periods was to fund our losses from
operations.
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Cash used in investing activities has consisted of capital expenditures
for computers, office furniture and equipment and the acquisition of certain
intangible assets. Reflecting the increased pace of business growth and Web site
traffic, our capital expenditures rose from $12,000 in the three months ended
April 30, 1998 to $135,000 in the three months ended April 30, 1999. In the
three months ended April 30, 1999 we also acquired a Web site domain name and a
customer mailing list in separate transactions for a total of $250,000.
Net cash provided by financing activities was insignificant in the three
months ended April 30, 1998 as we did not raise outside capital during this
period. In the three months ended April 30, 1999, we received the second $2.5
million cash installment from the sale of our Series A Convertible Preferred
Stock to Brand Equity Ventures, and we incurred approximately $377,000 of costs
associated with our initial public offering.
Upon the consummation of the Offering in May 1999, all outstanding
Series A Convertible Redeemable Preferred Stock was converted into 1,678,286
shares of common stock. After the closing of the Offering on May 19, 1999, the
principal and accrued interest of $4.2 million on our promissory notes issued in
May 1998 was repaid.
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
in light of the Offering which raised net proceeds of $50.2 million in May 1999,
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 at least the fiscal year ending January 31, 2001. 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.
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 provided by the U.S. Postal Service on its Web
site, as of April 30, 1999, 95% of the U.S. Postal Service's mission-critical
systems were reported to be remediated. 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.
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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 by September 1999.
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, 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.
13
<PAGE> 14
FORWARD LOOKING STATEMENTS
This report may contain forward-looking statements that involve risks
and uncertainties, including statements regarding our ability to generate
multiple revenue streams and increase visitors to our Web Site, our ability to
capitalize on our sales and marketing efforts, our ability to build the Alloy
brand name and develop our on-line community, our web site's appeal to
marketers, our ability to meet anticipated cash needs for working capital and
capital expenditures through the fiscal year ending January 31, 2001, and the
Year 2000 compliance of our internal systems and third-party systems. Our actual
results could differ materially from those projected in the forward-looking
statements and reported results should not be considered an indication of our
future performance. Factors that might cause or contribute to such differences
include, among others, our expected future losses, our planned online and
traditional marketing campaigns may not attract sufficient additional visitors
to our web site, we lack experienced management and personnel, we may fail to
establish an effective internal sales organization to attract sponsorship and
advertising revenues, we may not be able to adapt as internet technologies and
customer demands continue to evolve, and we would lose revenues and incur
significant costs if our systems or material third-party systems are not Year
2000 compliant.
14
<PAGE> 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Alloy was not exposed to material market risks associated with
activities in derivative financial instruments, other financial instruments or
commodity instruments as of the end of its most recent fiscal quarter.
15
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a) On May 13, 1999, Alloy effected a 1.128-for-1 stock split of all
outstanding shares of Common Stock.
(b) Not applicable.
(c)-(d) On May 13, 1999, in connection with Alloy's initial public
offering, a Registration Statement on Form S-1 (No. 333-74159) was declared
effective by the Securities and Exchange Commission, pursuant to which 3,700,000
shares of Common Stock were offered and sold for the account of Alloy at a price
of $15.00 per share, generating gross offering proceeds of $55.5 million. The
managing underwriters of the offering were BancBoston Robertson Stephens, Volpe
Brown Whelan & Company, Dain Rauscher Wessels, a division of Dain Rauscher
Incorporated, and Ladenburg Thalmann & Co. Inc. After deducting approximately
$3.9 million in underwriting discounts and commissions and an estimated $1.4
million in other related expenses, the net proceeds to Alloy were approximately
$50.2 million. The proceeds have been invested, pending their use as described
below, in a portfolio of investment grade fixed income securities.
Alloy used $4,212,084 of the net proceeds to repay in full principal
and accrued interest under the 10% promissory notes issued in May 1998. In
connection with such note repayments, we paid the following amounts to the
individuals and entity listed below. The relationship of such parties is also
indicated below.
NOTE HOLDER POSITION AMOUNT
----------- -------- ------
- Peter M. Graham Director $276,489.80
- Peter M. Graham Money Purchase Plan
c/o Peter M. Graham Director $276,489.80
- The LLZ 1997 Trust,
Peter M. Graham, Trustee Director $552,979.60
- Neil Vogel Officer $ 38,708.57
We expect to use the remaining proceeds to expand our marketing efforts
and sales force, improve our Internet and systems infrastructure and support,
and for working capital and general corporate purposes. Alloy may, when the
opportunity arises, use an unspecified portion of the net proceeds to acquire or
invest in complementary businesses, products and technologies. However, we have
no present understandings, commitments or agreements with respect to any
material acquisition.
During the quarter ended April 30, 1999, Alloy issued an aggregate of
362,481 shares of Common Stock to employees and a consultant upon the exercise
of outstanding options for an aggregate offering price of $245,009. These shares
were offered and sold pursuant to the exemption from registration afforded by
Rule 701 under the Securities Act of 1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On March 4, 1999, Alloy's stockholders acted by unanimous written
consent in lieu of a special meeting to amend the Restated Certificate of
Incorporation to change the name of the company to Alloy Online, Inc.
On April 26, 1999, Alloy's stockholders acted by unanimous written
consent in lieu of a special meeting to approve the following matters:
16
<PAGE> 17
(i) approve the Restated Certificate of Incorporation and Restated
Bylaws;
(ii) amend and restate the 1997 Employee, Director and Consultant
Stock Option Plan; and
(iii) approve and adopt the 1999 Employee Stock Purchase Plan.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS
Exhibit No. 3.1 Restated Certificate of Incorporation (filed as Exhibit 3.1 to
Registration Statement on Form S-1, No. 333-74159, and
incorporated herein by reference).
Exhibit No. 3.2 Restated Bylaws (filed as Exhibit 3.2 to Registration
Statement on Form S-1, No. 333-74159, and incorporated herein
by reference).
Exhibit No. 4.1 Form of Common Stock Certificate (filed as Exhibit 4.1 to
Registration Statement on Form S-1, No. 333-74159, and
incorporated herein by reference).
Exhibit No. 27 Financial Data Schedule
(B) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the quarter ended April 30,
1999.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ALLOY ONLINE, INC.
Date: June 14, 1999 By: /s/ Samuel A. Gradess
--------------------------------
Samuel A. Gradess,
Chief Financial Officer
(Principal Accounting and
Financial Officer)
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<PAGE> 19
ALLOY ONLINE, INC.
EXHIBIT INDEX
Exhibit No. 3.1 Restated Certificate of Incorporation (filed as Exhibit 3.1 to
Registration Statement on Form S-1, No. 333-74159, and
incorporated herein by reference).
Exhibit No. 3.2 Restated Bylaws (filed as Exhibit 3.2 to Registration
Statement on Form S-1, No. 333-74159, and incorporated herein
by reference).
Exhibit No. 4.1 Form of Common Stock Certificate (filed as Exhibit 4.1 to
Registration Statement on Form S-1, No. 333-74159, and
incorporated herein by reference).
Exhibit No. 27 Financial Data Schedule
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