<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 10, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
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 PER SHARE(2) PRICE(2) REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value per $ $46,000,000 $12,788
share................................
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 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(o) under the Securities Act.
------------------------
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 , 1999
[LOGO]
SHARES
COMMON STOCK
Alloy Online, Inc. is offering 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 $ and $ 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........................................... $ $
</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 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
[GRAPHICS:
INSIDE FRONT COVER AND INSIDE GATEFOLD:
VARIOUS PRODUCT SAMPLES, PICTURES OF ASSORTED SECTIONS OF OUR WEB SITE, OUR
LOGO AND SAMPLE PAGES FROM OUR CATALOG]
<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. IN THIS PROSPECTUS, "ALLOY,"
"WE," "US" AND "OUR" REFER TO ALLOY ONLINE, INC. (UNLESS THE CONTEXT OTHERWISE
REQUIRES).
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.................................................... 28
Management.................................................. 41
Certain Transactions........................................ 46
Principal Stockholders...................................... 49
Description of Capital Stock................................ 51
Shares Eligible for Future Sale............................. 55
Underwriting................................................ 57
Legal Matters............................................... 59
Experts..................................................... 59
Where You Can Find Additional Information................... 59
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 respective 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 Internet destination 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 lifestyle 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. Through our Web
site, 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 to efficiently and effectively reach this consumer group.
Generation Y is the first generation to grow up using the Internet as a
primary medium for information, entertainment, communication and shopping. We
believe, based on industry data, that nearly 65% of Generation Y currently use
the Internet and 88% regard the Internet, and specifically online community
functions such as chat rooms, as "cool." We created our Web site to meet the
unique interests and tastes of this generation. 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 1997 to $10.2 million in
1998. Our Web site, due to our unique blend of online services, generated over
17 million page views in February 1999, up from approximately 1.5 million in
February 1998. Additionally, we have compiled demographic information from
approximately 400,000 users who have registered to receive our weekly electronic
magazine, Alloy E-Mag. 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 proprietary database of
approximately two million Generation Y boys and girls, enabling us to
effectively market to specific segments of our audience.
Generation Y 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.
To reach this demographic group, marketers are increasingly looking to the
Internet and the Web sites where the boys and girls of Generation Y congregate.
To date, we have not focused on generating revenues from sponsorships or
advertising sales. However, we believe that our Web site is a valuable channel
for marketers seeking to reach our Generation Y community, providing us with
significant additional revenue opportunities.
4
<PAGE> 6
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.
- Generate Multiple Online Revenue Streams. We intend to generate multiple
online revenue streams by capitalizing on our targeted online community,
our proprietary database, our proven direct marketing capabilities and
our expertise in marketing to Generation Y.
- Strengthen Co-ed Community. We will continue to foster our online
community, which appeals to both boys and girls and facilitates dynamic
boy-girl interaction. We believe that a strong co-ed focus is critical to
creating a successful Generation Y online community and provides us an
important competitive advantage.
- Continue to Improve User Experience. We will continue to develop
community and content features that satisfy the evolving interests and
tastes of Generation Y.
- Attract Additional Visitors to Our Web Site. We will aggressively market
our Web site through our Alloy catalog, Alloy E-Mag and new
brand-building campaigns in broadcast, print and online media.
- Enhance Web Site and Technology Infrastructure. We will continue to use
"best-of-breed," scalable, third-party technologies, hardware and
transaction-processing systems to support our expected growth.
- Expand Internationally. We intend to pursue the significant
opportunities to serve the large and growing Generation Y population
internationally.
------------------------
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 an aggregate of shares of
common stock upon the completion of this offering;
- Reflects a -for- stock split of all of our outstanding
shares of common stock to be effected before 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...... shares
Common stock to be outstanding
after the offering................. 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 (1) the sale by Alloy of shares of common stock in
this offering at an assumed initial offering price of $ per share, after
deducting the underwriting discounts and estimated offering expenses payable by
Alloy, and the application of the net proceeds from this offering and (2) the
repayment of promissory notes and the conversion of our convertible preferred
stock upon the consummation of this offering. This information should be read in
conjunction with the Financial Statements and Notes thereto 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........................
Diluted net loss per common share......................
Weighted average common shares outstanding:
Basic.............................................
Diluted...........................................
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31, 1999
-----------------------
PRO FORMA AS
ACTUAL ADJUSTED
------- ------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 2,983 $
Working capital............................................. 5,266
Total assets................................................ 7,407
Promissory notes, net....................................... 3,945
Capital lease obligation, less current portion.............. 40
Convertible redeemable preferred stock, net................. 4,836
Total stockholders' (deficit) equity........................ (3,046)
</TABLE>
6
<PAGE> 8
RISK FACTORS
You should consider carefully the following risks before you decide to buy
our common stock. We have described these risks and uncertainties under the
following general categories: "Risks Related to Our Business," "Risks Related to
the Internet Industry" and "Risks Related to this Offering." Our business,
financial condition or results of operations could be materially and adversely
affected by any of the following risks. In that case, the trading price of our
common stock could decline, and you may lose all or part of the money you paid
to buy our common stock.
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. We believe these expenditures are necessary to strengthen
our brand recognition, attract more users to our Web site and generate greater
online revenues. 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 FUTURE REVENUES ARE UNPREDICTABLE AND OUR QUARTERLY OPERATING RESULTS MAY
FLUCTUATE SIGNIFICANTLY
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;
- our ability to keep current with the evolving tastes of Generation Y;
- the ability of our competitors to offer new or enhanced Web site
features, products or services;
- the demand for sponsorship and advertising on our Web site;
7
<PAGE> 9
- 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.
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. We must
continue to offer merchandise that appeals to their preferences on a timely and
affordable basis. 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 strength of
Alloy as a Generation Y lifestyle brand could be eroded by misjudgments in
merchandise selection or a failure to keep our online 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
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 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
8
<PAGE> 10
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 MAY BE
ADVERSELY AFFECTED BY DISRUPTIONS OR FAILURES IN SERVICE
General. We depend on third parties for important aspects of our business,
including Internet access, development of software for new Web site features,
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.
WE ARE GROWING RAPIDLY, AND EFFECTIVELY MANAGING OUR GROWTH MAY BE DIFFICULT
During the past year, we have grown from seven to 25 employees and
increased our revenues by more than 400%. 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.
9
<PAGE> 11
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY
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 is likely to increase because it is not difficult to enter the
e-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 e-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. See "Business -- Competition."
WE MAY FAIL TO SUCCESSFULLY MANAGE AND USE OUR PROPRIETARY DATABASES OF WEB SITE
USERS AND CUSTOMERS
An important component of our business model involves the use of our
proprietary 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 proprietary 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 such 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 certain categories in an effort to maintain satisfactory
fulfillment rates for our customers. This may expose us to risk of excess
inventories and inventory obsolescence, 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
10
<PAGE> 12
or strategic alliances and expand our existing ones could have a material and
adverse effect on our business.
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
PROPRIETARY 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.
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, which have been volatile in the past and may be volatile in the
future. Material increases in paper or catalog delivery costs could have a
material and adverse effect on our business.
ACQUISITIONS MAY DISRUPT OR OTHERWISE HAVE A NEGATIVE IMPACT ON OUR BUSINESS
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. Growth through acquisitions has
been a successful strategy used by other Internet companies. We do not have any
present understanding, nor are we having any discussions relating to any such
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 ADDITIONAL TAX OBLIGATIONS
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 e-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 e-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 e-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.
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 e-commerce does not continue to grow. Web usage may be
inhibited for a number of reasons, including:
- inadequate Internet infrastructure;
- security concerns;
- 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.
12
<PAGE> 14
OUR LONG-TERM SUCCESS DEPENDS ON THE DEVELOPMENT OF THE E-COMMERCE MARKET, WHICH
IS 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.
Rapid growth in the use of the Web and commercial online services is a recent
phenomenon. 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:
- e-commerce is at an early stage and buyers may be unwilling to shift
their purchasing from traditional vendors to online vendors;
- insufficient availability of telecommunication services or changes in
telecommunication services could result in slower response times; and
- adverse publicity and consumer concerns about the security of commerce
transactions on the Internet could discourage its acceptance and growth.
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 E-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 e-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 e-commerce
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
proprietary information, such as credit card numbers, security breaches could
disrupt our business, damage our reputation and expose us to a risk of loss or
litigation and possible liability. We could be liable for claims based on
unauthorized purchases with credit card information, impersonation or other
similar fraud claims. 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
13
<PAGE> 15
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 such 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 FACE RISKS 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 e-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."
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 shares of common stock and warrants and options
exercisable into an aggregate of 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 such 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
such 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
14
<PAGE> 16
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
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 such volatility may include, among other things:
- actual or anticipated fluctuations in our quarterly operating results;
- 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. We
undertake no obligation to update publicly any forward-looking statements for
any reason, even if new information becomes available or other events occur in
the future.
15
<PAGE> 17
USE OF PROCEEDS
The net proceeds we will receive from the sale of shares of
common stock offered by us are estimated to be $ ($ 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 $ 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 consummation 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 (1) the sale of shares of common stock offered by us in this
offering at an assumed initial public offering price of $ 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 and
(2) the conversion of our convertible preferred stock into an aggregate of
shares of common stock upon the completion of this offering. See "Use
of Proceeds." This information should be read in conjunction with our Financial
Statements and the related Notes appearing elsewhere in this prospectus.
<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,
shares authorized, issued and outstanding actual; no
shares issued and outstanding pro forma as adjusted....... 4,836 --
------- -----
Stockholders' (deficit) equity:
Common stock, $.01 par value, 11,500,000 shares
authorized; shares issued and outstanding
actual; shares authorized, shares
issued and outstanding pro forma as adjusted........... 75 --
Additional paid-in capital.................................. 5,451 --
Accumulated deficit......................................... (8,347) --
Deferred compensation....................................... (225) --
------- -----
Total stockholders' (deficit) equity................... (3,046) --
------- -----
Total capitalization................................ $ 5,775 $ --
======= =====
</TABLE>
The foregoing capitalization table excludes (1) shares of common
stock issued upon the exercise of stock options and warrants after January 31,
1999, (2) shares of common stock issuable upon the exercise of stock
options outstanding as of January 31, 1999 at a weighted average exercise price
of $ per share, (3) shares of common stock issuable upon exercise
of warrants outstanding as of January 31, 1999 at a weighted average exercise
price of $ per share and (4) additional shares of common stock
reserved for issuance under our stock option plan.
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
$ million, or $ per share of common stock. Pro forma net tangible book
value per share is equal to the amount of our total tangible assets (total
assets less intangible assets and total liabilities), divided by the number of
shares of common stock outstanding as of January 31, 1999. Assuming the sale by
us of shares of common stock offered in this offering at an assumed public
offering price of $ per share, and the application of the estimated net
proceeds from this offering, our pro forma net tangible book value as of January
31, 1999 would have been $ million, or $ per share of common stock. This
represents an immediate increase in pro forma net tangible book value of $
per share to our existing stockholders and an immediate dilution in pro forma
net tangible book value of $ per share to new investors. The following table
illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share as of January
31, 1999............................................... $
Pro forma increase attributable to new investors..........
-------
Pro forma net tangible book value per share after the
offering..................................................
-------
Pro forma dilution per share to new investors............... $
=======
</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..................... % $ % $
New investors............................. $
------ ------- ------- -------
Total................................ 100% $ 100%
====== ======= ======= =======
</TABLE>
None of the foregoing tables or calculations assumes that any options or
warrants outstanding as of January 31, 1999 will be exercised. If all
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 $
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, 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 Notes thereto, "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:
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)........................
========= ========= =========
Diluted net loss per common share(1)......................
========= ========= =========
Weighted average common shares outstanding:...............
========= ========= =========
Basic(1).............................................
Diluted(1)...........................................
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31,
----------------------
1998 1999
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 2,321 $ 2,983
Working capital............................................. 2,451 5,266
Total assets................................................ 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)........................ 2,479 (3,046)
</TABLE>
- ------------
(1) See Notes 2 and 10 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.
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 set forth under "Risk Factors" and elsewhere in this
prospectus.
OVERVIEW
Alloy Online is a leading Internet destination 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 lifestyle 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. Through our Web
site, 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. We currently offer 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 set forth 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.
20
<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, improved merchandise sell-
21
<PAGE> 23
through via our catalog and our Web site and increased sponsorship revenues,
which generally have higher gross margins.
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, along with increased order fill ratios 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 due to
the 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
22
<PAGE> 24
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.
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 Notes thereto 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 1,753 2,247 2,879 2,287
General and
administrative............ 336 244 265 509 517 392
------- ------ ------- ------- ------- ------
Total operating
expenses............. 903 1,437 2,018 2,756 3,396 2,679
------- ------ ------- ------- ------- ------
Loss from operations............. (765) (824) (1,571) (1,869) (1,800) (885)
Interest income (expense), net... 16 18 22 (60) (101) (100)
------- ------ ------- ------- ------- ------
Net loss......................... $ (749) $ (806) $(1,549) $(1,929) $(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 85.5 129.6 107.7 88.3 65.2
General and
administrative............ 84.0 17.5 19.6 24.4 15.8 11.2
------- ------ ------- ------- ------- ------
Total operating
expenses............. 225.5 103.0 149.1 132.1 104.1 76.4
------- ------ ------- ------- ------- ------
Loss from operations............. (191.1) (59.0) (116.0) (89.6) (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)% (114.4)% (92.5)% (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-Mag 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
23
<PAGE> 25
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.
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.
INCOME TAXES
At January 31, 1999, we had net operating loss carryforwards aggregating
approximately $6.4 million that may be applied against future years' income,
with various expiration dates through 2019. As a result of Internal Revenue Code
Section 382, a significant portion of this net operating loss carryforward may
be subject to limitation on future utilization.
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.
24
<PAGE> 26
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.
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 two third-party vendors upon whom we materially
rely are Harrison Fulfillment Services, our fulfillment services and call center
provider, and OneSoft Corporation, which maintains our Web site and provides our
connection to the Internet. We have sought confirmation from both 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.
In addition, we plan to seek verification from other key vendors,
distributors and suppliers that they are Year 2000 compliant or, if they are not
presently compliant, to provide a description of their plans to become so. To
the extent that vendors fail to provide certification that they are Year 2000
compliant by September 1999, we will seek to terminate and replace these
relationships. Until the migration of our fulfillment operations to a Year
2000-compliant system is complete, and our vendors, distributors and suppliers
have provided verification of their compliance, we will not be able to
completely evaluate whether our systems will need to be revised or replaced.
We have completed an internal assessment of all material information
technology and non-information technology systems at our headquarters. We
believe that all of these systems either are or will be made Year 2000 compliant
by September 1999 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
25
<PAGE> 27
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.
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 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.
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.
26
<PAGE> 28
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.
27
<PAGE> 29
BUSINESS
OUR BUSINESS
Alloy Online is a leading Internet destination 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 lifestyle 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. Through our Web
site, 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 to efficiently and effectively reach this consumer group.
INDUSTRY BACKGROUND
The Internet
Growth of the Internet and E-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, e-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. The Direct Marketing Association
estimates that advertisers and direct marketers spent approximately $284 billion
on all forms of advertising media in the United States in 1998. Jupiter
Communications, Inc. estimates that the amount of Internet advertising in the
U.S. will grow from approximately $1.8 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. The Direct Marketing Association estimates that
spending on Internet direct marketing will grow from $275 million in 1997 to
$3.5 billion in 2002.
28
<PAGE> 30
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. We believe, based on industry data, that nearly 65% of
Generation Y currently use the Internet and 88% regard the Internet, and
specifically online community functions such as chat rooms, as "cool." Further,
eMarketer estimates 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 an Internet destination 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 an estimated 17 million page views in February 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.
29
<PAGE> 31
We satisfy the needs of Generation Y through a site with the following
attributes:
- Community. Our online 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 and "cool" 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 400,000 registered users, 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
lifestyle brand.
Generate Multiple Online Revenue Streams. We intend to increase online
revenues by taking advantage of our targeted online community, our proprietary
database, our proven direct marketing
30
<PAGE> 32
capabilities and our 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 an online 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 what we believe to be
"best-of-breed" scalable third party technologies to 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.
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.
31
<PAGE> 33
[Screen Shot of Homepage]
32
<PAGE> 34
1. ALLOYSTORE -- This is the main purchasing area of our Web site where online
shopping is designed to be fun, safe and simple.
- Shopping -- access to over 300 different products from over 70 vendors
that include boys and girls apparel, outerwear, footwear, accessories,
music and cosmetics;
- 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; and
- Get Free Stuff -- allows users to register for contests and giveaways.
2. ALLOYCONNECT -- This section contains most of the community-oriented
features of our Web site.
- Fashion Diva -- interactive forum for fashion tips and advice moderated
by our fashion expert Penny D.;
- 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;
- Alloy Chat -- multiple areas where Generation Y boys and girls are able
to communicate with one another via text messages in real time;
- Ask Tucker -- interactive advice forum moderated by Tucker, our columnist
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.
3. ALLOYFEATURES -- This section of our Web site provides updated Generation
Y-focused news and information.
- Alloy Music -- updated music-related news about bands, artists, CDs,
events and concert schedules;
- Alloy TV -- Generation Y-focused programming via streaming audio and
video;
- Alloy Sports -- updated news about skateboarding, snowboarding and
extreme sports;
- AstroStation -- a variety of daily horoscopes and astrological
information;
- Homework 911 -- access to educational services and links for homework
assistance;
- Fashion Scopes -- updated fashion advice based on users' astrological
signs;
- Model Interviews -- interviews with the latest Alloy models;
- Movie Previews -- movie trailers for current releases via streaming audio
and video;
- Alloy Search -- an Internet search engine with categories and
subcategories for Generation Y users;
- Trauma Central -- highlights embarrassing, yet humorous, moments in our
users' lives; and
- Virtual Makeover -- weekly online fashion and makeup advice based on
photographs submitted by Alloy users.
33
<PAGE> 35
4. DO IT YOURSELF -- This section 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;
- Sponsorships -- users can obtain electronic copies of Alloy logos and
links for use on their own Web sites; and
- Zine Zone -- links to selected user homepages.
5. TODAY IN ALLOY -- This section of our Web site contains daily features,
including the latest news as well as celebrity gossip and user surveys.
- Today's Trivia -- a daily trivia question where users can win prizes;
- News and Gossip -- daily headlines and celebrity gossip focusing on
music, movies and TV;
- Alloy Poll -- a weekly Generation Y-focused survey question;
- 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.
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-Mag, a weekly broadcast e-mail to our registered users. Our
catalog and E-Mag 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-Mag, 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 proprietary databases of approximately two million
Generation Y boys and girls and approximately 400,000 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-Mag, 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 proprietary database to target specific groups of individuals via
direct mail with special online offers.
34
<PAGE> 36
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.
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 certain areas of our Web site. We offer
sponsorship opportunities throughout our entire site. We also offer
sponsorship advertising in Alloy E-Mag, our weekly electronic magazine
distributed by e-mail to approximately 400,000 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, Partnership for a Drug Free America, Buy.com and
MiningCo.com.
- 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.
35
<PAGE> 37
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 a
leading "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.
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. 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 feet 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.
36
<PAGE> 38
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
proprietary 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. 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
37
<PAGE> 39
- 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.
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
38
<PAGE> 40
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 proprietary 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 proprietary rights may be
inadequate.
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 e-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
e-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 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 such a child,
to collect personal information from the child 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 certain 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 certain information regarding Internet users.
This directive may limit our ability to target advertising or collect and use
information in certain European countries.
39
<PAGE> 41
EMPLOYEES
As of March 9, 1999, we had 25 full-time employees. Five of these employees
work in merchandising, four in editorial and content development, three in
customer service, three in sales and marketing, three in technology development,
four in operations and three 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.
40
<PAGE> 42
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
Directors, executive officers and other key employees of Alloy, and their
ages, as of March 1, 1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Matthew C. Diamond................... 30 Chief Executive Officer, Treasurer and Director
James K. Johnson, Jr................. 31 Chief Operating Officer, President and Director
Samuel A. Gradess.................... 33 Chief Financial Officer, Secretary and Director
Neil I. Vogel........................ 28 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...................... 43 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 and he was appointed as Chief
Executive Officer in January 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 employed in the Credit Department of
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.
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
41
<PAGE> 43
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
consummation 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 e-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 consummation 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 consummation of this offering.
They will each receive initial annual base salaries of $150,000 and be eligible
for bonuses based primarily on the achievement of financial objectives. 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 270,000 shares of our
common stock under our 1997 Employee, Director and Consultant Stock Option Plan.
Except in some circumstances, his options have the following vesting schedules
and exercise prices: (1) 25,000 options are currently exercisable at an exercise
price equal to the price paid by the public in this offering, (2) 25,000 options
will be exercisable on February 22, 2000 at an exercise price equal to the price
paid by the public in this offering, (3) 50,000 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, (4) 75,000 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 (5) 95,000 options will be exercisable on February 22, 2003 at an
exercise price equal to
42
<PAGE> 44
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 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
We do not currently compensate directors for attending meetings of the
board of directors or committee meetings of the board of directors, but
directors are eligible to receive grants of non-qualified stock options under
our 1997 Employee, Director and Consultant Stock Option Plan. Directors are
reimbursed for reasonable out-of-pocket expenses incurred in attending board
meetings.
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 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.
43
<PAGE> 45
EXECUTIVE COMPENSATION
Summary Compensation. The table below sets forth the compensation earned
during the fiscal years ended January 31, 1997, 1998 and 1999 by our chief
executive officer. No other executive officer or employee of Alloy received
compensation in excess of $100,000 in the fiscal years ended January 31, 1997,
1998 and 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION(1)
---------------
NAME AND PRINCIPAL POSITION YEAR SALARY
--------------------------- ---- -------
<S> <C> <C>
Matthew C. Diamond 1999 $70,000
Chief Executive Officer, Treasurer and Director 1998 $57,000
1997 $ --
</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 such options
as of January 31, 1999.
EMPLOYEE BENEFIT PLANS
1997 Employee, Director and Consultant Stock Option Plan. The following
description of Alloy's 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 such individuals in order to attract,
retain and reward them and strengthen the mutual interests between such
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. A total of shares are reserved for issuance under the plan. As
of March 5, 1999, 321,352 shares had been issued as the result of the exercise
of options, 369,000 shares were subject to outstanding options and 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 employees, directors and consultants of Alloy who are
to be awarded options and the terms of such awards, including:
- the number of shares subject to such option;
- when the option becomes exercisable;
- the option exercise price per share; and
- the duration of the option.
44
<PAGE> 46
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 set forth in written agreements between Alloy and the
respective option holders. 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.
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.
45
<PAGE> 47
CERTAIN TRANSACTIONS
DIRECTORS AND EXECUTIVE OFFICERS
On January 22, 1996, Mr. Diamond, our chief executive officer, and Mr.
Johnson, our chief operating officer, each purchased 300 shares of our common
stock for a purchase price of $166.67 per share which they paid in cash (60%)
and by contribution of services (40%). Mr. Gradess, our chief financial officer,
purchased 300 shares of common stock in September 1996 for a purchase price of
$500 per share in cash. In June 1997, Alloy carried out a 4,000-for-1 stock
split of its common stock which increased the number of shares of common stock
held by each of Messrs. Diamond, Johnson and Gradess to 1,200,000.
COMMON STOCK OFFERINGS
June 1997 Offering. In June 1997, Alloy raised gross aggregate proceeds of
approximately $2.36 million from the issue and sale of a total of 2,422,189
shares of common stock in a private placement to 36 investors at a price of
$0.98 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 such purchasers with dilution protection in the
event of certain 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 630,187 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 61,451 16,004
Stuart Gradess........... Father of Samuel Gradess 25,605 6,668
Anita R. Johnson......... Mother of James Johnson 30,725 8,002
</TABLE>
Mr. Robert E. Kerson, uncle of Matthew Diamond and a beneficial owner of
more than five percent of our common stock, purchased 122,902 shares of common
stock in the offering at a price of $0.98 per share and upon exercise of the
warrant associated with such shares acquired an additional 32,007 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 aggregate
proceeds of approximately $1.69 million from the issue and sale of a total of
864,499 shares of common stock in a private placement to 19 investors at a price
of $1.95 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 51,260
David M. Diamond........................ Brother of Matthew Diamond 10,252
Joseph Diamond.......................... Brother of Matthew Diamond 5,126
Amy K. Diamond.......................... Sister of Matthew Diamond 5,126
Michael K. Diamond...................... Brother of Matthew Diamond 5,126
Jeffrey Speer and Joy Diamond, JTWROS... Brother-in-law and Sister 26,911
of Matthew Diamond
</TABLE>
Mr. Kerson purchased 153,780 shares of common stock in the offering at a
price of $1.95 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 aggregate proceeds of approximately $3.81
million from the issue and sale of promissory notes together with warrants to
purchase an aggregate of 426,152 shares of common
46
<PAGE> 48
stock in a private 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 (1) May 13, 2001, (2) the closing of this offering and (3)
specified 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 $6.165 per share. The exercise price was reduced to
$5.68 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 $ 5,000 559
David M. Diamond....... Brother of Matthew Diamond $35,000 3,915
Joseph Diamond......... Brother of Matthew Diamond $10,000 1,119
Amy K. Diamond......... Sister of Matthew Diamond $ 5,000 559
Michael K. Diamond..... Brother of Matthew Diamond $ 5,000 559
Joy Diamond............ Sister of Matthew Diamond $ 5,000 559
</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 an aggregate
principal amount of $500,000 together with warrants to purchase an aggregate of
55,926 shares of common stock.
CONVERTIBLE PREFERRED STOCK OFFERING
In November 1998 and February 1999, Alloy raised aggregate 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 an aggregate 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 one share 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 22,429 shares of
common stock with an initial exercise price of $6.165 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 $5.68 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
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.
47
<PAGE> 49
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 $0.80
per share to purchase 250,000 shares of common stock under Alloy's 1997
Employee, Director and Consultant Stock Option Plan. 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
aggregate exercise price of the option upon its exercise. On March 4, 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 12,290 shares of common stock at an exercise price of
$0.407 per share. In March 1998, Alloy granted him options to purchase 7,689
shares of common stock at an exercise price of $0.488 per share and in February
1999, Alloy granted him options to purchase 6,000 shares of common stock at an
exercise price of $0.68 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 aggregate exercise price of
the options upon their exercise. On March 5, 1999, Joseph Diamond exercised
these options.
48
<PAGE> 50
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, (1) the following individuals have sole vesting
and sole investment control with respect to the shares they beneficially own and
(2) 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)....................................... 12.9% %
James K. Johnson, Jr(1)..................................... 12.9
Samuel A. Gradess(1)........................................ 12.9
Neil I. Vogel(2)............................................ *
Peter M. Graham(3).......................................... 1.4
David Yarnell(4)............................................ 15.8
All directors and executive officers as a group (6
persons)(5)............................................... 55.1
Other 5% Stockholders:
Brand Equity Ventures I, L.P.(6)............................ 15.8
Robert E. Kerson(7)......................................... 6.0
</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 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 shares, or % of the outstanding stock
prior to this offering. The Stockholders and Voting Agreement and the proxy
granted thereunder terminate upon the consummation of this offering.
(2) Includes 25,000 shares subject to currently exercisable options and 3,915
shares subject to a currently exercisable warrant.
(3) Consists of (1) 55,926 shares subject to a currently exercisable warrant in
Mr. Graham's name, (2) 55,925 shares subject to a currently exercisable
warrant held by The LLZ 1997 Trust and (3) 22,429 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 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
49
<PAGE> 51
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 1,454,573 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 such 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.
50
<PAGE> 52
DESCRIPTION OF CAPITAL STOCK
The following description of our securities and various provisions of our
restated certificate of incorporation and our restated bylaws are summaries.
Statements contained in this prospectus relating to such provisions are not
necessarily complete, and reference is made to the restated certificate of
incorporation and the restated bylaws that will be in effect upon the completion
of this offering, copies of which have been filed with the Securities and
Exchange Commission as exhibits to our Registration Statement of which this
prospectus constitutes a part. Our restated certificate of incorporation and the
restated bylaws will become effective at the time of completion of this
offering.
Our authorized capital stock will consist of shares of
common stock, par value $.01 per share, and shares of preferred
stock, par value $.01, at the time of completion of this offering.
COMMON STOCK
As of March 5, 1999, there were shares of stock outstanding
and held of record by stockholders, without giving effect to the
conversion of our convertible preferred stock. Based upon the number of shares
outstanding as of that date and giving effect to the issuance of the shares of
common stock in this offering and the conversion of our convertible preferred
stock upon the completion of this offering, there will be shares
of common stock outstanding upon the closing of this offering.
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders and do not have
cumulative voting rights. Accordingly, holders of a majority of the shares of
common stock entitled to vote in any election of directors may elect all of the
directors standing for election. Holders of common stock are entitled to receive
ratably dividends, if any, as may be declared by the board of directors out of
legally available funds therefor, subject to any preferential dividend rights of
any outstanding preferred stock. Upon the event of a liquidation, dissolution or
winding up of Alloy, holders of common stock are entitled to receive ratably our
net assets available after the payment of all debts and other liabilities and
subject to the prior rights of any outstanding shares of preferred stock.
Holders of common stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of common stock are, and the shares
offered by us in this offering will be, when issued in consideration for payment
thereof, fully paid and non-assessable upon receipt of payment. The rights,
preferences and privileges of the holders of common stock are subject to, and
may be adversely affected by, the rights of the holders of any series of
preferred stock that we may designate in the future. After completion of this
offering, there will be no shares of preferred stock outstanding.
PREFERRED STOCK
As of March 5, 1999, there were shares of convertible
preferred stock outstanding. We will effect a -for- stock split of all
of our outstanding shares of common stock prior to the completion of this
offering. The shares of convertible preferred stock will convert
into an aggregate of shares of common stock after giving effect
to the reverse stock split. These shares of convertible preferred stock will no
longer be authorized, issued or outstanding after completion of this offering.
Upon the completion of this offering, the board of directors will be
authorized, without further stockholder approval, to issue from time to time up
to an aggregate of shares of preferred stock. The preferred stock
may be issued in one or more series and the board of directors may fix the
rights, preferences, privileges and restrictions thereof, including dividend
rights, conversion rights, voting rights, terms of redemption (including sinking
fund provisions), liquidation preferences, the number of shares constituting any
series or designations of that 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."
51
<PAGE> 53
WARRANTS
Warrants to purchase a total of 448,581 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 Alloy's promissory notes in May 1998. These warrants
are currently exercisable at an exercise price of $5.68 per share and expire on
May 12, 2001. The warrants contain provisions for the adjustment of the exercise
price under circumstances set forth therein, including stock dividends, stock
splits, reorganizations, reclassifications, consolidations and other dilutive
issuances of securities at a price below the then existing warrant exercise
price.
REGISTRATION RIGHTS
Convertible Preferred Stock. The 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 (the "Securities Act"). Subject to
certain exceptions and after this public offering, if Alloy proposes to register
shares of the common stock under the Securities Act, such holders are entitled
to notice of the registration and are entitled to include their shares of common
stock in the registration at Alloy's 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 Alloy, at its 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 various
conditions and limitations, these holders may also require Alloy, at its
expense, to register their shares of common stock on Form S-3 when Alloy becomes
eligible to use such form.
Warrant Holders. Pursuant to the terms of their warrants, holders of
warrants to purchase a total of 448,581 shares of common stock are also entitled
to certain registration rights with respect to the registration of their shares
of common stock under the Securities Act. Subject to various and customary
exceptions, if Alloy proposes 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 Alloy's expense. If the registration is underwritten, the
managing underwriters have the right to limit the number of shares included in
the registration. Subject to certain conditions and limitations, holders may
require Alloy, at its expense but on not more than one occasion, to file a
registration statement under the Securities Act with respect to their shares of
common stock. Subject to conditions and limitations and its reasonable
commercial judgment, Alloy is obligated to file a registration statement
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, Alloy is subject to the anti-takeover
provisions of Section 203 of the Delaware General Corporation Law. Subject to
various exceptions, 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. A "business combination"
includes mergers, asset sales and other transactions resulting in a financial
benefit to the interested stockholder. Subject to various exceptions, an
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years prior, 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.
52
<PAGE> 54
In addition, various provisions of our certificate of incorporation and
bylaws, which provisions will be in effect upon the completion of this offering
and are summarized in the following paragraphs, may be deemed to have an
anti-takeover effect and 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, when coupled with the provision of
the certificate of incorporation authorizing the board of directors to fill
vacant directorships or increase the size of the board of directors, may deter a
stockholder from voting to remove incumbent directors and simultaneously gaining
control of the board of directors by filling the vacancies created by that
removal with its own nominees.
Advance Notice Requirements for Stockholder Proposals and Director
Nominees. Our bylaws provide that stockholders who wish to bring business
before an annual meeting of stockholders, or to nominate candidates for election
as directors at an annual meeting of stockholders, must provide timely notice in
writing. To be timely, a stockholder's notice must be delivered to or mailed and
received at our principal executive offices, not less than 75 days nor more than
90 days prior to the meeting. If the meeting is not an annual meeting, the
stockholder's notice is generally timely if it is delivered not later than the
later of (1) 90 days prior to the meeting, or (2) 10 days following the day on
which we first make a public announcement of the meeting. The only business
which may be conducted at a special meeting of stockholders is business which is
brought before the meeting pursuant to our notice of meeting. The notice by a
stockholder must contain, among other things, information about the stockholder
delivering the notice and background information about the nominee to the board
of directors or a description of the proposed business to be brought before the
meeting, as the case may be.
Stockholder Action; Special Meeting of Stockholders. Our restated
certificate of incorporation also requires that any action required or permitted
to be taken by our stockholders must be effected at a duly called annual or
special meeting of stockholders and may not be effected by a consent in writing.
Special meetings of the stockholders may be called only by our board of
directors pursuant to a resolution adopted by a majority of the total number of
directors authorized.
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. The
restated certificate of incorporation of Alloy requires the affirmative vote of
the holders of at least 70% of our outstanding voting stock, voting together as
a single class, 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. Such affirmative vote by holders of at least 70% of the
outstanding voting stock is 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. Such affirmative vote by holders of at least 70% of the
outstanding voting stock is also required for any amendment to, or repeal of,
our bylaws by the stockholders. The 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 provides that our directors shall not be personally
liable to Alloy or its stockholders for monetary damages for breach of the
director's fiduciary duties as a director, except for liability for:
- any breach of the director's duty of loyalty to Alloy or its
stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
53
<PAGE> 55
- as provided in Section 174 of the Delaware General Corporation Law; or
- any transaction from which the director derived an improper personal
benefit.
Our restated certificate of incorporation and bylaws provide that we shall
indemnify our directors and officers to the fullest extent permitted by Delaware
law (except, in some circumstances, with respect to suits initiated by the
director or officer) 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.
54
<PAGE> 56
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 such 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 an aggregate of
shares of common stock outstanding, assuming no exercise of the underwriters'
over-allotment option and no exercise of options or warrants outstanding at
March 5, 1999. Of the outstanding shares, the 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. Our directors, executive officers and substantially all of our
other stockholders, holding shares in the aggregate, 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>
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
Upon the filing of a registration statement to register for
resale shares of common stock issued upon the exercise of
stock options, which shares are not subject to the lock-up
After 90 days from the date of this prospectus, shares
saleable under Rule 144 that are not subject to the 180-day
lock-up
After 180 days from the date of this prospectus, the 180-day
lock-up is released and these shares are saleable under Rule
144 (subject, in some cases, to volume limitations), Rule
144(k), or pursuant to a registration statement to register
for resale shares of common stock issued upon the exercise
of stock options
Over 180 days from the date of this prospectus, restricted
securities 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 (approximately shares immediately
after 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 such
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, such person's holding period for the purpose of
effecting a sale under Rule 144 commences on the date of transfer from the
affiliate.
55
<PAGE> 57
As of March 5, 1999, options and warrants to purchase a total of
shares of common stock were outstanding, of which 483,581 were exercisable.
Upon the completion of this offering, we intend to file a registration statement
to register for resale the shares of common stock reserved for issuance
under our 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 or the lock-up
agreements with BancBoston Robertson Stephens Inc. Holders of options to
purchase shares of common stock and holders of warrants to purchase
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
Employee, Director and Consultant Stock Option Plan.
Following this offering, under specified conditions and subject to
customary exceptions, holders of 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 an aggregate 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 448,581 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.
56
<PAGE> 58
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 such 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.............................................
========
</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 set forth
on the cover page of this prospectus and to certain 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. No
such reduction shall change the amount of proceeds to be received by us as set
forth 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 additional shares of common stock at the same
price per share as we will receive for the 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 such 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 shares offered hereby. If
purchased, these additional shares will be sold by the underwriters on the same
terms as those on which the 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 such option only to cover
over-allotments made in connection with the sale of the shares of common stock
offered hereby. If such option is exercised in full, the total price to public,
underwriting discounts and commissions and proceeds to company will be
$ million, $ million and $ million, respectively.
Directed Share Program. At our request, the underwriters have reserved up
to 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 such individuals purchase such 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 certain 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 certain 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
57
<PAGE> 59
purchase any shares of common stock, or any securities convertible into or
exchangeable for shares of common stock owned as of the date of this prospectus
or thereafter acquired directly by such holders or with respect to which they
have the power of disposition, without the prior written consent of BancBoston
Robertson Stephens Inc. However, 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 certain exceptions, (1) 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 (2) 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 such 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 22,429 shares of common stock with a current exercise price
of $5.68 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 aggregate principal amount of $500,000 and warrants to purchase
55,926 shares of common stock in Alloy's May 1998 financing. Nine other
Ladenburg Thalmann & Co. Inc. employees also purchased notes in the aggregate
principal amount of $315,000 and warrants to purchase an aggregate of 35,234
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 consummation 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, certain 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 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
58
<PAGE> 60
covering transaction and has therefore not been effectively placed by such
underwriter or syndicate member. The Representatives have advised us that such
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
thereto, 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 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. Certain
information is omitted and you should refer to the Registration Statement and
its exhibits. With respect to references made in this prospectus to any
contract, agreement or other document of Alloy, such references are not
necessarily complete and you should refer to the exhibits attached to the
Registration Statement for copies of the actual contract, agreement or other
document. You may review a copy of the Registration Statement, including
exhibits, at the 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 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 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
Commission.
Our Commission filings and the Registration Statement can also be reviewed
by accessing the 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 Commission.
59
<PAGE> 61
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> 62
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
F-2
<PAGE> 63
ALLOY ONLINE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31,
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 2,320,548 $ 2,983,283
Accounts receivable.................................... -- 145,476
Stock subscription receivable (Note 7)................. -- 2,500,000
Inventories, net....................................... 512,006 810,354
Other current assets................................... 305,387 458,687
----------- -----------
Total current assets................................... 3,137,941 6,897,800
Property and equipment, net................................. 22,874 178,017
Deferred financing costs, net............................... -- 125,851
Other assets................................................ 5,661 205,387
----------- -----------
Total assets........................................... $ 3,166,476 $ 7,407,055
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable....................................... $ 379,378 $ 936,291
Accrued expenses....................................... 308,033 622,186
Current portion of capital lease obligation............ -- 73,178
----------- -----------
Total current liabilities.............................. 687,411 1,631,655
Promissory notes, net of unamortized discount............... -- 3,945,122
Capital lease obligation, less current portion.............. -- 40,218
----------- -----------
Series A convertible redeemable preferred stock:
$.01 par value; 1,487,843 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; 6,886,688 and 7,517,505 shares issued and
outstanding, respectively............................. 68,867 75,175
Additional paid-in capital............................. 4,393,116 5,450,634
Accumulated deficit.................................... (1,982,918) (8,347,241)
Deferred compensation.................................. -- (224,895)
----------- -----------
Total stockholders' equity (deficit).............. 2,479,065 (3,046,327)
----------- -----------
Total liabilities and stockholders' equity
(deficit)...................................... $ 3,166,476 $ 7,407,055
=========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE> 64
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) $ (.37) $ (.85)
========= =========== ===========
Diluted............................................ $ (.03) $ (.35) $ (.81)
========= =========== ===========
Weighted average common shares outstanding:
Basic.............................................. 3,600,000 4,980,126 7,517,505
========= =========== ===========
Diluted............................................ 3,945,352 5,325,478 7,862,857
========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 65
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..................... 3,600,000 36,000 214,000 -- -- 250,000
Net loss....................... -- -- -- (118,308) -- (118,308)
--------- ------- ---------- ----------- --------- -----------
Balance, January 31, 1997........ 3,600,000 36,000 214,000 (118,308) -- 131,692
Proceeds from issuance of
common stock in connection
with private placements, net
of issuance costs............ 3,286,688 32,867 3,989,116 -- -- 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........ 6,886,688 68,867 4,393,116 (1,982,918) -- 2,479,065
Issuance of shares in
connection with anti-dilution
protection included in
private placement............ 630,817 6,308 (6,308) -- -- --
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........ 7,517,505 $75,175 $5,450,634 $(8,347,241) $(224,895) $(3,046,327)
========= ======= ========== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 66
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> 67
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 an online
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.
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
F-7
<PAGE> 68
ALLOY ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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. Alloy has expensed
all internal and external costs relating to its internet activities, which
includes the development of its initial Web-based e-mail service that Alloy
replaced with a third party provider in June 1998.
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.
F-8
<PAGE> 69
ALLOY ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-9
<PAGE> 70
ALLOY ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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>
F-10
<PAGE> 71
ALLOY ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 426,152 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
22,429 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 $6.165 per share. In accordance with
the anti-dilution provision in the agreement, the exercise price of the warrants
was reduced to $5.68 per share as a result of the issuance of the Series A
Convertible Redeemable Preferred Stock (Note 7) in November 1998.
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 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 1,487,843 shares
of its Series A Convertible Redeemable Preferred Stock (the "Preferred Stock")
to investors for approximately
F-11
<PAGE> 72
ALLOY ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
$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 $3.391 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, $3.391 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.
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 2,422,189 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.
F-12
<PAGE> 73
ALLOY ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In January 1998, Alloy issued 864,499 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 630,817 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 871,352 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
set forth 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.
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.......... -- $ -- -- $ -- 162,860 $.29
Options granted......................... -- -- 162,860 .29 347,653 .76
Options exercised....................... -- -- -- -- -- --
Options canceled or expired............. -- -- -- -- (165,161) (.31)
------- ---- ------- ---- -------- ----
Outstanding, end of year................ -- $ -- 162,860 $.29 345,352 $.76
======= ==== ======= ==== ======== ====
Exercisable, end of year................ -- $ -- 162,860 $.29 321,852 $.76
======= ==== ======= ==== ======== ====
</TABLE>
The options outstanding at January 31, 1999 range in price from $.41 per
share to $1.54 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 $81,000 for the years ended January 31, 1997, 1998 and 1999,
respectively, in connection with the granting of these options.
F-13
<PAGE> 74
ALLOY ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 $1.17 and $3.13, 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 122,902 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 250,000 shares of common stock at an exercise price of $.80 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.
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..................................... -- -- 458,581
Warrants exercised.................................. -- -- --
------- ------- -------
Outstanding, end of year.............................. -- -- 458,581
======= ======= =======
</TABLE>
The weighted average fair value of the warrants granted during fiscal 1998
was estimated at $0.43, 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.
In connection with the execution of a capital lease for computer equipment,
Alloy issued a warrant to purchase 10,000 shares of common stock at an exercise
price of $3.00 per share. The warrants are exercisable at the earlier of June
30, 2003 or the closing of an initial public offering. Alloy recorded a charge
to operations equal to the fair value of these warrants as determined at the
date of grant using the Black-Scholes option-pricing model.
F-14
<PAGE> 75
ALLOY ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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............. 1,487,843
Stock Option Plan........................................... 871,352
Warrants.................................................... 458,581
---------
2,817,776
=========
</TABLE>
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-15
<PAGE> 76
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....... 3,600,000 4,980,126 7,517,505
Nominal issuances of stock options.............. 345,352 345,352 345,352
--------- ----------- -----------
Diluted weighted average shares outstanding..... 3,945,352 5,325,478 7,862,857
========= =========== ===========
Basic net loss per share............................. $ (.03) $ (.37) $ (.85)
========= =========== ===========
Diluted net loss per share........................... $ (.03) $ (.35) $ (.81)
========= =========== ===========
</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...... -- -- 1,487,843
Warrants............................................. -- -- 458,581
</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-16
<PAGE> 77
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.
F-17
<PAGE> 78
[GRAPHICS:
INSIDE BACK COVER:
SAMPLE PAGES FROM OUR WEB SITE
OUTSIDE BACK COVER:
OUR CORPORATE LOGO]
<PAGE> 79
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........................................ $12,788
Nasdaq National Market Listing Fee..........................
NASD Fee.................................................... 5,100
Printing and engraving fees.................................
Registrant's counsel fees and expenses......................
Accounting fees and expenses................................
Blue Sky expenses and counsel fees..........................
Transfer agent and registrar fees...........................
Miscellaneous...............................................
</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 such a 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
such 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 such indemnitee, to repay all amounts so advanced, if it shall ultimately be
determined that such indemnitee is not entitled to be indemnified for such
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 such 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 such
action, suit or proceeding, if such 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 such person had no reasonable cause to believe his or her conduct
was unlawful, except that, if such action shall be in the right of the
corporation, no such indemnification shall be provided as to any claim, issue or
matter as to which such 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 such suit or action was brought, shall determine
upon application that, in view of all of the circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses as such
court shall deem proper.
II-1
<PAGE> 80
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 such 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 certain 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 certain 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.
During the course of 1997, the registrant issued 1,200,000 shares of common
stock at a purchase price of $0.125 per share (after giving effect to the 4000
for 1 stock split in June 1997) to Samuel A. Gradess, Chief Financial Officer
and a Director of the registrant, for aggregate consideration of $150,000.
In June 1997, the registrant issued and sold a total of 2,422,189 shares of
common stock in a private placement to 36 investors at a price of $0.98 per
share for an aggregate 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 certain future sales of equity securities by the registrant.
These warrants were exercised in July 1998 and, in accordance with their terms,
a total of 630,817 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, the Board of Directors and the
stockholders of the registrant approved and adopted an amendment 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 690,392
shares of common stock have been granted. As of March 5, 1999, 321,352 of these
options had been exercised.
II-2
<PAGE> 81
In January 1998, the registrant issued and sold a total of 864,499 shares
of common stock in a private placement to 19 investors at a price of $1.95 per
share for an aggregate gross consideration of $1,688,500.
In March 1998, the registrant issued a warrant to purchase 10,000 shares of
common stock with an exercise price of $3.00 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 given notice that he
will exercise these warrants upon consummation of the offering.
In May 1998, the registrant issued warrants to purchase a total of 426,152
shares of common stock in connection with a private placement of promissory
notes to 31 investors. The warrants had an initial exercise price of $6.165 per
share. The exercise price was reduced to $5.68 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 22,429
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 an aggregate 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 such names as 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 such 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 such 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 such 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> 82
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 1997 Employee, Director and Consultant Stock Option Plan, as
amended
+*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 August 21, 1998, between OneSoft
Corporation and the Registrant
+*10.8 Mailing List Purchase Agreement 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 between Catalog City and the
Registrant
+*10.11 Agreement between Fashion Mall, LLC and the Registrant dated
May 29, 1998
+*10.12 Memorandum of Understanding between Primedia Consumer
Marketing and the Registrant dated January 28, 1999
+*10.13 Memorandum of Understanding between Elektra Entertainment
Group and the Registrant
+*10.14 Transfer Agreement dated February 1999 between Alloy
Engineering Co. and the Registrant
10.15 Stockholder and Voting Agreement dated as of June 30, 1997
between 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 Stockholder and
Voting Agreement dated June 30, 1997
10.17 Stockholder Agreement dated November 24, 1998 between the
stockholders named on Schedule I thereto and Samuel A.
Gradess, James K. Johnson, Jr. and Matthew Diamond
*10.18 Employment Agreement, effective as of the closing of this
offering, between Matthew C. Diamond and the Registrant
*10.19 Employment Agreement, effective as of the closing of this
offering, between James K. Johnson, Jr. and the Registrant
*10.20 Employment Agreement, effective as of the closing of this
offering, 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> 83
<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 between Ronald Demer and the
Registrant dated March 11, 1998
+*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 Termination letter, dated February 3, 1999, between
Ladenburg Thalmann & Co. Inc.
10.30 Non-Qualified Stock Option Agreement, dated August 14, 1998,
to purchase 250,000 shares of common stock of the
Registrant, between the Registrant and Robert E. Kerson
10.31 Letter Agreement, dated August 14, 1998, between Robert E.
Kerson and the Registrant
*10.32 Form of Non-Qualified Stock Option Agreement to purchase
shares of common stock of Alloy Online, Inc.
*10.33 Form of Incentive Stock Option Agreement to purchase shares
of common stock of Alloy Online, Inc.
*10.34 Form of 1997 Stock and Warrant Subscription Agreement
*10.35 Form of May 1998 Subscription Agreement between the
Registrant and each of Ladenburg Thalmann & Co. Inc., Peter
Graham and Neil Vogel
*10.36 Form of May 1998 Promissory Note issued by the Registrant to
Ladenburg Thalmann & Co. Inc., Peter Graham and Neil Vogel
*10.37 Form of Warrant, dated May 13, 1998, to purchase common
stock of the Registrant 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. and Alloy Online,
Inc.
*10.40 Flexible Standardized 401(k) Profit Sharing Plan Adoption
Agreement
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)
27.1 Financial Data Schedule
</TABLE>
- ------------
* To be filed by amendment.
+ 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> 84
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has duly caused this 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 March 9, 1999.
ALLOY ONLINE, INC.
By: /s/ MATTHEW C. DIAMOND
------------------------------------
Matthew C. Diamond
Chief Executive Officer
POWER OF ATTORNEY
We the undersigned officers and directors of Alloy Online, Inc., hereby
severally constitute and appoint Matthew C. Diamond, James K. Johnson and Samuel
A. Gradess, and each of them singly (with full power to each of them to act
alone), our true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution in each of them for him and in his name, place
and stead, and in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement (or any
other Registration Statement for the same offering that is to be effective upon
filing pursuant to Rule 462(b) under the Securities Act of 1933), and to file
the same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as full to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them or their or his substitute or substitutes may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
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>
/s/ MATTHEW C. DIAMOND Chief Executive Officer, March 9, 1999
- ------------------------------------------------ Treasurer and Director
Matthew C. Diamond (principal executive
officer)
/s/ JAMES K. JOHNSON, JR. Chief Operating Officer, March 9, 1999
- ------------------------------------------------ President and Director
James K. Johnson, Jr.
/s/ SAMUEL A. GRADESS Chief Financial Officer, March 9, 1999
- ------------------------------------------------ Secretary and Director
Samuel A. Gradess (principal financial and
accounting officer)
/s/ PETER M. GRAHAM Director March 9, 1999
- ------------------------------------------------
Peter M. Graham
/s/ DAVID YARNELL Director March 9, 1999
- ------------------------------------------------
David Yarnell
</TABLE>
II-6
<PAGE> 85
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 1997 Employee, Director and Consultant Stock Option Plan, as
amended
+*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 August 21, 1998, between OneSoft
Corporation and the Registrant
+*10.8 Mailing List Purchase Agreement 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 between Catalog City and the
Registrant
+*10.11 Agreement between Fashion Mall, LLC and the Registrant dated
May 29, 1998
+*10.12 Memorandum of Understanding between Primedia Consumer
Marketing and the Registrant dated January 28, 1999
+*10.13 Memorandum of Understanding between Elektra Entertainment
Group and the Registrant
+*10.14 Transfer Agreement dated February 1999 between Alloy
Engineering Co. and the Registrant
10.15 Stockholder and Voting Agreement dated as of June 30, 1997
between 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 Stockholder and
Voting Agreement dated June 30, 1997
10.17 Stockholder Agreement dated November 24, 1998 between the
stockholders named on Schedule I thereto and Samuel A.
Gradess, James K. Johnson, Jr. and Matthew Diamond
*10.18 Employment Agreement, effective as of the closing of this
offering, between Matthew C. Diamond and the Registrant
</TABLE>
<PAGE> 86
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
- ------- ---------------------- ------------
<C> <S> <C>
*10.19 Employment Agreement, effective as of the closing of this
offering, between James K. Johnson, Jr. and the Registrant
*10.20 Employment Agreement, effective as of the closing of this
offering, 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 between Ronald Demer and the
Registrant dated March 11, 1998
+*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 Termination letter, dated February 3, 1999, between
Ladenburg Thalmann & Co. Inc.
10.30 Non-Qualified Stock Option Agreement, dated August 14, 1998,
to purchase 250,000 shares of common stock of the
Registrant, between the Registrant and Robert E. Kerson
10.31 Letter Agreement, dated August 14, 1998, between Robert E.
Kerson and the Registrant
*10.32 Form of Non-Qualified Stock Option Agreement to purchase
shares of common stock of Alloy Online, Inc.
*10.33 Form of Incentive Stock Option Agreement to purchase shares
of common stock of Alloy Online, Inc.
*10.34 Form of 1997 Stock and Warrant Subscription Agreement
*10.35 Form of May 1998 Subscription Agreement between the
Registrant and each of Ladenburg Thalmann & Co. Inc., Peter
Graham and Neil Vogel
*10.36 Form of May 1998 Promissory Note issued by the Registrant to
Ladenburg Thalmann & Co. Inc., Peter Graham and Neil Vogel
*10.37 Form of Warrant, dated May 13, 1998, to purchase common
stock of the Registrant 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. and Alloy Online,
Inc.
*10.40 Flexible Standardized 401(k) Profit Sharing Plan Adoption
Agreement
23.1 Consent of Arthur Andersen LLP
</TABLE>
<PAGE> 87
<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)
27.1 Financial Data Schedule
</TABLE>
- ------------
* To be filed by amendment.
+ Confidential treatment requested as to certain portions, which portions have
been omitted and filed separately with the SEC.
<PAGE> 1
Exhibit 10.15
STOCKHOLDERS AND VOTING AGREEMENT
Agreement made as of this 30th day of June, 1997, by and among (i) Alloy
Designs, Inc., a Delaware Corporation (the "Company"), (ii) the stockholders
named on Schedule I hereto, (iii) each of the persons who shall, after the date
hereof, acquire or receive the right to acquire any shares of capital stock of
the Company and join in and become a party to this Agreement by executing and
delivering to the Company an Accession Agreement in the form of Schedule II
hereto (each of the aforementioned persons in (ii) and (iii) being hereinafter
referred to collectively as the "Stockholders" and singularly as a
"Stockholder"), and (iv) Samuel A. Gradess, James K. Johnson, and Matthew
Diamond (collectively, the "Founders").
WHEREAS, the Company has issued, effective the date hereof, shares of
common stock, $.01 par value per share ("Common Stock") of the Company in the
amounts and to the Stockholders listed on Schedule I hereto (such shares,
together with any after acquired shares as provided in Section 1 hereof, the
"Shares"); and
WHEREAS, the parties hereto desire to promote their mutual interests and
the interests of the Company by providing in this Agreement for the terms and
conditions governing the transfer of the Shares and with respect to the voting
of the Shares.
NOW THEREFORE, in consideration of these premises and of the stipulations
hereinafter recited, and for other good and valuable consideration, the receipt
and sufficiency of which is hereby acknowledged, the parties hereto hereby agree
as follows:
1. GENERAL PROVISIONS
1.1 Shares Subject to this Agreement. The Stockholders expressly agree
that the terms and restrictions of this Agreement shall apply to all shares of
capital stock of the Company which any of them now owns or hereafter acquires by
any means, including without limitation by purchase, assignment or operation of
law, or as a result of any stock dividend, stock split, reorganization,
reclassification, whether voluntary or involuntary, or other similar
transaction, and to any shares of capital stock of any successor in interest of
the Company, whether by sale, merger, consolidation or other similar
transaction, or by purchase, assignment or operation of law.
1.2 No Partnership Relationship. Notwithstanding, but not in limitation
of, any other provision of this Agreement, the parties understand and agree that
the creation, management and operation of the Company shall not create or imply
a general partnership between or among the Stockholders and shall not make any
Stockholder the agent or partner of any other Stockholder for any purpose.
2. RESTRICTIONS ON TRANSFER
2.1 Non-complying Transfers Prohibited. Except as provided in this
Agreement, no Stockholder may sell, assign, transfer, exchange, gift, devise,
pledge, hypothecate, encumber
<PAGE> 2
or otherwise alienate or dispose of any Shares now owned by such Stockholder or
owned by him or her during the term of this Agreement, or any right or interest
therein, whether voluntarily or involuntarily, by operation of law or otherwise,
except in accordance with this Agreement. Any such purported transfer in
violation of any provision of this Agreement and all actions by the purported
transferor and transferee in connection therewith shall be of no force or effect
and the Company shall not be required to recognize such purported transfer for
any purpose, including without limitation for purposes of dividend and voting
rights.
2.2 Rights of First Refusal on Voluntary Transfers.
2.2.1 Right of First Refusal of the Company. Any Stockholder who
intends to sell, assign, transfer or otherwise voluntarily alienate or dispose
of any Shares (the "Selling Stockholder") shall, prior to any such transfer,
give written notice (the "Selling Stockholder's Notice") of such intention to
the Company. The Selling Stockholder's Notice shall include the name of the
proposed transferee, the proposed purchase price per Share, the terms of payment
of such purchase price and all other matters relating to such sale and shall be
accompanied by a copy of a binding written agreement of the proposed transferee
to purchase such Shares from the Selling Stockholder. The Selling Stockholder's
Notice shall constitute a binding offer by the Selling Stockholder to sell to
the Company such number of Shares (the "Offered Shares") then owned by the
Selling Stockholder as are proposed to be sold in the Selling Stockholder's
Notice at the monetary price per Share designated in the Selling Stockholder's
Notice, payable as provided in Section 2.2.3 hereof. Not later than sixty (60)
days after receipt of the Selling Stockholder's Notice, the Company shall
deliver written notice (the "Company's Notice") to the Selling Stockholder
stating whether the Company has accepted the offer stated in the Selling
Stockholder's Notice. The Company may only accept the offer of the Selling
Stockholder in whole and may not accept such offer in part. If the Company
accepts the offer of the Selling Stockholder, the Company's Notice shall fix a
time, location and date for the closing of such purchase, which date shall be
not less than ten (10) nor more than sixty (60) days after delivery of the
Company's Notice.
2.2.2 Right of First Refusal of the Founders. If the Company fails
to accept the offer stated in the Selling Stockholder's Notice within the
sixty-day period provided in Section 2.2.1, the Founders (the "Buying
Stockholders") shall have the right to purchase the Offered Shares, at the
monetary price per Share designated in the Selling Stockholder's Notice, payable
as provided in Section 2.2.3. Not later than thirty (30) days after the
expiration of the sixty-day period described in Section 2.2.1, the Buying
Stockholders shall deliver to the Selling Stockholder a written notice (the
"Buying Stockholders' Notice") stating whether the Buying Stockholders have
accepted the offer stated in the Selling Stockholder's Notice. The Buying
Stockholders may only accept the offer of the Selling Stockholder in whole and
may not accept such offer in part. If the Buying Stockholders accept the offer
of the Selling Stockholder, the Buying Stockholders' Notice shall fix a time,
location and date for the closing of such purchase, which date shall be not less
than ten (10) nor more than sixty (60) days after delivery of the Buying
Stockholders' Notice. Unless otherwise agreed between or among the Buying
Stockholders, the purchase by the Buying Stockholders shall be pro rata to their
then holdings of Shares; provided, that if one or more of the Buying
Stockholders elects not to purchase any Offered Shares, the remaining Buying
Stockholders may purchase all of the
-2-
<PAGE> 3
Offered Shares without the consent of any non-purchasing Stockholders, pro rata
between or among them or in such other manner as they may agree.
2.2.3 Closing. The place for the closing of any purchase and sale
described in Section 2.2.1 or Section 2.2.2 shall be the principal office of the
Company or at such other place as the parties shall agree. At the closing, the
Selling Stockholder shall accept payment on the terms offered by the proposed
transferee named in the Selling Stockholder's Notice; provided, however, that
the Company and the Buying Stockholders shall not be required to meet any
non-monetary terms of the proposed transfer, including, without limitation,
delivery of other securities in exchange for the Shares proposed to be sold. At
the closing, the Selling Stockholder shall deliver to the Company or the Buying
Stockholders, as the case may be, in exchange for Shares purchased and sold at
the closing, certificates for the number of Shares stated in the Selling
Stockholder's Notice, accompanied by duly executed instruments of transfer.
2.2.4 Transfers to Third Parties. If the Company and the Buying
Stockholders fail to accept the offer stated in the Selling Stockholder's
Notice, then the Selling Stockholder shall be free to sell all, but not less
than all, of the Offered Shares to the designated transferee at a price and on
terms no less favorable to the Selling Stockholder than described in the Selling
Stockholder's Notice; provided, however, that such sale is consummated within
ninety (90) days after the later of the giving of the Selling Stockholder's
Notice to the Company and, if applicable, to the Buying Stockholders. As a
condition precedent to the effectiveness of a transfer pursuant to this Section
2.2.4, the proposed transferee(s) shall agree in writing prior to such transfer
to become a party to this Agreement and shall thereafter be permitted to
transfer Shares only in accordance with this Agreement.
2.3 Transfers to Permitted Transferees. The restrictions on transfer
contained in Section 2.1 hereof shall not apply to (a) transfers by a
Stockholder to the trustee or trustees of a trust for the benefit of his or her
immediate family, (b) transfers by a Stockholder to his or her guardian or
conservator, (c) or transfers by a Stockholder, in the event of his or her
death, to his or her executor(s) or administrator(s) or to trustee(s) under his
or her will (collectively, "Permitted Transferees"); provided, however, that in
any such event the Shares so transferred in the hands of each such Permitted
Transferee shall remain subject to this Agreement, and each such Permitted
Transferee shall so acknowledge in writing as a condition precedent to the
effectiveness of such transfer.
VOTING
3.1 Grant of Proxy. By his or her execution hereof, each of the
Stockholders hereby grants to the Founders an irrevocable proxy, with full power
of substitution, to vote all of the Shares held by him or her or to execute and
deliver written consents on all matters submitted to the stockholders of the
Company with respect to his or her Shares in such manner as the Founders in
their sole discretion shall determine. The Founders shall have full power and
authority to do and perform each and every act and thing whether necessary or
desirable to be done, as fully as such Stockholder might or could do if
personally present at a stockholders' meeting or personally providing or
withholding such consent. The Founders may adopt their
-3-
<PAGE> 4
own rules of procedure and are authorized to vote or act in person or by proxy
at any and all regular and special meetings of the stockholders of the Company
for whatever purpose called or held, or in connection with any proceedings
wherein the vote or written consent of the stockholders may be required or
authorized. Each Stockholder hereby affirms that this proxy is given as a
condition to his or her receipt of the Shares and as such is coupled with an
interest and will not be revocable or revoked by him or her during the term of
this Agreement.
3.2 Notice of Meeting or Consent. The Company agrees that during the term
of this Agreement it will provide written notice to the Founders with respect to
all proposals to be submitted to a vote of stockholders at a special or annual
meeting of the Company or all proposals as to which the consents of the
stockholders of the Company are being sought, as if he/she were a stockholder of
the Company in the manner provided under the Company's Certificate of
Incorporation and By-Laws or as written notice is otherwise provided to other
holders of the Company's voting capital stock.
3.3 Dividends. This Agreement shall only effect the Stockholders' right to
vote the Shares at a special or annual meeting of the Company or consent to
proposals otherwise presented to stockholders of the Company. Nothing herein
shall restrict the Stockholders from receiving payments of dividends or other
distributions from the Company with respect to the Shares.
3.4 Resignation and Replacement of Founders. If any of the Founders dies,
becomes disabled or resigns as proxyholder [or is no longer an officer or
director of the Company], the remaining Founder(s) shall be entitled to exercise
all of the powers and rights granted to the Founders hereunder without any
further action or formality. If none of the Founders is entitled to act as
proxyholder under this Agreement either due to death, disability or resignation
[or because none of the Founders is an officer or director of the Company], the
Stockholders, by vote of a majority in interest of their Shares shall designate
a replacement proxyholder hereunder. Upon such replacement, such proxyholder
shall be entitled to exercise all of the powers and rights granted to the
Founders hereunder without any further action or formality.
3.5 Effect of Votes. Each Stockholder covenants and agrees that, on any
proposal upon which the Founders are empowered to vote Shares pursuant hereto,
whether at a meeting of stockholders or by written consent, such voting will be
as fully effective as if such votes had been cast by such Stockholder without
regard hereto. Without limiting the generality of the foregoing, each
Stockholder agrees that he or she will not, with respect to any proposal upon
which such votes may be cast, make any claim against the Company, its other
stockholders, directors, officers, employees, agents or representatives in his
or her capacity as a stockholder of the Company, including but not limited to
any claim for an appraisal with respect to any Shares.
4. REPRESENTATIONS AND WARRANTIES
4.1 Representations and Warranties of Individual Stockholders. Each
Stockholder who is an individual hereby represents and warrants to the Company
and to each other Stockholder as follows:
-4-
<PAGE> 5
(a) Absence of Violation. Neither the execution and delivery of this
Agreement nor the consummation of the transactions contemplated hereby will
constitute a violation of, or default under, or conflict with, or require any
consent under any term or provision of any contract, commitment, indenture,
lease or other agreement to which such Stockholder is a party or by which such
Stockholder or any of his or her assets is bound.
(b) Binding Obligation. This Agreement constitutes a valid and binding
obligation of such Stockholder, enforceable in accordance with its terms, except
to the extent that such enforceability may be limited by bankruptcy, insolvency
and similar laws affecting the rights and remedies of creditors generally, and
by general principals of equity and public policy.
5. MISCELLANEOUS
5.1 Term. This Agreement shall remain in full force and effect until
terminated upon the earlier to occur of the closing of the sale of the Company
by stock purchase, exchange, merger, sale of all or substantially all of the
Company's assets or the dissolution and liquidation of the Company.
5.2 Legend Required. Each certificate representing Shares shall bear the
following legend during the term of this Agreement:
"The shares represented by this certificate are subject to a Stockholders
and Voting Agreement dated as of June 30, 1997, a copy of which Stockholders and
Voting Agreement is available for inspection at the offices of the Company or
will be furnished upon request of the record owner of the shares represented by
this certificate."
5.3 Enforcement. Each Stockholder acknowledges that immediate and
irreparable damage would occur in the event that he or she fails to perform the
provisions of this Agreement in accordance with their specific terms or if he or
she otherwise breaches this Agreement. Accordingly, in addition to any other
remedy, the Company shall be entitled to an injunction or injunctions to prevent
breaches of this Agreement by the Stockholder and to enforce specifically the
terms and provisions hereof in any federal or state court jurisdiction.
5.4 Entire Agreement. This Agreement constitutes the entire agreement of
the parties hereto with respect to the subject matter hereof and supersedes all
prior agreements and undertakings, both written and oral.
5.5 Notices. All notices, requests, consents and other communications
hereunder shall be in writing, shall be addressed to the receiving party's
address set forth below or to such other address as a party may designate by
notice hereunder, and shall be either (i) delivered by hand, (ii) made by telex,
telecopy or facsimile transmission, (iii) sent by overnight courier, or (iv)
sent by registered or certified mail, return receipt requested, postage prepaid.
-5-
<PAGE> 6
If to the Company:
Alloy Designs, Inc.
_______________________________
_______________________________
Attn: _________________________
Telecopier No.: _______________
If to the Stockholders:
To the address indicated on the signature pages hereto.
If to the Founders:
Samuel A. Gradess
James K. Johnson
Matthew Diamond
c/o Alloy Designs, Inc.
_______________________________
Attn: _________________________
Telecopier No.: _______________
All notices, requests, consents and other communications hereunder shall
be deemed to have been given either (i) if by hand, at the time of the delivery
thereof to the receiving party at the address of such party set forth above,
(ii) if made by telex, telecopy or facsimile transmission, at the time that
receipt thereof has been acknowledged by electronic confirmation or otherwise,
(iii) if sent by overnight courier, on the next business day following the day
such notice is delivered to the courier service, or (iv) if sent by registered
or certified mail, on the fifth business day following the day such mailing is
made.
5.6 Severability. In the event that any court having jurisdiction shall
determine that any provision contained in this Agreement shall be unreasonable
or unenforceable in any respect, then such covenant or other provision shall be
deemed limited to the extent that such court deems it reasonable and
enforceable, and as so limited shall remain in full force and effect. In the
event that such court shall deem any such covenant or other provision wholly
unenforceable, the remaining covenants and other provisions of this Agreement
shall nevertheless remain in full force and effect.
5.7 Further Agreements. Each of the parties hereto shall execute such
documents and take such further actions as may be reasonably required or
desirable to carry out the provisions of this Agreement and the transactions
contemplated hereby.
5.8 Assignment. This Agreement shall not be assigned by operation of law
or otherwise without the prior written consent of the other party hereto.
-6-
<PAGE> 7
5.9 Parties in Interest. This Agreement shall be binding upon the heirs,
legatees and devisees, executors, administrators, legal representatives,
successors and assigns of the Company, the Stockholders and the Founders.
Nothing herein, either express or implied, is intended to confer upon any other
person any rights or remedies of any nature whatsoever under or by reason of
this Agreement. Nothing in this Agreement shall be construed to create any
rights or obligations except among the parties hereto, and no person or entity
shall be regarded as a third-party beneficiary of this Agreement.
5.10 Interpretation. The parties hereto acknowledge and agree that: (i)
each party and its counsel have reviewed and negotiated the terms and provisions
of this Agreement and have contributed to its revision; (ii) the rule of
construction to the effect that any ambiguities are resolved against the
drafting party shall not be employed in the interpretation of this Agreement;
and (iii) the terms and provisions of this Agreement shall be construed fairly
as to all parties hereto and not in favor of or against any party, regardless of
which party was generally responsible for the preparation of this Agreement.
5.11 Amendment; Waiver. This Agreement may not be amended or modified
except by an instrument in writing signed by the parties hereto. The terms and
provisions of this Agreement may be waived, or consent for the departure
therefrom granted, only by written document executed by the party entitled to
the benefits of such terms or provisions. No such waiver or consent shall be
deemed to be or shall constitute a waiver or consent with respect to any other
terms or provisions of this Agreement, whether or not similar. Each such waiver
or consent shall be effective only in the specific instance and for the purpose
for which it was given, and shall not constitute a continuing waiver or consent.
5.12 Governing Law. This Agreement shall be governed by, and construed in
accordance with, the law of the State of Delaware, without giving effect to the
conflict of law principles thereof.
5.13 Counterparts. This Agreement may be executed in one or more
counterparts, and by the different parties hereto in separate counterparts, each
of which when executed shall be deemed to be an original but all of which taken
together shall constitute one and the same agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Stockholders and
Voting Agreement to be executed and delivered under seal as of the date first
written above.
ALLOY DESIGNS, INC.
By:________________________________
-7-
<PAGE> 8
FOUNDERS
___________________________________
Samuel A. Gradess
___________________________________
James K. Johnson
___________________________________
Matthew Johnson
[See attached counterpart signature pages]
-8-
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have caused this Stockholders and
Voting Agreement to be executed and delivered under seal as of the date first
written above.
STOCKHOLDER
________________________________
Signature
________________________________
Print Name
Address:
________________________________
________________________________
________________________________
-9-
<PAGE> 10
Schedule I
Stockholders
<TABLE>
<CAPTION>
Stockholder Name and Address No. of Shares Owned
- ---------------------------- -------------------
<S> <C>
</TABLE>
-10-
<PAGE> 11
Schedule II
ACCESSION AGREEMENT
Reference is made to the Stockholders and Voting Agreement dated as of
_____________, 1997 (the "Stockholders and Voting Agreement"), by and among (i)
Alloy Designs, Inc., a Delaware Corporation (the "Company"); (ii) the
stockholders named on Schedule I to the Stockholders and Voting Agreement, (iii)
each of the persons who shall, after the date hereof, acquire or receive the
right to acquire any shares of capital stock of the Company and join in and
become a party to the Stockholders and Voting Agreement by executing and
delivering to the Company an Accession Agreement in the form of Schedule II to
the Stockholders and Voting Agreement, and (iv) Samuel A. Gradess, James K.
Johnson, and Matthew Diamond. All capitalized terms used but not defined herein
shall have the meanings ascribed to such terms in the Stockholders and Voting
Agreement.
Pursuant to a vote of the Board of Directors of the Company dated as of
_______________, the Company is issuing to the undersigned purchaser (the
"Investor") shares of the Company's ___________________, in the aggregate amount
of ________ shares. By execution and delivery of this Accession Agreement, the
Investor agrees to be bound by the terms and conditions of the Stockholders and
Voting Agreement. Upon such execution and delivery, the Investor shall be deemed
to be a "Stockholder" (as such term is defined in the Stockholders and Voting
Agreement) for all purposes of the Stockholders and Voting Agreement effective
the date hereof and Schedule I to the Stockholders and Voting Agreement shall be
revised to reflect the Investor's admission to the Stockholders and Voting
Agreement.
This Accession Agreement may be executed in one or more counterparts, and
by different parties hereto on separate counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the same
agreement.
IN WITNESS WHEREOF, this Accession Agreement has been duly executed under
seal by the Investor as of this ____ day of ______, 199_.
________________________________
Investor Signature
________________________________
Print Name
Address:
________________________________
________________________________
________________________________
Agreed to and Accepted:
Alloy Designs, Inc.
By: ________________________________
-11-
<PAGE> 1
Exhibit 10.16
Alloy Designs, Inc.
79 Franklin Street
Allston, MA 02134
August 25, 1997
Re: Amendment No. 1 to Stockholders' and Voting Agreement
Dear Stockholder:
As a condition to their investment, certain participants in the recent
private offering of Common Stock, $.01 par value per share ("Common Stock") of
Alloy Designs, Inc. (the "Company") requested that, for so long as the Company
remains a so-called S corporation for federal income tax purposes, the Company
covenant to distribute cash to stockholders in an amount sufficient to enable
stockholders to pay tax liability in years in which the Company has taxable net
income.
Accordingly, the Company hereby agrees to the addition of the following
section to the Stockholders and Voting Agreement (the "Stockholders and Voting
Agreement") dated as of June 30, 1997 by and among the Company and the
stockholders of the Company:
"2.5 Distributions to Stockholders. For so long as the Company is taxed as
an S corporation under Subchapter S of the Internal Revenue Code of 1986, as
amended (the "Code"), subject to any limitations on distributions imposed by
statute, the Company and Stockholders agree as follows:
(i) Subject to terms of this Section 2.5, the Company shall use all
reasonable efforts to make pro rata distributions of money, based on
ownership of shares of Common Stock, to pay the federal and state income
taxes on the income (net of any tax benefits produced for the Stockholders
by the Company's losses, deductions and credits) that passes through from
the Company under the applicable provisions of the Code.
(ii) The total amount to be distributed shall be determined by
conclusively presuming that all taxable income passed through to each
Stockholder will be taxed at the maximum federal rate (without regard to
exemptions or phaseouts of lower tax rates) and the maximum State of New
York rate at which income of any individual can be taxed in the calendar
year that includes the last day of the Company's taxable year. It shall
further be conclusively presumed that the Stockholder can deduct the State
of New York tax for federal income tax purposes, and the calculations
shall be made using the net effective State of New York rate.
(iii) No provision in this Section 2.5 shall cause the total
dividend paid
<PAGE> 2
with respect to any outstanding share of Common Stock to differ from the
per share amounts paid with respect to any other outstanding share of
Common Stock.
<PAGE> 3
(iv) No provision of this Section 2.5 shall be construed to limit
the ability of the Company to declare and pay additional dividends to the
Stockholders out of the assets of the Company legally available for such
payment at such time or times as the Board of Directors may determine.
Except as amended hereby, the Stockholders and Voting Agreement remains in
full force and effect.
Very truly yours,
ALLOY DESIGNS, INC.
By:______________________________________
Samuel A. Gradess, Executive Vice
President and Secretary
ACCEPTED AND AGREED:
______________________________
Stockholder's Signature
______________________________
Print Name
__________________
Date
<PAGE> 1
Execution Copy
Exhibit 10.17
STOCKHOLDERS AGREEMENT
AGREEMENT made this 24th day of November, 1998, by and among (i) Alloy
Designs, Inc., a Delaware corporation (the "Company"), (ii) James K. Johnson,
Jr., Matthew C. Diamond and Samuel A. Gradess (each a "Founder" and collectively
the "Founders"), (iii) each person who shall, after the date hereof, acquire at
least 5,000 shares of Common Stock in the aggregate, (other than pursuant to the
exercise or conversion of any warrants, options or convertible securities
outstanding on the date of this Agreement) and join in and become a party to
this Agreement by executing and delivering to the Company an Instrument of
Accession in the form of Schedule II hereto (collectively, the "Non Founder
Stockholders" and singularly a "Non Founder Stockholder") (each of such
aforementioned persons in (ii) and (iii) being hereinafter referred to
collectively as the "Holders" and singularly as a "Holder"), and (iv) those
persons whose names are set forth under the heading "Investors" on Schedule I
hereto (the "Investors").
WHEREAS, the Holders currently hold collectively 3,600,000 shares of the
Common Stock, par value $.01 per share (the "Common Stock"), of the Company;
WHEREAS, the Investors are acquiring (or agreeing to acquire)
simultaneously herewith up to an aggregate of 1,487,843 shares of the Company's
Series A Convertible Preferred Stock, par value $.01 per share (the "Preferred
Stock"), of the Company pursuant to a certain Series A Preferred Stock Purchase
Agreement dated as of the date hereof, by and among the Investors, the Founders
and the Company (the "Purchase Agreement");
NOW, THEREFORE, in consideration of the mutual covenants herein contained
and other good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, the Company, the Holders and the Investors agree as
follows:
1. Prohibited Transfers. The Holders shall not sell, assign, transfer,
pledge, hypothecate, mortgage or dispose of, by gift or otherwise, or in any way
encumber, all or any part of the Shares (as hereinafter defined) owned by them
except in compliance with the terms of this Agreement. For purposes of this
Agreement, the term "Shares" shall mean and include all shares of Common Stock
of the Company owned by the Holders, whether presently held or hereafter
acquired. Additionally, for two (2) years following the date hereof, each
Founder may not transfer more than 300,000 shares of Common Stock, in the
aggregate, and any such transfers shall be in accordance with the terms and
conditions of this Agreement.
2. Right of Refusal on Dispositions by the Founders. If at any time any
Founder wishes to sell, assign, transfer or otherwise dispose of any or all
Shares owned by him pursuant to the terms of a bona fide offer received from a
third party, he shall submit a written offer to sell such Shares to the Company
on terms and conditions, including price, not less favorable to the Company than
those on which he proposes to sell such Shares to such third
<PAGE> 2
-2-
party (the "Offer"). The Offer shall disclose the identity of the proposed
purchaser or transferee, the Shares proposed to be sold or transferred, the
agreed terms of the sale or transfer and any other material facts relating to
the sale or transfer. Within fifteen (15) days after receipt of the Offer, the
Company shall give notice to the Founder of its intent to purchase all or any
portion of the offered Shares on the same terms and conditions as set forth in
the Offer. If, for any reason whatever, the Company shall not exercise its right
to purchase all of the offered Shares as provided herein, then each of the
Investors shall have the right to purchase a portion of the offered Shares which
the Company shall not have agreed to purchase from the Founder (all such
remaining shares being referred to as the "Remaining Offered Shares") to be
determined in the manner set forth herein. Each Investor shall have the right to
purchase that number of the Remaining Offered Shares as shall be equal to the
aggregate Remaining Offered Shares multiplied by a fraction, the numerator of
which is the number of shares of Preferred Stock of the Company then owned by
such Investor and the denominator of which is the aggregate number of shares of
said Preferred Stock then issued and outstanding and held by (and deemed to be
held by) all the Investors. (The amount of shares each Investor or Qualified
Transferee, as that term is defined below, is entitled to purchase under this
Section 2 shall be referred to as his "Pro Rata Fraction"). Each Investor shall
have the right to transfer his right to any Pro Rata Fraction or part thereof to
any Qualified Transferee. In the event an Investor does not wish to purchase or
to transfer his right to purchase his Pro Rata Fraction, then any Investors who
so elect shall have the right to purchase, on a pro rata basis with any other
Investors who so elect any Pro Rata Fraction not purchased by an Investor or
Qualified Transferee. Each Investor shall act upon the Offer as soon as
practicable after receipt from the Company of notice that it has not elected to
purchase all of the offered Shares, and in all events within fifteen (15) days
after receipt thereof. Each Investor shall have the right to accept the Offer as
to all or part of the Remaining Offered Shares offered thereby. In the event
that an Investor shall elect to purchase all or part of the Remaining Offered
Shares covered by the Offer, said Investor shall individually communicate in
writing such election to purchase to the Founder who has made the Offer, which
communication shall be delivered by hand or mailed to the Founder at the address
set forth in Section 8 below and shall, when taken in conjunction with the Offer
be deemed to constitute a valid, legally binding and enforceable agreement for
the sale and purchase of the Shares covered thereby.
In the event that the Company and Investors, taken together, do not
purchase all of the Shares offered by the Founder pursuant to and within
forty-five (45) days after the Offer, each such agreement to purchase the Shares
shall be deemed null and void, and such Shares may be sold by the Founder at any
time within 90 days after the expiration of the Offer, but subject to the
provisions of Section 4 below. Any such sale shall be at not less than the price
and upon other terms and conditions, if any, not more favorable to the purchaser
than those specified in the Offer. Any Shares not sold within such 90-day period
shall continue to be subject to the requirements of a prior offer and re-sale
pursuant to this Section. In the event that Shares are sold to any purchaser
pursuant to this Section 2, said Shares shall no longer be entitled to the
benefits conferred by, or subject to the restrictions imposed by, this
Agreement, except that the purchaser of said Shares shall agree in writing to
abide by the provisions of Section 5 hereof.
<PAGE> 3
-3-
For purposes of this Agreement, a Qualified Transferee shall mean any
person (i) who is an Investor, (ii) who is an affiliated person, as that term is
defined in the Investment Company Act of 1940, of an Investor, (iii) who is a
partner of an Investor, or (iv) who acquires at least 50,000 shares of Preferred
Stock (as adjusted for stock splits, stock dividends, reclassifications,
recapitalizations or other similar events).
3. Right of Refusal on Dispositions by the Non Founder Stockholders. If at
any time any of the Non Founder Stockholders wishes to sell, assign, transfer or
otherwise dispose of any or all Shares owned by him pursuant to the terms of a
bona fide offer received from a third party, he shall submit a written offer to
sell such Shares to the Company on terms and conditions, including price, not
less favorable to the Company than those on which he proposes to sell such
Shares to such third party (the "Stockholder Offer"). The Stockholder Offer
shall disclose the identity of the proposed purchaser or transferee, the Shares
proposed to be sold or transferred, the agreed terms of the sale or transfer and
any other material facts relating to the sale or transfer. Within fifteen (15)
days after receipt of the Stockholder Offer, the Company shall give notice to
the Non Founder Stockholder of its intent to purchase all or any portion of the
offered Shares (all such shares being referred to as the "Offered Shares") on
the same terms and conditions as set forth in the Stockholder Offer. If, for any
reason whatsoever, the Company shall not exercise its right to purchase all of
the Offered Shares, as provided herein, then each of the Investors and Founders
shall have the right to purchase a portion of the Offered Shares which the
Company shall not have agreed to purchase from the Non Founder Stockholder (all
such shares being referred to as the "Remaining Non Founder Offered Shares") to
be determined in the manner set forth herein. Each Investor shall have the right
to purchase that number of the Remaining Non Founder Offered Shares as shall be
equal to the aggregate Remaining Non Founder Offered Shares multiplied by a
fraction, the numerator of which is the number of shares of Stock (as defined in
Section 6 below) of the Company then owned by such Investor (including any
shares of Common Stock deemed to be owned hereunder, being a number of shares
equal to that into which Preferred Stock held by such Investor is convertible on
the date of the Offer using as the conversion formula that conversion price
equal to the lesser of (i) the Series A Conversion Price in place at such time
(as defined in the Company's Certificate of Incorporation) or (ii) the
conversion price of $2.402 per share) and the denominator of which is the
aggregate number of shares of said Stock then issued and outstanding and held by
(and deemed to be held by) all the Investors and Founders together. Each Founder
shall have the right to purchase that number of the Remaining Non Founder
Offered Shares as shall be equal to the aggregate Remaining Non Founder Offered
Shares not allocated to the Investors, as set forth above, multiplied by a
fraction, the numerator of which is the number of shares of Stock (as defined in
Section 6 below) of the Company then owned by such Founder and the denominator
of which is the aggregate number of shares of said Stock then issued and
outstanding and held by (and deemed to be held by) all the Founders together.
(The amount of shares each Investor, Founder or Qualified Transferee is entitled
to purchase under this Section 3 shall be referred to as his "Stockholder Pro
Rata Fraction"). Each Investor and Founder shall have the right to transfer his
right to any Stockholder Pro Rata Fraction or part thereof to any Qualified
Transferee. In the event an Investor or a Founder does not wish to purchase or
to transfer his right to purchase his Stockholder Pro Rata Fraction, then any
Investors or Founders who so elects
<PAGE> 4
-4-
shall have the right to purchase, on a pro rata basis with any other Investors
or Founders who so elect any Stockholder Pro Rata Fraction not purchased by an
Investor, a Founder or Qualified Transferee. Each Investor or Founder, as the
case may be, shall act upon the Stockholder Offer as soon as practicable after
receipt from the Company of its notice that it has not elected to purchase all
of the Offered Shares, and in all events within fifteen (15) days after receipt
thereof. Each Investor or Founder, as the case may be, shall have the right to
accept the Stockholder Offer as to all or part of the Remaining Non Founder
Offered Shares offered thereby. In the event that an Investor or a Founder shall
elect to purchase all or part of the Remaining Non Founder Offered Shares
covered by the Stockholder Offer, said Investor or Founder shall individually
communicate in writing such election to purchase to whichever Non Founder
Stockholder has made the Stockholder Offer, which communication shall be
delivered by hand or mailed to such Non Founder Stockholder at the address set
forth in Section 8 below and shall, when taken in conjunction with the
Stockholder Offer be deemed to constitute a valid, legally binding and
enforceable agreement for the sale and purchase of the Shares covered thereby.
In the event that the Company, Investors and Founders, taken together, do
not purchase all of the Shares offered by a Non Founder Stockholder pursuant to
and within forty-five (45) days after the Stockholder Offer, each such agreement
to purchase the Shares shall be deemed null and void, and such Shares may be
sold by such Non Founder Stockholder at any time within 90 days after the
expiration of the Stockholder Offer. Any such sale shall be at not less than the
price and upon other terms and conditions, if any, not more favorable to the
purchaser than those specified in the Stockholder Offer. Any Shares not sold
within such 90-day period shall continue to be subject to the requirements of a
prior offer and re-sale pursuant to this Section. In the event that Shares are
sold to any purchaser pursuant to this Section, said Shares shall no longer be
entitled to the benefits conferred by, or subject to the restrictions imposed
by, this Agreement, except that the purchaser of said Shares shall agree in
writing to abide by the provisions of Section 5 hereof.
4. Right of Participation in Sales. If at any time a Founder wishes to
sell, or otherwise dispose of any Shares owned by him (the "Selling Founder") to
any person (the "Purchaser") in a transaction which is subject to the provisions
of Section 2 hereof, each Investor shall have the right to require, as a
condition to such sale or disposition, that the Purchaser purchase from said
Investor at the same price per Share and on the same terms and conditions as
involved in such sale or disposition by the Selling Founder the same percentage
of shares of Common Stock owned (and deemed to be owned hereunder) by such
Investor as such sale or disposition (as finally consummated) represents with
respect to said shares of Common Stock then owned by the Founders. Each Investor
wishing so to participate in any such sale or disposition shall notify the
Selling Founder of such intention as soon as practicable after receipt of the
Offer made pursuant to Section 2, and in all events within fifteen (15) days
after receipt thereof. In the event that an Investor shall elect to participate
in such sale or disposition, said Investor shall individually communicate such
election to the Selling Founder, which communication shall be delivered by hand
or mailed to the Selling Founder at the address set forth in Section 8 below.
The Selling Founder and/or each participating Investor shall sell to the
Purchaser all, or at the option of the Purchaser, any part
<PAGE> 5
-5-
of the Stock (as defined in Section 5 below) proposed to be sold by them at not
less than the price and upon other terms and conditions, if any, not more
favorable to the Purchaser than those originally offered; provided, however,
that any purchase of less than all of such Stock by the Purchaser shall be made
from the Selling Founder and/or each participating Investor based upon a
fraction, the numerator of which is the number of shares of Stock of the Company
then owned by the Selling Founder or such participating Investor (including any
shares of Common Stock deemed to be owned hereunder, being a number of shares
equal to that into which Preferred Stock held by such Investor is convertible on
the date of the Offer using as the conversion formula that conversion price
equal to the lesser of (i) the Series A Conversion Price in place at such time
(as defined in the Company's Certificate of Incorporation, as amended or
restated from time to time) or (ii) the conversion price of $2.402 per share)
and the denominator of which is the aggregate number of shares of Stock held by
(and deemed to be held by) the Founders and all of the participating Investors.
The Selling Founder or Investor shall use his or its best efforts to obtain the
agreement of the Purchaser to the participation of the participating Investors
in the contemplated sale, and shall not sell any Stock to such Purchaser if such
Purchaser declines to permit the participating Investors to participate pursuant
to the terms of this Section 4. The provisions of this Section 4 shall not apply
to the sale of any Shares by a Founder to Brand Equity Ventures I, L.P. ("Brand
Equity") pursuant to an Offer under Section 2.
5. Right to Participate in Sale by Third Parties. If any Founder has at
any time the right to purchase shares of Common Stock or a security convertible
into Common Stock (the "Third Party Shares") pursuant to that certain
Stockholders and Voting Agreement dated as of June 30, 1997, as amended, among
the Company, the Founders and certain other signatories thereto (the
"Stockholders and Voting Agreement"), and if any of the Founders chooses not to
purchase all or a portion of the Third Party Shares, such Founders shall, as a
group, submit a written offer to sell such remaining Third Party Shares (the
"Remaining Third Party Shares") to the Investors within ten (10) days after
receiving the offer to purchase the Third Party Shares on the same terms and
conditions, including price, as was offered to the Founders (the "Third Party
Offer"). The Third Party Offer shall disclose the identity of the seller, the
number of Remaining Third Party Shares, the agreed terms of the sale or transfer
and any material aspects relating to the sale. Each of the Investors shall have
the right to purchase a portion of the offered Remaining Third Party Shares from
the Founders to be determined in the manner set forth herein. Each Investor
shall have the right to purchase that number of Remaining Third Party Shares as
shall be equal to the aggregate Remaining Third Party Shares multiplied by a
fraction, the numerator of which is the number of shares of Preferred Stock of
the Company then owned by the Investor and the denominator of which is the
aggregate number of shares of said Preferred Stock then issued and outstanding
and held by (and deemed to be held by) all the Investors. (The amount of shares
each Investor or Qualified Transferee, as that term is defined below, is
entitled to purchase under this Section 5 shall be referred to as his "Section 5
Pro Rata Fraction"). Each Investor shall have the right to transfer his right to
any Pro Rata Fraction or part thereof to any Qualified Transferee. In the event
an Investor does not wish to purchase or to transfer his right to purchase his
Section 5 Pro Rata Fraction, then any Investors who so elect shall have the
right to purchase, on a pro rata basis with any other Investors who so elect any
Section 5 Pro Rata Fraction not purchased by an Investor or
<PAGE> 6
-6-
Qualified Transferee. Each Investor shall act upon the Third Party Offer as soon
as practicable after receipt from the Founders of notice that they have not
elected to purchase all of the offered Third Party Shares, and in all events
within fifteen (15) days after receipt thereof. Each Investor shall have the
right to accept the Third Party Offer as to all or part of the Remaining Third
Party Offered Shares offered thereby. In the event that an Investor shall elect
to purchase all or part of the Remaining Third Party Offered Shares covered by
the Third Party Offer, said Investor shall individually communicate in writing
such election to purchase to the Founder(s) who has made the Third Party Offer,
which communication shall be delivered by hand or mailed to the Founder(s) at
the address set forth in Section 8 below and shall, when taken in conjunction
with the Third Party Offer, be deemed to constitute a valid, legally binding and
enforceable agreement for the sale and purchase of the Remaining Third Party
Shares covered thereby. Such purchasing Investors shall, within twenty (20) days
of the notice forward to the Founders, by check or wire transfer, the funds to
purchase such shares. Upon receipt of such funds the Founders shall purchase the
Remaining Third Party Shares for the purchasing Investors and transfer such
Remaining Third Party Shares to the purchasing Investors. This Section 5 is
conditioned on the fact that under the Stockholders and Voting Agreement, the
offer of the Founders to purchase on behalf of themselves and/or the Investors
the Third Party Shares is only valid if all such Third Party Shares available
for purchase are purchased and that such offer may not be accepted in part.
6. Permitted Transfers. Anything herein to the contrary notwithstanding,
the provisions of Sections 1, 2 , 3 and 4 shall not apply to: (a) any transfer
of Shares by a Holder by gift or bequest or through inheritance to, or for the
benefit of, any member or members of his immediate family; (b) any transfer of
Shares by a Holder to a trust in respect of which he serves as trustee, provided
that the trust instrument governing said trust shall provide that such Holder,
as trustee, shall retain sole and exclusive control over the voting and
disposition of said Shares until the termination of this Agreement; and (c) any
sale of Common Stock in a public offering pursuant to a registration statement
filed by the Company with the Securities and Exchange Commission. In the event
of any such transfer, other than pursuant to subsection (c) of this Section 6,
the transferee of the Shares shall hold the Shares so acquired with all the
rights conferred by, and subject to all the restrictions imposed by, this
Agreement.
7. Election of Directors. Each of the parties hereto agrees to vote all of
the Stock (as hereinafter defined) of the Company now owned or hereafter
acquired by such party (and attend, in person or by proxy, all meetings of
stockholders called for the purpose of electing directors), and the Company
agrees to take all actions (including, but not limited to the nomination of
specified persons) to cause and maintain the election to the Board of Directors
of the Company, to the extent permitted pursuant to the Company's Restated
Certificate of Incorporation, the following:
(i) three (3) nominees designated by the holders of a majority of
the Common Stock (one of whom shall be the Chief Executive Officer of the
Company), who shall initially be James K. Johnson, Jr., Matthew C. Diamond and
Samuel A. Gradess;
<PAGE> 7
-7-
(ii) one nominee designated by Brand Equity and elected by the
holders of the Preferred Stock, voting as a separate class; and
(iii) three (3) nominees designated by (x) the Founders (provided
that each such Founder remains employed by the Company and continues to own at
least seventy-five percent (75%) of his initial ownership of the Company as set
forth on Schedule I hereto) and (y) Brand Equity:
(a) one of whom shall be a representative of the holders
of the Company's outstanding notes and warrants issued
in the May 1998 financing of the Company who shall
initially be Peter Graham for the first three (3) years
following the date of this Agreement and, after such
period, shall be a person unaffiliated with the Company;
(b) one of whom shall be experienced in the
Internet/"e-commerce" field and unaffiliated with the
Company; and
(c) one of whom shall be a non-employee with relevant
industry experience who shall initially be Robert Kerson
or an individual (reasonably acceptable to the other
Directors and Brand Equity) referred by Robert Kerson
for the first three (3) years following the date of this
Agreement and, after such period, shall be a
non-employee with relevant industry experience.
Each of the parties further covenants and agrees to vote, to the extent
possible, all shares of Stock of the Company now owned or hereafter acquired by
such party so that the Company's Board of Directors shall consist of no more
than seven (7) members. For the purposes of this Agreement, "Stock" shall mean
and include all Preferred Stock and all shares of Common Stock, and all other
securities of the Company which may be exchangeable for or issued in exchange
for or in respect of shares of Common Stock (whether by way of stock split,
stock dividends, combination, reclassification, reorganization or any other
means).
In the absence of any designation from the persons or groups so
designating directors as specified above, the director previously designated by
them and then serving shall be reelected if still eligible to serve as provided
herein.
No party hereto shall vote to remove any member of the Board of Directors
designated in accordance with the aforesaid procedure unless the persons or
groups so designating directors as specified above so vote, and, if such persons
or groups so vote then the non-designating party or parties shall likewise so
vote.
Any vacancy on the Board of Directors created by the resignation, removal,
incapacity or death of any person designated under this Section 7 shall be
filled by another person designated in a manner so as to preserve the
constitution of the Board as provided above.
<PAGE> 8
-8-
8. Termination. This Agreement, and the respective rights and obligations
of the parties hereto, shall terminate upon the earliest to occur of the
following: (i) the completion of a fully underwritten, firm commitment public
offering pursuant to an effective registration under the Securities Act covering
the offering or sale by the Company of its Common Stock in which (x) the net
proceeds received by the Company shall be at least $15 million, and (y) the
price per share of such Common Stock equals a price per share representing a
valuation of the Company of not less than $75 million; or (ii) the sale of the
Company, whether by merger, sale, or transfer of capital stock representing a
majority of the voting power at elections of directors of the Company, or sale
of substantially all of its assets (an "Acquisition").
9. Notices. All notices and other communications hereunder shall be in
writing and shall be deemed to have been given when delivered or mailed by first
class, registered or certified mail (air mail if to or from outside the United
States), return receipt requested, postage prepaid, if to each Holder at his
respective address set forth on Schedule I hereto or on the Instrument of
Accession pursuant to which he became a party to this Agreement, if to the
Company at the address set forth in the Purchase Agreement with a copy to
counsel to the Company as set forth therein, and if to the Investors, at their
respective addresses set forth on Schedule I hereto or to such other address as
the addressee shall have furnished to the other parties hereto in the manner
prescribed by this Section 9.
10. Holders' Lock-up Agreement. Each of the Holders and the Investors
hereby agrees in connection with the Company's initial public offering, upon the
request of the principal underwriter managing the initial public offering of the
Company, not to sell publicly any Shares now owned or hereafter acquired by him
and subject to this Agreement without the prior written consent of such
underwriter for a period of time (not to exceed one hundred eighty (180) days)
from the effective date of such registration as the underwriter may specify, in
all events subject to the provisions of Section 13(g) of a certain Registration
Rights Agreement dated as of the date hereof (the "Registration Rights
Agreement").
11. Failure to Deliver Shares. If a Holder becomes obligated to sell any
Common Stock of the Company to an Investor, Founder or the Company (or to any
Qualified Transferee) (a "Purchasing Party") under this Agreement and fails to
deliver such Common Stock in accordance with the terms of this Agreement, such
Purchasing Party may, at its option, in addition to all other remedies it may
have, send to said Holder the purchase price for such Common Stock as is herein
specified. Thereupon, the Company upon written notice to said Holder, (a) shall
cancel on its books the certificate or certificates representing the Common
Stock to be sold and (b) shall issue, in lieu thereof, in the name of such
Purchasing Party a new certificate or certificates representing such Common
Stock, and thereupon all of said Holder's rights in and to such Common Stock
shall terminate.
12. Specific Performance. The rights of the parties under this Agreement
are unique and, accordingly, the parties shall, in addition to such other
remedies as may be available to any of them at law or in equity, have the right
to enforce their rights hereunder by actions for specific performance to the
extent permitted by law.
<PAGE> 9
-9-
13. Legend. The certificates representing the Shares shall bear on their
face a legend indicating the existence of the restrictions imposed hereby.
14. Entire Agreement. This Agreement, the Purchase Agreement (including
any and all exhibits, schedules and other instruments contemplated thereby) and
the Registration Rights Agreement constitute the entire agreement among the
parties with respect to the subject matter hereof and supersede all prior
agreements and understandings between them or any of them as to such subject
matter.
15. Waivers and Further Agreements. Any of the provisions of this
Agreement may be waived with the consent of the Investors holding at least a
majority in interest of the issued and outstanding shares of Preferred Stock
(including shares of Common Stock into which any such shares may have been
converted) then held or deemed to be held by all Investors by an instrument in
writing. Any waiver by any party of a breach of any provision of this Agreement
shall not operate or be construed as a waiver of any subsequent breach of that
provision or of any other provision hereof. Each of the parties hereto agrees to
execute all such further instruments and documents and to take all such further
action as any other party may reasonably require in order to effectuate the
terms and purposes of this Agreement. Notwithstanding the foregoing, no waiver
approved in accordance herewith shall be effective if and to the extent that
such waiver grants to any one or more Investors any rights more favorable than
any rights granted to all other Investors or otherwise treats any one or more
Investors differently than all other Investors.
16. Amendments. Except as otherwise expressly provided herein, this
Agreement may not be amended except by an instrument in writing executed by (i)
Investors holding at least seventy-five percent (75%) in interest of the issued
and outstanding shares of Preferred Stock (including shares of Common Stock into
which any such shares may have been converted) and Common Stock, (ii) Holders
holding a majority of the Shares subject to this Agreement, and (iii) the
Company.
17. Assignment; Successors and Assigns. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
heirs, executors, legal representatives, successors and permitted transferees,
except as may be expressly provided otherwise herein, and provided, further,
that no Investor may transfer its rights or obligations hereunder except to a
Qualified Transferee.
18. Severability. In case any one or more of the provisions contained in
this Agreement shall for any reason be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision of this Agreement and such invalid, illegal
and unenforceable provision shall be reformed and construed so that it will be
valid, legal, and enforceable to the maximum extent permitted by law.
19. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and
<PAGE> 10
-10-
the same instrument. The Company shall require (i) each executive officer who
shall, after the date hereof, acquire any shares of Common Stock, and (ii) each
person who shall, after the date hereof, acquire more than 5,000 shares of
Common Stock (appropriately adjusted for any stock split, recapitalization or
other reorganization), as a condition to such acquisition, to become a party to
this Agreement by executing and delivering to the Company an Instrument of
Accession in the form of Schedule II hereto. Any person who may, after the date
hereof, purchase shares of Preferred Stock pursuant to the Purchase Agreement
shall become an "Investor" for all purposes hereunder, all upon execution of a
counterpart to this Agreement signed by such person and the Company.
20. Section Headings. The headings contained in this Agreement are for
reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
21. Governing Law. This Agreement shall be construed and enforced in
accordance with and governed by the General Corporation Law of the State of
Delaware as to matters within the scope thereof, and as to all other matters
shall be governed by and construed in accordance with the internal law of The
Commonwealth of Massachusetts.
22. Changes in Common Stock or Preferred Stock. If, and as often as, there
is any change in the Common Stock or the Preferred Stock by way of a stock
split, stock dividend, combination or reclassification, or through a merger,
consolidation, reorganization or recapitalization, or by any other means,
appropriate adjustment shall be made in the provisions hereof, including without
limitation an equitable adjustment of all per share prices herein, so that the
rights and privileges granted hereby shall continue with respect to the Common
Stock, the Preferred Stock or per share price as so changed.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 11
-11-
IN WITNESS WHEREOF, the undersigned have executed this Agreement as a
sealed instrument as of the day and year first above written.
INVESTORS:
ALLOY DESIGNS, INC. BRAND EQUITY VENTURES I, L.P.
By: Brand Equity Partners I, LLC,
General Partner
By:_________________________ By:______________________________
Name: Manager
Title:
FOUNDERS: _________________________________
J. Edward Diamond
_________________________________
James K. Johnson, Jr.
_________________________________
Matthew C. Diamond
_________________________________
Samuel A. Gradess
<PAGE> 12
SCHEDULE I
ALLOY DESIGNS, INC.
SCHEDULE OF HOLDERS AND INVESTORS
<TABLE>
<CAPTION>
Names and Addresses No. of Shares
- ------------------- -------------
<S> <C>
FOUNDERS
James K. Johnson, Jr.
[Address] 1,200,000
Matthew C. Diamond
[Address] 1,200,000
Samuel A. Gradess
[Address] 1,200,000
<CAPTION>
INVESTORS
- ---------
Brand Equity Ventures I, L.P.
Three Pickwick Plaza
Greenwich, CT 06830 1,474,573*
J. Edward Diamond
P.O. Box 9187
Canton, OH 44711 13,270*
</TABLE>
* Shares of Series A Convertible Preferred Stock.
<PAGE> 13
SCHEDULE II
ALLOY DESIGNS, INC.
INSTRUMENT OF ACCESSION
The undersigned, _________________, as a condition precedent to becoming
the owner or holder of record of ___________________ (______) shares of the
Common Stock, par value $.01 per share, of Alloy Designs, Inc., a Delaware
corporation (the "Company"), hereby agrees to become a Holder party to and bound
by that certain Stockholders' Agreement, dated as of ______________ ____, 1998
by and among the Company and other shareholders of the Company. This Instrument
of Accession shall take effect and shall become an integral part of the said
Stockholders' Agreement immediately upon execution and delivery to the Company
of this Instrument.
IN WITNESS WHEREOF, this INSTRUMENT OF ACCESSION has been duly executed by
or on behalf of the undersigned, as a sealed instrument under the laws of the
State of Delaware, as of the date below written.
Signature:
-----------------------------------
(Print Name)
Address:
Date:
-----------------------------------
Accepted:
ALLOY DESIGNS, INC.
By:
----------------------------------
Name:
-----------------------------
Title:
----------------------------
Date:
---------------------------------
<PAGE> 1
Exhibit 10.21
Alloy Designs, Inc.
Offer Letter
February 22, 1999
Neil Vogel
5 East 16th Street, #8
New York, NY 10003
Dear Mr. Vogel:
I am very pleased to provide you with the terms and conditions of your
employment by Alloy Designs, Inc. (the "Company"). The following sets forth the
proposed terms and conditions of our offer to employ you. We hope that you
choose to join the Company and look forward to a mutually beneficial
relationship.
1. Position: Your initial position will be Chief Corporate Development Officer,
based out of the Company's main office located in New York City, New York. Your
location is subject to change at the discretion of the Company. As the Company's
employee, we expect you to devote your full time and energies to the business
and affairs of the Company, and to perform any and all duties and
responsibilities associated with this position and as may be reasonably assigned
to you by the Company consistent with your position as Chief Corporate
Development Officer. In addition to your primary duties, you shall perform such
other services for the Company as may be reasonably assigned to you from time to
time by the Company consistent with your position as Chief Corporate Development
Officer. You will report directly to the Chief Executive, Chief Operating and
Chief Financial Officers. Your performance will be reviewed on a periodic basis
as long as you remain employed by the Company.
2. Starting Date/Nature of Relationship: If you accept this offer, your
employment with the Company shall commence on February 22, 1999. Except as
expressly set forth herein, no provision of this letter shall be construed to
create an express or implied employment contract, or a promise of employment for
a specific period of time and you agree that, except as expressly set forth
herein, your employment is at-will and either party may terminate the
relationship with or without cause on five (5) days prior notice.
3. Compensation and Benefits: Your initial base pay shall be $1,634.62 per week
($85,000 on an annualized basis). This level of base pay will be reviewed at
least every six months. In addition, effective upon the date of commencement of
employment, the Company will grant you ten year options to purchase an aggregate
of 270,000 shares of the Common Stock under the Company's 1997 Employee,
Director and Consultant Stock Option Plan, or a successor Plan if established.
To the extent permissible under the Internal Revenue Code, such options will be
<PAGE> 2
granted as Incentive Stock Options and any options that cannot be granted as
Incentive Stock Options will be granted as Non-Qualified Options. The options
shall have the following vesting and exercise price ("Strike Price") schedules:
25,000 shares shall vest upon the commencement of employment with the Company
with an exercise price per share equal to the price to the public at the closing
of the initial public offering of common stock (the "IPO Price"), par value .01
per share (the "Common Stock"), of the Company (the "IPO") before deducting any
underwriting commissions or expenses of the offering; an aggregate of 25,000
shares shall vest on the first anniversary of your commencement of employment
with the Company with an exercise price per share equal to the IPO Price; 50,000
shares shall vest on the second anniversary of your commencement of employment
with the Company with an exercise price per share equal to 120% of the IPO
Price; an aggregate of 75,000 shares shall vest on the third anniversary of your
commencement of employment with the Company with an exercise price per share
equal to 150% of the IPO Price; and an aggregate of 95,000 shares shall vest on
the fourth anniversary of your commencement of employment with the Company with
an exercise price per share equal to 175% of the IPO Price. If the IPO is not
completed prior to January 1, 2000; or if there is a Change of Control prior to
the completion of the IPO, as defined in 1997 Employee, Director and Consultant
Stock Option Plan, prior to January 1, 2000; or if your employment is terminated
without cause prior to January 1, 2000 without an IPO or Change of Control
having occurred prior to such termination, the Strike Price of the options will
be equal to the following; (i) in the event the Company consummates an equity
offering larger than $3 million (the "Equity Financing") other than an IPO, the
Strike Price will be equal to the price per share paid by the new equity
investor or (ii) if there is no Equity Financing, the Strike Price will be equal
to the per share conversion price to be used in conversion of the Series A
Preferred Stock issued in November 1998 and February 1999 to common stock.
In addition to your compensation, you will be entitled to receive the
various benefits (pension, stock option, bonus, profit sharing, health, dental,
disability, etc.) offered by the Company to its executive officers. These
benefits may be modified or changed from time to time at the discretion of the
Company but only to the extent the other executive officers are similarly
effected. Where a particular benefit is subject to a formal plan, eligibility to
participate in and receive any particular benefit of the plan is governed solely
by the applicable plan document. Should you ever have any questions, you should
ask Sam Gradess, or the Company's Human Resources representative, for a copy of
the applicable plan document.
In the event your employment is terminated by the Company for any reason
other than for "cause" (as defined below), all then outstanding options issued
to you shall immediately (and without further action by you or the Company) be
accelerated and vested in full and be exercisable, and shall remain vested and
exercisable for the duration of the term of such Options.
For purposes hereof, termination for cause shall mean (i) your conviction
of or guilty plea to an act of fraud or a to a felony; (ii) your embezzlement,
misappropriation or commission of a fraudulent act against the Company; (iii)
your material breach, after a reasonable opportunity to cure, of the terms
hereof or the Non-Competition and Confidentiality Agreement, as determined by
the unanimous consent of Matt Diamond (Chief Executive Officer), Sam Gradess
(Chief Financial Officer) and Jim Johnson (Chief Operating Officer); or (iv)
your commission of an act
-2-
<PAGE> 3
causing material harm to the Company as determined by the unanimous consent of
Messrs. Diamond, Johnson and Gradess. In the event that at least two of the
three previously named officers are not employed at the Company at the time of
the termination, termination for cause shall mean your material breach, after
notice from the Board of Directors and a reasonable opportunity to cure, of the
terms hereof or the Non-Competition and Confidentiality Agreement, or your
commission of an act causing material harm to the Company as determined by the
Board of Directors. The foregoing definition of "cause" shall take precedence
over any other definition of "cause" utilized by the Company, including without
limitation the 1997 Employee, Director and Consultant Stock Option Plan.
4. Confidentiality: The Company considers the protection of its confidential
information, proprietary materials and goodwill to be extremely important.
Consequently, as a condition of this offer of employment and your subsequent
employment, you are required to sign the Non-Competition and Confidentiality
Agreement (the "Agreement") enclosed with this letter.
5. Miscellaneous: This letter, together with the Agreement, constitutes our
entire offer regarding the terms and conditions of your employment by the
Company. It supersedes any prior agreements, or other promises or statements
(whether oral or written) regarding the offered terms of employment. The terms
of your employment shall be governed by the law of the State of New York. By
accepting this offer of employment, you agree that any action, demand, claim or
counterclaim concerning any aspect of your employment relationship with the
Company shall be resolved by a judge alone, and you waive and forever renounce
your right to a trial before a civil jury.
You may accept this offer of employment and the terms and conditions hereof by
signing the enclosed additional copy of this letter and the Agreement, which
execution will evidence your agreement with the terms and conditions set forth
herein and therein, and returning it to the Company in the enclosed envelope.
This offer will expire on February 22, 1999 unless accepted by you prior to such
date.
We are delighted to offer you the opportunity to join our Company, and we look
forward to your joining us.
ALLOY DESIGNS, INC.
By:_____________________________________________________
Samuel A. Gradess -- Director and Corporate Secretary
Accepted and Agreed:
By:____________________________
Neil Vogel
Date:__________________________
3
<PAGE> 1
Exhibit 10.22
ALLOY DESIGNS, INC.
Agreement
November 24, 1998
Matthew C. Diamond
4 East 30th Street, #4B
New York, NY 10016
Dear Mr. Diamond:
In consideration of your employment by Alloy Designs, Inc. (the "Company")
and for other good and valuable consideration, the receipt and sufficiency of
which you acknowledge, you agree as follows:
1. Confidentiality. The Company has developed, uses and maintains trade
secrets and other confidential and proprietary information including, without
limitation, training materials, product information, personnel information
relating to Company employees, operating procedures, marketing information,
profit and loss information, inventory strategy, product costs, gross profit
margins, selling strategies, supplier information, and customer information (the
"Confidential Information"), and the Company has taken and shall continue to
take all reasonable measures to protect the confidentiality of such Confidential
information.
You acknowledge that during your employment with the Company you will have
direct access to and knowledge of the Confidential Information, and you
acknowledge that if you become employed or affiliated with any competitor of the
Company in violation of your obligations in Section 2 of this Agreement, it is
inevitable that you would disclose the Company's Confidential Information to
such competitor. You covenant and agree that all such Confidential Information
is and shall remain the sole property of the Company and that you will hold in
strictest confidence, and will not (except as required in the course of your
employment with the Company) disclose to any business, firm, entity or person,
either directly or indirectly, any of the Confidential Information. You further
agree that you will return all such Confidential Information (regardless of how
it is maintained) and any copies thereof, to the Company upon termination of
your employment, whether voluntary or involuntary and regardless of the reason
for termination. The terms of this paragraph are in addition to, and not in lieu
of any legal or other contractual obligations that you may have relating to the
protection of the Company's Confidential Information. The terms of this
paragraph shall survive indefinitely the termination of this Agreement and/or
your employment with the Company.
2. Non-Competition and Non-Solicitation. You acknowledge that the Company
has invested substantial time, money and resources in the development and
retention of its customers and accounts, and further acknowledge that during the
course of your employment you
<PAGE> 2
will be introduced to customers and accounts of the Company. You acknowledge and
agree that any and all "goodwill" associated with any customer or account
belongs exclusively to the Company including, but not limited to, any goodwill
created as a result of direct or indirect contacts or relationships between
yourself and any customers or accounts of the Company. In recognition of this
and as a condition of your employment with the Company, you covenant and agree
as follows:
(a) You understand and acknowledge that the Company's business interests
are worldwide because the Company's products and/or services are sold in
countries around the world and the Company's competitors similarly operate from
and market their products and/or services in many locations around the world. In
order to protect the Company's interests wherever they may be affected by the
matters addressed in this Agreement, the term "Competitive Business" as used in
this Agreement shall mean any business anywhere in the world which engages or
plans to engage in the sale, distribution or licensing of clothing or apparel
through catalog direct marketing to teenagers and young adults, in any media now
existing or hereafter developed.
(b) You acknowledge that your employment by the Company will give you
access to Confidential Information and that your knowledge of Confidential
Information would enable you to place the Company at a significant competitive
disadvantage if you are employed or engaged by, or become involved in, a
Competitive Business. Accordingly, during the term of your employment by the
Company and for a period of twelve (12) months commencing on the termination of
your employment, you shall not without the prior written consent of the Company,
(1) be engaged directly or indirectly, in any manner whatsoever, including,
without limitation, whether individually or in partnership, jointly or in
conjunction with any other person, or as an employee, agent, servant, owner,
partner, consultant, independent contractor or representative, stockholder,
member or proprietor, in any Competitive Business, or (2) advise, invest in,
lend money to, guarantee the debts or obligations of, or otherwise have any
financial interest in any Competitive Business.
(c) You further acknowledge the importance to the business carried on by
the Company of the human resources engaged and developed by it and the unique
access that your employment offers to interfere with such resources.
Accordingly, during the term of your employment by the Company and for a period
of twelve (12) months commencing on the termination of your employment, you
shall not, induce or solicit, or assist any third party in inducing or
soliciting any employee or consultant of the Company who is employed by the
Company at the time of your termination of employment or who became employed by
the Company during the twelve (12) months following your termination of the
employment to leave the employment of the Company or to accept employment or
engagement elsewhere.
3. Provisions Necessary and Reasonable. You agree that (i) the provisions
of Sections 1 and 2 are necessary and reasonable to protect the Company's
Confidential Information and goodwill, (ii) the specific time, geography and
scope provisions set forth in Section 2 are reasonable and necessary to protect
the Company's business interests and (iii) in
2
<PAGE> 3
the event of your breach of any of your agreements set forth in Sections 1 and
2, the Company would suffer substantial irreparable harm and that the Company
would not have an adequate remedy at law for such breach. In recognition of the
foregoing, you agree that in the event of a breach or threatened breach of any
of these covenants, in addition to such other remedies as the Company may have
at law, without posting any bond or security, the Company shall be entitled to
seek and obtain equitable relief, in the form of specific performance, or
temporary, preliminary or permanent injunctive relief, or any other equitable
remedy which then may be available. The seeking of such injunction or order
shall not affect the Company's right to seek and obtain damages or other
equitable relief on account of any such actual or threatened breach.
4. Choice of Law; Enforceability; Waiver of Jury Trial. You acknowledge
that a substantial portion of the Company's business is based out of and
directed from the State of New York, where the Company maintains its main office
and administers all employee compensation and benefits. You also acknowledge
that during the course of your employment with the Company you will have
substantial contacts with New York. This Agreement shall be deemed to have been
made in the State of New York, shall take effect as an instrument under seal
within New York, and the validity, interpretation and performance of this
Agreement shall be governed by, and construed in accordance with, the internal
law of New York, without giving effect to conflict of law principles. Both
parties further acknowledge that the last act necessary to render this Agreement
enforceable is its execution by the Company in New York, and that the Agreement
thereafter shall be maintained in New York. Both parties agree that any action,
demand, claim or counterclaim relating to the terms and provisions of this
Agreement, or to its breach, shall be commenced in New York in a court of
competent jurisdiction. Both parties further acknowledge that venue shall
exclusively lie in New York and that material witnesses and documents would be
located in New York. Both parties further agree that any action, demand, claim
or counterclaim shall be resolved by a judge alone, and both parties hereby
waive and forever renounce the right to a trial before a civil jury.
5. Miscellaneous.
(a) You acknowledge and agree that no provision of this Agreement shall be
construed to create an express or implied employment contract, or a promise of
employment for a specific period of time, and the Company may terminate your
employment at any time, with or without cause (i.e., you are an "at-will"
employee).
(b) You acknowledge and agree that should you transfer between or among
Company affiliates, wherever situated, or otherwise become employed by any
Company affiliate, or be promoted or reassigned to functions other than your
present functions, the terms of this Agreement including, but not limited to,
Sections 1 and 2 hereof, shall continue to apply with full force.
(c) Should any provision or term of this Agreement be held to be invalid,
illegal or unenforceable, in whole or part, such invalidity, illegality, or
unenforceability shall not affect the validity, legality or enforceability of
any other provision of this Agreement, and to the extent
3
<PAGE> 4
permissible by law, the parties agree that a court shall have the power to amend
such specific provision so that it can be enforced to the fullest extent
permissible by law.
(d) No amendment, waiver or revocation of this Agreement of any kind shall
be effective unless supported by a written instrument executed by you and an
authorized officer of the Company.
(e) You hereby acknowledge that you have had adequate opportunity to
review these terms and conditions and to reflect upon and consider the terms and
conditions of this Agreement. You further acknowledge that you fully understand
its terms and have voluntarily executed this Agreement.
Kindly acknowledge your acceptance of this Agreement by signing both
copies of this letter where indicated.
ALLOY DESIGNS, INC.
By:
---------------------------------
Name:
Title:
ACCEPTED AND AGREED:
- ---------------------------------
Name:
Date:
---------------------------
4
<PAGE> 1
Exhibit 10.23
ALLOY DESIGNS, INC.
Agreement
November 24, 1998
James K. Johnson, Jr.
66 2nd Avenue, Apt. 4B
New York, NY 10003
Dear Mr. Johnson:
In consideration of your employment by Alloy Designs, Inc. (the "Company")
and for other good and valuable consideration, the receipt and sufficiency of
which you acknowledge, you agree as follows:
1. Confidentiality. The Company has developed, uses and maintains trade
secrets and other confidential and proprietary information including, without
limitation, training materials, product information, personnel information
relating to Company employees, operating procedures, marketing information,
profit and loss information, inventory strategy, product costs, gross profit
margins, selling strategies, supplier information, and customer information (the
"Confidential Information"), and the Company has taken and shall continue to
take all reasonable measures to protect the confidentiality of such Confidential
information.
You acknowledge that during your employment with the Company you will have
direct access to and knowledge of the Confidential Information, and you
acknowledge that if you become employed or affiliated with any competitor of the
Company in violation of your obligations in Section 2 of this Agreement, it is
inevitable that you would disclose the Company's Confidential Information to
such competitor. You covenant and agree that all such Confidential Information
is and shall remain the sole property of the Company and that you will hold in
strictest confidence, and will not (except as required in the course of your
employment with the Company) disclose to any business, firm, entity or person,
either directly or indirectly, any of the Confidential Information. You further
agree that you will return all such Confidential Information (regardless of how
it is maintained) and any copies thereof, to the Company upon termination of
your employment, whether voluntary or involuntary and regardless of the reason
for termination. The terms of this paragraph are in addition to, and not in lieu
of any legal or other contractual obligations that you may have relating to the
protection of the Company's Confidential Information. The terms of this
paragraph shall survive indefinitely the termination of this Agreement and/or
your employment with the Company.
2. Non-Competition and Non-Solicitation. You acknowledge that the Company
has invested substantial time, money and resources in the development and
retention of its customers and accounts, and further acknowledge that during the
course of your employment you
<PAGE> 2
will be introduced to customers and accounts of the Company. You acknowledge and
agree that any and all "goodwill" associated with any customer or account
belongs exclusively to the Company including, but not limited to, any goodwill
created as a result of direct or indirect contacts or relationships between
yourself and any customers or accounts of the Company. In recognition of this
and as a condition of your employment with the Company, you covenant and agree
as follows:
(a) You understand and acknowledge that the Company's business interests
are worldwide because the Company's products and/or services are sold in
countries around the world and the Company's competitors similarly operate from
and market their products and/or services in many locations around the world. In
order to protect the Company's interests wherever they may be affected by the
matters addressed in this Agreement, the term "Competitive Business" as used in
this Agreement shall mean any business anywhere in the world which engages or
plans to engage in the sale, distribution or licensing of clothing or apparel
through catalog direct marketing to teenagers and young adults, in any media now
existing or hereafter developed.
(b) You acknowledge that your employment by the Company will give you
access to Confidential Information and that your knowledge of Confidential
Information would enable you to place the Company at a significant competitive
disadvantage if you are employed or engaged by, or become involved in, a
Competitive Business. Accordingly, during the term of your employment by the
Company and for a period of twelve (12) months commencing on the termination of
your employment, you shall not without the prior written consent of the Company,
(1) be engaged directly or indirectly, in any manner whatsoever, including,
without limitation, whether individually or in partnership, jointly or in
conjunction with any other person, or as an employee, agent, servant, owner,
partner, consultant, independent contractor or representative, stockholder,
member or proprietor, in any Competitive Business, or (2) advise, invest in,
lend money to, guarantee the debts or obligations of, or otherwise have any
financial interest in any Competitive Business.
(c) You further acknowledge the importance to the business carried on by
the Company of the human resources engaged and developed by it and the unique
access that your employment offers to interfere with such resources.
Accordingly, during the term of your employment by the Company and for a period
of twelve (12) months commencing on the termination of your employment, you
shall not, induce or solicit, or assist any third party in inducing or
soliciting any employee or consultant of the Company who is employed by the
Company at the time of your termination of employment or who became employed by
the Company during the twelve (12) months following your termination of the
employment to leave the employment of the Company or to accept employment or
engagement elsewhere.
3. Provisions Necessary and Reasonable. You agree that (i) the provisions
of Sections 1 and 2 are necessary and reasonable to protect the Company's
Confidential Information and goodwill, (ii) the specific time, geography and
scope provisions set forth in Section 2 are reasonable and necessary to protect
the Company's business interests and (iii) in
2
<PAGE> 3
the event of your breach of any of your agreements set forth in Sections 1 and
2, the Company would suffer substantial irreparable harm and that the Company
would not have an adequate remedy at law for such breach. In recognition of the
foregoing, you agree that in the event of a breach or threatened breach of any
of these covenants, in addition to such other remedies as the Company may have
at law, without posting any bond or security, the Company shall be entitled to
seek and obtain equitable relief, in the form of specific performance, or
temporary, preliminary or permanent injunctive relief, or any other equitable
remedy which then may be available. The seeking of such injunction or order
shall not affect the Company's right to seek and obtain damages or other
equitable relief on account of any such actual or threatened breach.
4. Choice of Law; Enforceability; Waiver of Jury Trial. You acknowledge
that a substantial portion of the Company's business is based out of and
directed from the State of New York, where the Company maintains its main office
and administers all employee compensation and benefits. You also acknowledge
that during the course of your employment with the Company you will have
substantial contacts with New York. This Agreement shall be deemed to have been
made in the State of New York, shall take effect as an instrument under seal
within New York, and the validity, interpretation and performance of this
Agreement shall be governed by, and construed in accordance with, the internal
law of New York, without giving effect to conflict of law principles. Both
parties further acknowledge that the last act necessary to render this Agreement
enforceable is its execution by the Company in New York, and that the Agreement
thereafter shall be maintained in New York. Both parties agree that any action,
demand, claim or counterclaim relating to the terms and provisions of this
Agreement, or to its breach, shall be commenced in New York in a court of
competent jurisdiction. Both parties further acknowledge that venue shall
exclusively lie in New York and that material witnesses and documents would be
located in New York. Both parties further agree that any action, demand, claim
or counterclaim shall be resolved by a judge alone, and both parties hereby
waive and forever renounce the right to a trial before a civil jury.
5. Miscellaneous.
(a) You acknowledge and agree that no provision of this Agreement shall be
construed to create an express or implied employment contract, or a promise of
employment for a specific period of time, and the Company may terminate your
employment at any time, with or without cause (i.e., you are an "at-will"
employee).
(b) You acknowledge and agree that should you transfer between or among
Company affiliates, wherever situated, or otherwise become employed by any
Company affiliate, or be promoted or reassigned to functions other than your
present functions, the terms of this Agreement including, but not limited to,
Sections 1 and 2 hereof, shall continue to apply with full force.
(c) Should any provision or term of this Agreement be held to be invalid,
illegal or unenforceable, in whole or part, such invalidity, illegality, or
unenforceability shall not affect the validity, legality or enforceability of
any other provision of this Agreement, and to the extent
3
<PAGE> 4
permissible by law, the parties agree that a court shall have the power to amend
such specific provision so that it can be enforced to the fullest extent
permissible by law.
(d) No amendment, waiver or revocation of this Agreement of any kind shall
be effective unless supported by a written instrument executed by you and an
authorized officer of the Company.
(e) You hereby acknowledge that you have had adequate opportunity to
review these terms and conditions and to reflect upon and consider the terms and
conditions of this Agreement. You further acknowledge that you fully understand
its terms and have voluntarily executed this Agreement.
Kindly acknowledge your acceptance of this Agreement by signing both
copies of this letter where indicated.
ALLOY DESIGNS, INC.
By:
---------------------------------
Name:
Title:
ACCEPTED AND AGREED:
- ---------------------------------
Name:
Date:
---------------------------
4
<PAGE> 1
Exhibit 10.24
ALLOY DESIGNS, INC.
Agreement
November 24, 1998
Samuel A. Gradess
7 East 14th Street, Apt. 1507
New York, NY 10003
Dear Mr. Gradess:
In consideration of your employment by Alloy Designs, Inc. (the "Company")
and for other good and valuable consideration, the receipt and sufficiency of
which you acknowledge, you agree as follows:
1. Confidentiality. The Company has developed, uses and maintains trade
secrets and other confidential and proprietary information including, without
limitation, training materials, product information, personnel information
relating to Company employees, operating procedures, marketing information,
profit and loss information, inventory strategy, product costs, gross profit
margins, selling strategies, supplier information, and customer information (the
"Confidential Information"), and the Company has taken and shall continue to
take all reasonable measures to protect the confidentiality of such Confidential
information.
You acknowledge that during your employment with the Company you will have
direct access to and knowledge of the Confidential Information, and you
acknowledge that if you become employed or affiliated with any competitor of the
Company in violation of your obligations in Section 2 of this Agreement, it is
inevitable that you would disclose the Company's Confidential Information to
such competitor. You covenant and agree that all such Confidential Information
is and shall remain the sole property of the Company and that you will hold in
strictest confidence, and will not (except as required in the course of your
employment with the Company) disclose to any business, firm, entity or person,
either directly or indirectly, any of the Confidential Information. You further
agree that you will return all such Confidential Information (regardless of how
it is maintained) and any copies thereof, to the Company upon termination of
your employment, whether voluntary or involuntary and regardless of the reason
for termination. The terms of this paragraph are in addition to, and not in lieu
of any legal or other contractual obligations that you may have relating to the
protection of the Company's Confidential Information. The terms of this
paragraph shall survive indefinitely the termination of this Agreement and/or
your employment with the Company.
2. Non-Competition and Non-Solicitation. You acknowledge that the Company
has invested substantial time, money and resources in the development and
retention of its customers and accounts, and further acknowledge that during the
course of your employment you
<PAGE> 2
will be introduced to customers and accounts of the Company. You acknowledge and
agree that any and all "goodwill" associated with any customer or account
belongs exclusively to the Company including, but not limited to, any goodwill
created as a result of direct or indirect contacts or relationships between
yourself and any customers or accounts of the Company. In recognition of this
and as a condition of your employment with the Company, you covenant and agree
as follows:
(a) You understand and acknowledge that the Company's business interests
are worldwide because the Company's products and/or services are sold in
countries around the world and the Company's competitors similarly operate from
and market their products and/or services in many locations around the world. In
order to protect the Company's interests wherever they may be affected by the
matters addressed in this Agreement, the term "Competitive Business" as used in
this Agreement shall mean any business anywhere in the world which engages or
plans to engage in the sale, distribution or licensing of clothing or apparel
through catalog direct marketing to teenagers and young adults, in any media now
existing or hereafter developed.
(b) You acknowledge that your employment by the Company will give you
access to Confidential Information and that your knowledge of Confidential
Information would enable you to place the Company at a significant competitive
disadvantage if you are employed or engaged by, or become involved in, a
Competitive Business. Accordingly, during the term of your employment by the
Company and for a period of twelve (12) months commencing on the termination of
your employment, you shall not without the prior written consent of the Company,
(1) be engaged directly or indirectly, in any manner whatsoever, including,
without limitation, whether individually or in partnership, jointly or in
conjunction with any other person, or as an employee, agent, servant, owner,
partner, consultant, independent contractor or representative, stockholder,
member or proprietor, in any Competitive Business, or (2) advise, invest in,
lend money to, guarantee the debts or obligations of, or otherwise have any
financial interest in any Competitive Business.
(c) You further acknowledge the importance to the business carried on by
the Company of the human resources engaged and developed by it and the unique
access that your employment offers to interfere with such resources.
Accordingly, during the term of your employment by the Company and for a period
of twelve (12) months commencing on the termination of your employment, you
shall not, induce or solicit, or assist any third party in inducing or
soliciting any employee or consultant of the Company who is employed by the
Company at the time of your termination of employment or who became employed by
the Company during the twelve (12) months following your termination of the
employment to leave the employment of the Company or to accept employment or
engagement elsewhere.
3. Provisions Necessary and Reasonable. You agree that (i) the provisions
of Sections 1 and 2 are necessary and reasonable to protect the Company's
Confidential Information and goodwill, (ii) the specific time, geography and
scope provisions set forth in Section 2 are reasonable and necessary to protect
the Company's business interests and (iii) in
2
<PAGE> 3
the event of your breach of any of your agreements set forth in Sections 1 and
2, the Company would suffer substantial irreparable harm and that the Company
would not have an adequate remedy at law for such breach. In recognition of the
foregoing, you agree that in the event of a breach or threatened breach of any
of these covenants, in addition to such other remedies as the Company may have
at law, without posting any bond or security, the Company shall be entitled to
seek and obtain equitable relief, in the form of specific performance, or
temporary, preliminary or permanent injunctive relief, or any other equitable
remedy which then may be available. The seeking of such injunction or order
shall not affect the Company's right to seek and obtain damages or other
equitable relief on account of any such actual or threatened breach.
4. Choice of Law; Enforceability; Waiver of Jury Trial. You acknowledge
that a substantial portion of the Company's business is based out of and
directed from the State of New York, where the Company maintains its main office
and administers all employee compensation and benefits. You also acknowledge
that during the course of your employment with the Company you will have
substantial contacts with New York. This Agreement shall be deemed to have been
made in the State of New York, shall take effect as an instrument under seal
within New York, and the validity, interpretation and performance of this
Agreement shall be governed by, and construed in accordance with, the internal
law of New York, without giving effect to conflict of law principles. Both
parties further acknowledge that the last act necessary to render this Agreement
enforceable is its execution by the Company in New York, and that the Agreement
thereafter shall be maintained in New York. Both parties agree that any action,
demand, claim or counterclaim relating to the terms and provisions of this
Agreement, or to its breach, shall be commenced in New York in a court of
competent jurisdiction. Both parties further acknowledge that venue shall
exclusively lie in New York and that material witnesses and documents would be
located in New York. Both parties further agree that any action, demand, claim
or counterclaim shall be resolved by a judge alone, and both parties hereby
waive and forever renounce the right to a trial before a civil jury.
5. Miscellaneous.
(a) You acknowledge and agree that no provision of this Agreement shall be
construed to create an express or implied employment contract, or a promise of
employment for a specific period of time, and the Company may terminate your
employment at any time, with or without cause (i.e., you are an "at-will"
employee).
(b) You acknowledge and agree that should you transfer between or among
Company affiliates, wherever situated, or otherwise become employed by any
Company affiliate, or be promoted or reassigned to functions other than your
present functions, the terms of this Agreement including, but not limited to,
Sections 1 and 2 hereof, shall continue to apply with full force.
(c) Should any provision or term of this Agreement be held to be invalid,
illegal or unenforceable, in whole or part, such invalidity, illegality, or
unenforceability shall not affect the validity, legality or enforceability of
any other provision of this Agreement, and to the extent
3
<PAGE> 4
permissible by law, the parties agree that a court shall have the power to amend
such specific provision so that it can be enforced to the fullest extent
permissible by law.
(d) No amendment, waiver or revocation of this Agreement of any kind shall
be effective unless supported by a written instrument executed by you and an
authorized officer of the Company.
(e) You hereby acknowledge that you have had adequate opportunity to
review these terms and conditions and to reflect upon and consider the terms and
conditions of this Agreement. You further acknowledge that you fully understand
its terms and have voluntarily executed this Agreement.
Kindly acknowledge your acceptance of this Agreement by signing both
copies of this letter where indicated.
ALLOY DESIGNS, INC.
By:
---------------------------------
Name:
Title:
ACCEPTED AND AGREED:
- ---------------------------------
Name:
Date:
---------------------------
4
<PAGE> 1
Exhibit 10.30
NON-QUALIFIED STOCK OPTION AGREEMENT
ALLOY DESIGNS, INC.
AGREEMENT made as of the 14th day of August 1998, between Alloy Designs,
Inc. (the "Company"), a Delaware corporation having a principal place of
business in New York, New York and Robert E. Kerson (the "Participant").
WHEREAS, the Company desires to grant to the Participant an Option to
purchase shares of its common stock, $.01 par value per share (the "Shares"),
under and for the purposes set forth in the Company's 1997 Employee, Director
and Consultant Stock Option Plan (the "Plan");
WHEREAS, the Company and the Participant understand and agree that any
terms used and not defined herein have the same meanings as in the Plan; and
WHEREAS, the Company and the Participant each intend that the Option
granted herein shall be a Non-Qualified Option.
NOW, THEREFORE, in consideration of the mutual covenants hereinafter set
forth and for other good and valuable consideration, the parties hereto agree as
follows:
1. GRANT OF OPTION.
The Company hereby grants to the Participant the right and option to
purchase all or any part of Two Hundred Fifty Thousand (250,000) shares of
Common Stock of the Company, on the terms and conditions and subject to all the
limitations set forth herein and in the Plan, which is incorporated herein by
reference. The Participant acknowledges receipt of a copy of the Plan.
The Company and the Participant acknowledge and agree that the Option
granted herein replaces in its entirety the options granted to the Participant
pursuant to the Non-Qualified Stock Option Agreements dated August 19, 1997 and
June 26, 1998 which shall be null and void and of no further force or effect.
The Company and the Participant further acknowledge and agree that the execution
and delivery of this Agreement shall terminate any and all obligations of the
Company under the Letter Agreement between the Company and the Participant dated
August 19, 1997 which shall be null and void and of no further force or effect.
2. PURCHASE PRICE.
The aggregate purchase price of the Shares covered by the Option shall be
two hundred thousand dollars ($200,000). Upon partial exercise of the Option,
the purchase price shall be determined by multiplying two hundred thousand
dollars ($200,000) by a fraction, the numerator of which shall equal the number
of shares being issued to the Participant pursuant to such
<PAGE> 2
exercise and the denominator of which shall equal 250,000. Payment shall be made
in accordance with Paragraph 7 of the Plan.
2
<PAGE> 3
3. EXERCISE OF OPTION.
Subject to the terms and conditions set forth in this Agreement and the
Plan, the Option granted hereby is exercisable immediately.
4. TERM OF OPTION.
The Option shall terminate upon the earlier to occur of (i) August 14th,
2008 or (ii) the closing of the sale of the Company by stock purchase, exchange,
merger, sale of all or substantially all of the Company's assets, dissolution
and liquidation, or otherwise.
5. METHOD OF EXERCISING OPTION.
Subject to the terms and conditions of this Agreement, the Option may be
exercised by written notice to the Company at its principal executive office, in
substantially the form of Exhibit A attached hereto. Such notice shall state the
number of Shares with respect to which the Option is being exercised and shall
be signed by the person exercising the Option. Payment of the purchase price for
such Shares shall be made in accordance with Paragraph 7 of the Plan. The
Company shall deliver a certificate or certificates representing such Shares as
soon as practicable after the notice shall be received, provided, however, that
the Company may delay issuance of such Shares until completion of any action or
obtaining of any consent, which the Company deems necessary under any applicable
law (including, without limitation, state securities or "blue sky" laws). The
certificate or certificates for the Shares as to which the Option shall have
been so exercised shall be registered in the name of the person or persons so
exercising the Option (or, if the Option shall be exercised by the Participant
and if the Participant shall so request in the notice exercising the Option,
shall be registered in the name of the Participant and another person jointly,
with right of survivorship) and shall be delivered as provided above to or upon
the written order of the person or persons exercising the Option. In the event
the Option shall be exercised by any person or persons other than the
Participant, such notice shall be accompanied by appropriate proof of the right
of such person or persons to exercise the Option. All Shares that shall be
purchased upon the exercise of the Option as provided herein shall be fully paid
and nonassessable.
6. PARTIAL EXERCISE.
Exercise of this Option to the extent above stated may be made in part at
any time and from time to time within the above limits, except that no
fractional share shall be issued pursuant to this Option. Upon any partial
exercise of this Option, the aggregate amount of shares for which this Option is
exercisable shall be reduced by the number of shares issued to the Optionee
pursuant to such exercise and the aggregate purchase price payable pursuant to
Section 2 hereof shall be reduced by the portion of the purchase price paid upon
such exercise.
3
<PAGE> 4
7. NON-ASSIGNABILITY.
The Option shall not be transferable by the Participant otherwise than by
will or by the laws of descent and distribution or pursuant to a qualified
domestic relations order as defined by the Code or Title I of the Employee
Retirement Income Security Act or the rules thereunder. Except as provided in
the previous sentence, the Option shall be exercisable, during the Participant's
lifetime, only by the Participant (or, in the event of legal incapacity or
incompetency, by the Participant's guardian or representative) and shall not be
assigned, pledged or hypothecated in any way (whether by operation of law or
otherwise) and shall not be subject to execution, attachment or similar process.
Any attempted transfer, assignment, pledge, hypothecation or other disposition
of the Option or of any rights granted hereunder contrary to the provisions of
this Section 7, or the levy of any attachment or similar process upon the Option
shall be null and void.
8. NO RIGHTS AS STOCKHOLDER UNTIL EXERCISE.
The Participant shall have no rights as a stockholder with respect to
Shares subject to this Agreement until registration of the Shares in the
Company's share register in the name of the Participant. Except as is expressly
provided in the Plan with respect to certain changes in the capitalization of
the Company, no adjustment shall be made for dividends or similar rights for
which the record date is prior to the date of such registration.
9. CAPITAL CHANGES AND BUSINESS SUCCESSIONS.
The Plan contains provisions covering the treatment of Options in a number
of contingencies such as stock splits and mergers. Provisions in the Plan for
adjustment with respect to stock subject to Options and the related provisions
with respect to successors to the business of the Company are hereby made
applicable hereunder and are incorporated herein by reference, subject to the
provisions of Section 4 of this Agreement.
10. TAXES.
The Participant acknowledges that upon exercise of the Option the
Participant will be deemed to have taxable income measured by the difference
between the then fair market value of the Shares received upon exercise and the
price paid for such Shares pursuant to this Agreement. The Participant
acknowledges that any income or other taxes due from him or her with respect to
this Option or the Shares issuable pursuant to this Option shall be the
Participant's responsibility.
The Participant agrees that the Company may withhold from the
Participant's remuneration, if any, the appropriate amount of federal, state and
local withholding attributable to such amount that is considered compensation
includable in such person's gross income. At the Company's discretion, the
amount required to be withheld may be withheld in cash from such remuneration,
or in kind from the Shares otherwise deliverable to the Participant on exercise
of the Option. The Participant further agrees that, if the Company does not
withhold an amount from the Participant's remuneration sufficient to satisfy the
Company's income tax withholding
4
<PAGE> 5
obligation, the Participant will reimburse the Company on demand, in cash, for
the amount under-withheld.
11. PURCHASE FOR INVESTMENT.
Unless the offering and sale of the Shares to be issued upon the
particular exercise of the Option shall have been effectively registered under
the Securities Act of 1933, as now in force or hereafter amended (the "1933
Act"), the Company shall be under no obligation to issue the Shares covered by
such exercise unless and until the following conditions have been fulfilled:
(a) The person(s) who exercise the Option shall warrant to the Company,
at the time of such exercise, that such person(s) are acquiring such
Shares for their own respective accounts, for investment, and not
with a view to, or for sale in connection with, the distribution of
any such Shares, in which event the person(s) acquiring such Shares
shall be bound by the provisions of the following legend which shall
be endorsed upon the certificate(s) evidencing the Shares issued
pursuant to such exercise:
"The shares represented by this certificate have been taken
for investment and they may not be sold or otherwise
transferred by any person, including a pledgee, unless (1)
either (a) a Registration Statement with respect to such
shares shall be effective under the Securities Act of 1933, as
amended, or (b) the Company shall have received an opinion of
counsel satisfactory to it that an exemption from registration
under such Act is then available, and (2) there shall have
been compliance with all applicable state securities laws;"
and
(b) If the Company so requires, the Company shall have received an
opinion of its counsel that the Shares may be issued upon such
particular exercise in compliance with the 1933 Act without
registration thereunder. Without limiting the generality of the
foregoing, the Company may delay issuance of the Shares until
completion of any action or obtaining of any consent, which the
Company deems necessary under any applicable law (including without
limitation state securities or "blue sky" laws).
12. RESTRICTIONS ON TRANSFER OF SHARES.
12.1 The Shares acquired by the Participant pursuant to the exercise of
the Option granted hereby shall not be transferred by the Participant except as
permitted in the Stockholders and Voting Agreement dated August 19, 1997 between
the Company and the Participant (the "Stockholders and Voting Agreement").
12.2 If, in connection with a registration statement filed by the Company
pursuant to the Securities Act, the Company or its underwriter so requests, the
Participant will agree not to
5
<PAGE> 6
sell any Shares for a period not to exceed 180 days following the effectiveness
of such registration.
12.3 The Participant acknowledges and agrees that neither the Company, its
shareholders nor its directors and officers, has any duty or obligation to
disclose to the Participant any material information regarding the business of
the Company or affecting the value of the Shares before, at the time of, or
following a termination of the employment of the Participant by the Company,
including, without limitation, any information concerning plans for the Company
to make a public offering of its securities or to be acquired by or merged with
or into another firm or entity.
13. NO OBLIGATION TO MAINTAIN RELATIONSHIP.
The Company is not by the Plan or this Option obligated to continue the
Participant as an employee, director or consultant of the Company.
14. NOTICES.
Any notices required or permitted by the terms of this Agreement or the
Plan shall be given by recognized courier service, facsimile, registered or
certified mail, return receipt requested, addressed as follows:
If to the Company:
Alloy Designs, Inc.
115 West 30th Street, No. 304
New York, NY 10001
Facsimile: (212) 244-4311
If to the Participant:
Robert E. Kerson
29 Haviland Road
Harrison, NY 10528
or to such other address or addresses of which notice in the same manner has
previously been given. Any such notice shall be deemed to have been given upon
the earlier of receipt, one business day following delivery to a recognized
courier service or three business days following mailing by registered or
certified mail.
15. GOVERNING LAW.
This Agreement shall be construed and enforced in accordance with the law
of the State of Delaware, without giving effect to the conflict of law
principles thereof.
6
<PAGE> 7
16. BENEFIT OF AGREEMENT.
Subject to the provisions of the Plan and the other provisions hereof,
this Agreement shall be for the benefit of and shall be binding upon the heirs,
executors, administrators, successors and assigns of the parties hereto.
17. ENTIRE AGREEMENT.
This Agreement, together with the Plan, embodies the entire agreement and
understanding between the parties hereto with respect to the subject matter
hereof and supersedes all prior oral or written agreements and understandings
relating to the subject matter hereof. No statement, representation, warranty,
covenant or agreement not expressly set forth in this Agreement shall affect or
be used to interpret, change or restrict, the express terms and provisions of
this Agreement, provided, however, in any event, this Agreement shall be subject
to and governed by the Plan.
18. MODIFICATIONS AND AMENDMENTS.
The terms and provisions of this Agreement may be modified or amended as
provided in the Plan.
19. WAIVERS AND CONSENTS.
Except as provided in the Plan, the terms and provisions of this Agreement
may be waived, or consent for the departure therefrom granted, only by written
document executed by the party entitled to the benefits of such terms or
provisions. No such waiver or consent shall be deemed to be or shall constitute
a waiver or consent with respect to any other terms or provisions of this
Agreement, whether or not similar. Each such waiver or consent shall be
effective only in the specific instance and for the purpose for which it was
given, and shall not constitute a continuing waiver or consent.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed
by its duly authorized officer, and the Participant has hereunto set his or her
hand, all as of the day and year first above written.
ALLOY DESIGNS, INC.
By:
-----------------------------------
Name
Title
----------------------------------------
Participant
7
<PAGE> 8
Exhibit A
NOTICE OF EXERCISE OF NON-QUALIFIED STOCK OPTION
[Form For Unregistered Shares]
To: ALLOY DESIGNS, INC.
Ladies and Gentlemen:
I hereby exercise my Non-Qualified Stock Option to purchase ___shares (the
"Shares") of the common stock, $.01 par value, of Alloy Designs, Inc. (the
"Company"), at the exercise price of $___ per share, pursuant to and subject to
the terms of that certain Non-Qualified Stock Option Agreement between the
undersigned and the Company dated August 19, 1997.
I am aware that the Shares have not been registered under the Securities
Act of 1933, as amended (the "1933 Act"), or any state securities laws. I
understand that the reliance by the Company on exemptions under the 1933 Act is
predicated in part upon the truth and accuracy of the statements by me in this
Notice of Exercise.
I hereby represent and warrant that (1) I have been furnished with all
information which I deem necessary to evaluate the merits and risks of the
purchase of the Shares; (2) I have had the opportunity to ask questions
concerning the Shares and the Company and all questions posed have been answered
to my satisfaction; (3) I have been given the opportunity to obtain any
additional information I deem necessary to verify the accuracy of any
information obtained concerning the Shares and the Company; and (4) I have such
knowledge and experience in financial and business matters that I am able to
evaluate the merits and risks of purchasing the Shares and to make an informed
investment decision relating thereto.
I hereby represent and warrant that I am purchasing the Shares for my own
personal account for investment and not with a view to the sale or distribution
of all or any part of the Shares.
I understand that because the Shares have not been registered under the
1933 Act, I must continue to bear the economic risk of the investment for an
indefinite time and the Shares cannot be sold unless the Shares are subsequently
registered under applicable federal and state securities laws or an exemption
from such registration requirements is available.
I agree that I will in no event sell or distribute or otherwise dispose of
all or any part of the Shares unless (1) there is an effective registration
statement under the 1933 Act and applicable state securities laws covering any
such transaction involving the Shares or (2) the Company receives an opinion of
my legal counsel (concurred in by legal counsel for the
8
<PAGE> 9
Company) stating that such transaction is exempt from registration or the
Company otherwise satisfies itself that such transaction is exempt from
registration.
I consent to the placing of a legend on my certificate for the Shares
stating that the Shares have not been registered and setting forth the
restriction on transfer contemplated hereby and to the placing of a stop
transfer order on the books of the Company and with any transfer agents against
the Shares until the Shares may be legally resold or distributed without
restriction.
I understand that at the present time Rule 144 of the Securities and
Exchange Commission (the "SEC") may not be relied on for the resale or
distribution of the Shares by me. I understand that the Company has no
obligation to me to register the sale of the Shares with the SEC and has not
represented to me that it will register the sale of the Shares.
I understand the terms and restrictions on the right to dispose of the
Shares set forth in the 1997 Employee, Director and Consultant Stock Option Plan
and the Non-Qualified Stock Option Agreement, both of which I have carefully
reviewed. I consent to the placing of a legend on my certificate for the Shares
referring to such restrictions and the placing of stop transfer orders until the
Shares may be transferred in accordance with the terms of such restrictions.
I have considered the Federal, state and local income tax implications of
the exercise of my Option and the purchase and subsequent sale of the Shares.
I am paying the option exercise price for the Shares as follows:
________________________________________________
Please issue the stock certificate for the Shares (check one):
|_| to me; or
|_| to me and ________________, as joint tenants with right of
survivorship
and mail the certificate to me at the following address:
____________________________
____________________________
____________________________
9
<PAGE> 10
My mailing address for shareholder communications, if different from the
address listed above is:
____________________________
____________________________
____________________________
Very truly yours,
--------------------------------------------
Participant (signature)
--------------------------------------------
Print Name
--------------------------------------------
Date
--------------------------------------------
Social Security Number
10
<PAGE> 11
Exhibit A
NOTICE OF EXERCISE OF NON-QUALIFIED STOCK OPTION
[Form For Registered Shares]
TO: ALLOY DESIGNS, INC.
IMPORTANT NOTICE: This form of Notice of Exercise may only be used at such time
as the Company has filed a Registration Statement with the Securities and
Exchange Commission under which the issuance of the Shares for which this
exercise is being made is registered and such Registration Statement remains
effective.
Ladies and Gentlemen:
I hereby exercise my Non-Qualified Stock Option to purchase _________
shares (the "Shares") of the common stock, $.01 par value of Alloy Designs, Inc.
(the "Company"), at the exercise price of $________ per share, pursuant to and
subject to the terms of that certain Non-Qualified Stock Option Agreement
between the undersigned and the Company dated August 19, 1997.
I understand the nature of the investment I am making and the financial
risks thereof. I am aware that it is my responsibility to have consulted with
competent tax and legal advisors about the relevant national, state and local
income tax and securities laws affecting the exercise of the Option and the
purchase and subsequent sale of the Shares.
I am paying the option exercise price for the Shares as follows:
________________________________________________
Please issue the stock certificate for the Shares (check one):
|_| to me; or
|_| to me and ________________, as joint tenants with right of
survivorship,
and mail the certificate to me at the following address:
____________________________
11
<PAGE> 12
____________________________
____________________________
My mailing address for shareholder communications, if different from the
address listed above, is:
____________________________________________
____________________________________________
____________________________________________
Very truly yours,
--------------------------------------------
Participant (signature)
--------------------------------------------
Print Name
--------------------------------------------
Date
--------------------------------------------
Social Security Number
12
<PAGE> 1
Exhibit 10.31
Alloy Designs, Inc.
115 West 30th Street, #302 - #304
New York, NY 10001
Phone: (212) 244-4307
Fax: (212) 244-4311
August 14, 1998
Robert E. Kerson
29 Haviland Road
Harrison, NY 10528
Dear Mr. Kerson:
Alloy Designs, Inc. ("Alloy" or the "Company") is pleased to present you with
the following Letter Agreement (the "Letter Agreement"). This Letter Agreement
supplements the Non-Qualified Stock Option Agreement between you and Alloy dated
August 14th, 1998 (the "Option Agreement"), pursuant to which the Company
granted you an option (the "Option") to purchase 250,000 shares of Common Stock,
$0.01 par value per share ("Common Stock"), of the Company. In consideration of
the mutual covenants set forth herein and in the Option Agreement, and for other
good and valuable consideration, Alloy hereby agrees as follows:
For as long as the Option remains outstanding, the Company will pay you a bonus
at the time of any complete or partial exercise of the Option (each a "Bonus")
in an amount sufficient to accomplish the following:
o To provide you with funds to pay fully the applicable Option exercise
price(s).
If the foregoing accurately reflects our agreement related to these matters,
please execute this Letter Agreement in the space provided below.
Sincerely,
Samuel A. Gradess
Alloy Designs, Inc.
Director and Corporate Secretary
Agreed and Accepted:
__________________________________
Robert E. Kerson
<PAGE> 1
Execution Copy
Exhibit 10.38
ALLOY DESIGNS, INC.
Series A Convertible Preferred Stock Purchase Agreement
Dated as of November 24, 1998
<PAGE> 2
ALLOY DESIGNS, INC.
Series A Convertible Preferred Stock Purchase Agreement
Dated as of November 24, 1998
Table of Contents
Page
ARTICLE I.....................................................................1
PURCHASE, SALE AND TERMS OF SHARES..........................................1
1.01. The Purchased Shares................................................1
1.02. The Additional Preferred Shares.....................................1
1.03. The Converted Shares................................................2
1.04. The Shares..........................................................2
1.05. Purchase Price and Closing..........................................2
1.06. Use of Proceeds.....................................................3
1.07. Representations and Warranties by the Purchasers....................3
ARTICLE II....................................................................4
CONDITIONS TO PURCHASERS' OBLIGATION........................................4
2.01. Representations and Warranties......................................4
2.02. Documentation at Initial Closing....................................4
2.03. Consents, Waivers, Etc..............................................5
2.04 Conditions Precedent to Additional Closing..........................6
ARTICLE III...................................................................6
REPRESENTATIONS AND WARRANTIES..............................................6
3.01. Organization and Standing of the Company............................6
3.02. Corporate Action....................................................6
3.03. Governmental Approvals..............................................7
3.04. Litigation..........................................................7
3.05. Certain Agreements of Officers and Key Employees....................7
3.06. Compliance with Other Instruments...................................8
3.07. ERISA...............................................................8
3.08. Transactions with Affiliates........................................8
3.09. Assumptions or Guarantees of Indebtedness of Other Persons..........8
3.10. Investments in Other Persons........................................9
3.11. Securities Act of 1933..............................................9
<PAGE> 3
3.12. Disclosure..........................................................9
3.13. Brokers or Finders..................................................9
3.14. Capitalization; Status of Capital Stock.............................9
3.15. Registration Rights................................................10
3.16. Insurance..........................................................10
3.17. Books and Records..................................................10
3.18 Title to Assets, Patents...........................................10
3.19. Compliance with Law; Permits.......................................11
3.20. Financial Information..............................................12
3.21. Taxes..............................................................12
3.22. Other Agreements...................................................12
3.23. License Agreement..................................................14
3.24. Year 2000 Compliance...............................................14
ARTICLE IV...................................................................14
COVENANTS OF THE COMPANY...................................................14
4.01. Affirmative Covenants of the Company Other Than Reporting
Requirements.......................................................15
(a) Payment of Taxes and Trade Debt....................................15
(b) Maintenance of Insurance...........................................15
(c) Preservation of Corporate Existence................................15
(d) Compliance with Laws...............................................16
(e) Inspection.........................................................16
(f) Keeping of Records and Books of Account............................16
(g) Maintenance of Properties..........................................16
(h) Compliance with ERISA..............................................16
(i) Budgets Approval...................................................17
(j) The Board of Directors.............................................17
(k) Stockholders and Voting Agreement..................................18
(l) Agreements of Officers and Employees...............................18
(m) By-laws............................................................18
4.02. Negative Covenants of the Company..................................19
(a) Indebtedness.......................................................19
(a) Merger.............................................................19
(b) Assumptions or Guarantees of Indebtedness of Other Persons.........20
(c) Vesting of Reserved Employee Shares................................20
(d) Consideration for Issuances of Common Stock........................20
(e) Chief Executive Officer............................................20
4.03. Reporting Requirements.............................................20
(a) Monthly Reports....................................................21
(b) Quarterly Reports..................................................21
(c) Annual Reports.....................................................21
(d) Budgets............................................................21
(e) Notice of Adverse Changes..........................................21
ii
<PAGE> 4
(f) Written Reports....................................................21
(g) Notice of Proceedings..............................................22
(h) Stockholders' and SEC Reports......................................22
(i) Other Information..................................................22
ARTICLE V. ..................................................................22
RIGHT OF FIRST REFUSAL....................................................22
5.01. Right of First Refusal.............................................22
5.02. Notice of Acceptance...............................................22
5.03. Conditions to Acceptances and Purchase.............................23
(a) Permitted Sales of Refused Securities..............................23
(b) Reduction in Amount of Offered Securities..........................23
(c) Closing............................................................23
5.04. Further Sale.......................................................24
5.05. Termination of Right of First Refusal..............................24
5.06 Exception..........................................................24
ARTICLE VI...................................................................24
DEFINITIONS AND ACCOUNTING TERMS...........................................24
6.01. Certain Defined Terms..............................................24
6.02. Accounting Terms...................................................27
ARTICLE VII..................................................................27
MISCELLANEOUS..............................................................27
7.01. No Waiver; Cumulative Remedies.....................................28
7.02. Amendments, Waivers and Consents...................................28
7.03. Addresses for Notices..............................................28
7.04. Costs, Expenses and Taxes..........................................28
7.05. Binding Effect; Assignment.........................................29
7.06. Survival of Representations and Warranties.........................29
7.07. Prior Agreements...................................................29
7.08. Severability.......................................................29
7.09. Governing Law......................................................29
7.10. Headings...........................................................29
7.11. Counterparts.......................................................29
7.12. Further Assurances.................................................30
7.13 Indemnification.....................................................30
7.14 Changes in Common Stock or Preferred Stock..........................30
iii
<PAGE> 5
EXHIBITS
1.01 List of Purchasers
1.01A Description of Preferred Stock
2.02B Form of Opinion Letter
2.02F Stockholders' Agreement
2.02J Registration Rights Agreement
2.02K By-Laws
2.02M Form of Non-Competition Agreement
SCHEDULES
3.04 Litigation
3.08 Transactions with Affiliates
3.10 Investments in Other Persons
3.13 Brokers or Finders
3.14 Capitalization
3.15 Registration Rights
3.18 Patents
3.19 Permits
3.20 Financial Information
3.22 Agreements
iv
<PAGE> 6
Alloy Designs, Inc.
115 West 30th Street, #304
New York, NY 10001
As of November 24, 1998
TO: The Persons listed on Exhibit 1.01 hereto
Re: Series A Preferred Stock
Gentlemen:
Alloy Designs, Inc., (the "Company"), a Delaware corporation, agrees with
each of you as follows:
ARTICLE I
PURCHASE, SALE AND TERMS OF SHARES
1.01. The Initial Purchased Shares. The Company has authorized the
issuance and sale of up to 1,487,843 shares (the "Initial Preferred Shares") of
its previously authorized but unissued shares of Series A Convertible Preferred
Stock, $.01 par value (the "Series A Preferred Stock") at a purchase price of
$3.391 per share to the persons (collectively, the "Purchasers" and,
individually, a "Purchaser") and in the respective amounts set forth in Exhibit
1.01 hereto. The designation, rights, preferences and other terms and conditions
relating to the Series A Preferred Stock shall be as set forth on Exhibit 1.01A
hereto.
1.02. The Additional Preferred Shares. Subject to the terms and conditions
hereof, the Company has authorized the issuance to the Purchasers at the
Additional Closing (as hereinafter defined) of up to an additional number of
shares of Series A Preferred Stock equal to 1,487,843 less the number of shares
sold at the Initial Closing (as defined below) (said additional number of shares
of Series A Preferred Stock being sometimes collectively referred to in this
Agreement as the "Additional Preferred Shares;" and the Initial Preferred Shares
and the Additional Preferred Shares being sometimes collectively referred to as
the "Purchased Shares") at a price of $3.391 per share and in the respective
amounts set forth in Exhibit 1.01 hereto provided that, without the consent of
the Purchasers of a majority of the Initial Preferred Shares, no Purchaser shall
be entitled to purchase more Additional Preferred Shares than the number of
Initial Preferred Shares purchased by such Purchaser.
<PAGE> 7
2
1.03. The Converted Shares. The Company has authorized and has reserved
and covenants to continue to reserve, free of preemptive rights and other
preferential rights, a sufficient number of its previously authorized but
unissued shares of Common Stock, $.01 par value, to satisfy the rights of
conversion of the holders of the Purchased Shares. Any shares of Common Stock
issuable upon conversion of the Purchased Shares, and such shares when issued,
are herein referred to as the "Converted Shares."
1.04. The Shares. The Purchased Shares and the Converted Shares are
sometimes collectively referred to herein as the "Shares."
1.05. Purchase Price and Closings.
(a) Initial Closing. The Company agrees to issue and sell to the
Purchasers and, subject to and in reliance upon the representations, warranties,
covenants, terms and conditions of this Agreement, the Purchasers, severally but
not jointly, agree to purchase that number of the Initial Preferred Shares set
forth opposite their respective names in Exhibit 1.01. The aggregate purchase
price of the Initial Preferred Shares being purchased by each Purchaser is set
forth opposite such Purchaser's name in Exhibit 1.01. The initial purchase and
sale shall take place at a closing (the "Initial Closing") to be held at the
offices of Testa, Hurwitz & Thibeault, LLP, 125 High Street, High Street Tower,
Boston, Massachusetts 02110 on November 24, 1998, at 10:00 A.M., or at such
other location, on such other date and at such time as may be mutually agreed
upon. At the Initial Closing, the Company will issue and deliver certificates
evidencing the Initial Preferred Shares to be sold at such Initial Closing to
each of the Purchasers (or its nominee) against payment of the full purchase
price therefor by (i) wire transfer of immediately available funds to an account
designated by the Company, (ii) check payable to the order of the Company or its
designees or (iii) any combination of (i) and (ii) above.
(b) The Additional Closing. On February 1, 1999, the Company shall
sell and each Purchaser shall purchase, upon the terms and conditions
hereinafter set forth, that number of shares of Additional Preferred Shares set
forth opposite the name of such Purchaser on Exhibit 1.01 attached hereto in the
aggregate being all of the Additional Preferred Shares. The per share purchase
price for each Additional Preferred Share (as constituted on the date hereof) to
be purchased pursuant to this Agreement at the Additional Closing shall be
$3.391. Such purchase and sale of Additional Preferred Shares, if any, shall
take place at a closing (the "Additional Closing") at the offices of Testa,
Hurwitz & Thibeault, High Street Tower, 125 High Street, Boston, Massachusetts
02110, on February 1, 1999, or on such other date or dates as the Company and
the Purchasers may agree. At the Additional Closing the Company will issue and
deliver the certificates evidencing the Additional Preferred Shares sold at the
Additional Closing to each of the Purchasers (or its nominee) against payment of
the full purchase price therefor by wire transfer or check payable to the order
of the Company. Notwithstanding the foregoing, in no event shall the Company
sell less than an aggregate of 737,286 Additional Preferred Shares hereunder
(subject to Section 2.04 herein). Further notwithstanding the foregoing, unless
and until an aggregate of 737,286 Additional Preferred Shares are sold
hereunder, the Company shall provide each Purchaser with at least 20 days' prior
written notice of the occurrence of any of (i) a Qualified Public Offering, (ii)
an Organic Change (as such term is defined in Exhibit 1.01A
<PAGE> 8
3
hereto), or (iii) a Change in Ownership (as such term is defined in Exhibit
1.01A hereto) (each a "Triggering Event"). Each Purchaser shall thereupon have
the right, but not the obligation, exercisable upon written notice to the
Company, to require that the Company sell to such Purchaser any or all of the
previously unsold Additional Preferred Shares set forth opposite such
Purchaser's name in Exhibit 1.01. Such purchase and sale shall take place at an
Additional Closing which shall occur no later than the date of Triggering Event,
and shall otherwise be on the same terms and conditions as set forth above.
(c) If any Purchaser fails to purchase their Additional Preferred
Shares in accordance with Section 1.05(b) hereof at the Additional Closing, he
or it shall have twenty (20) days from the date of the Additional Closing in
which to cure such default and purchase his or its Additional Preferred Shares.
If the Purchaser fails to purchase his or its Additional Preferred Shares in
such cure period he or it shall be required to forfeit to the Company 50% of his
or its Initial Preferred Shares. If a Purchaser becomes obligated to forfeit any
Preferred Shares to the Company under this section and fails to deliver such
shares, the Company may, upon written notice to such Purchaser, cancel on its
books the certificate or certificates representing such shares of Initial
Preferred Shares and thereupon all said Purchaser's rights in and to such
Initial Preferred Shares shall terminate. Furthermore, if a Purchaser so fails
to purchase the Additional Preferred Shares, the Company shall no longer be
obligated to sell such shares to the Purchaser.
1.06. Use of Proceeds. The Company shall use the proceeds from the sale of
the Purchased Shares for working capital and general corporate purposes.
1.07. Representations and Warranties by the Purchasers. Each of the
Purchasers represents and warrants to the Company severally, but not jointly,
that (a) it will acquire the Purchased Shares to be acquired by it for its own
account and that the Purchased Shares are being and will be acquired by it for
the purpose of investment and not with a view to distribution or resale thereof;
subject, nevertheless, to the condition that the disposition of the property of
each Purchaser shall at all times be within its control; (b) the execution of
this Agreement and the consummation of the transactions contemplated hereby have
been duly authorized by all necessary action (if any) on the part of the
Purchaser, and this Agreement has been duly executed and delivered, and
constitutes a valid, legal, binding and enforceable agreement of the Purchasers;
(c) it is an "accredited investor" within the meaning of Rule 501 of Regulation
D promulgated under the Securities Act; and (d) it has taken no action which
would give rise to any claim by any other person for any other person for any
brokerage commissions, finders' fees or the like relating to this Agreement or
the transaction contemplated hereby. The acquisition by each Purchaser of the
Purchased Shares acquired by it shall constitute a confirmation of the
representations and warranties made by each such Purchaser. Each of the
Purchasers further represents that it understands and agrees that, until
registered under the Securities Act or transferred pursuant to the provisions of
Rule 144 as promulgated by the Securities and Exchange Commission, all
certificates evidencing any of the Shares, whether upon initial issuance or upon
any transfer thereof, shall bear a legend, prominently stamped or printed
thereon, reading substantially as follows:
<PAGE> 9
4
"The securities represented by this certificate have not been
registered under the Securities Act of 1933 or applicable state securities laws.
These securities have been acquired for investment and not with a view to
distribution or resale, and may not be mortgaged, pledged, hypothecated or
otherwise transferred without an effective registration statement for such
securities under the Securities Act of 1933 and applicable state securities
laws, or the availability of an exemption from the registration provisions of
the Securities Act of 1933."
ARTICLE II
CONDITIONS TO PURCHASERS' OBLIGATION
The obligation of each Purchaser to purchase and pay for the Purchased
Shares to be purchased by it at the Initial Closing is subject to the following
conditions:
2.01. Representations and Warranties. Each of the representations and
warranties of the Company set forth in Article III hereof shall be true and
correct on the date of the Initial Closing.
2.02. Documentation at Initial Closing. The Purchasers shall have received
prior to or at the Initial Closing all of the following documents or
instruments, or evidence of completion thereof, each in form and substance
satisfactory to the Purchasers and their counsel:
(a) A certified copy of the Certificate of Incorporation of the
Company, a copy of the resolutions of the Board of Directors and, if required,
the stockholders of the Company evidencing, as applicable, the adoption of the
Company's Restated Certificate of Incorporation, the approval of this Agreement,
the issuance of the Purchased Shares and the other matters contemplated hereby,
and a certified copy of the By-laws of the Company, and certified copies of all
documents evidencing other necessary corporate or other action and governmental
approvals, if any, with respect to this Agreement and the Shares.
(b) An opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, PC,
counsel for the Company, in the form set forth on Exhibit 2.02B.
(c) A certificate of the Secretary or an Assistant Secretary of the
Company which shall certify the names of the officers of the Company authorized
to sign this Agreement, the certificates for the Purchased Shares and the other
documents, instruments or certificates to be delivered pursuant to this
Agreement by the Company or any of its officers, together with the true
signatures of such officers. The Purchasers may conclusively rely on such
certificate until they shall receive a further certificate of the Secretary or
an Assistant Secretary of the Company cancelling or amending the prior
certificate and submitting the signatures of the officers named in such further
certificate.
(d) A certificate of the President of the Company stating that the
representations and warranties of the Company contained in Article III hereof
and otherwise made by the Company in writing pursuant hereto are true and
correct and that all conditions
<PAGE> 10
5
required to be performed prior to or at the Initial Closing have been performed
as of the Initial Closing.
(e) The Restated Certificate of Incorporation of the Company shall
provide for the designation of the rights and preferences of the Series A
Preferred Stock in the form set forth in Exhibit 1.01A attached hereto.
(f) A Stockholders' Agreement in the form set forth in Exhibit 2.02F
shall have been executed by the parties named therein.
(g) A Certificate of Good Standing for the Company shall have been
provided to the Purchasers and their counsel.
(h) Payment for the costs, expenses, taxes and filing fees
identified in Section 7.04.
(i) The Board of Directors of the Company following the Initial
Closing shall consist of seven (7) members of which the current members shall be
James K. Johnson, Jr., Matthew C. Diamond, Samuel A. Gradess, Peter Graham,
Robert Kerson (or his designee), David Yarnell and such other person designated
in accordance with the Stockholders' Agreement.
(j) The Company, the Purchasers and the Founders shall have entered
into a Registration Rights Agreement in the form set forth in Exhibit 2.02J.
(k) The Company's By-laws shall be in form set forth in Exhibit
2.02K and shall include the provisions set forth in Section 4.01(l) hereof.
(l) Participation of all Purchasers specified on Exhibit 1.01
hereto.
(m) Each Founder shall have entered into a Non-Competition Agreement
in the form of Exhibit 2.02M.
(n) The Company shall have reserved 871,352 shares of Common Stock
for issuance pursuant to an employee, director and consultant stock option plan.
2.03. Consents, Waivers, Etc. Prior to the Initial Closing, the Company
shall have obtained all consents or waivers, if any, necessary to execute and
deliver this Agreement, issue the Purchased Shares and to carry out the
transactions contemplated hereby and thereby, and all such consents and waivers
shall be in full force and effect. All corporate and other action and
governmental filings necessary to effectuate the terms of this Agreement, the
Purchased Shares and other agreements and instruments executed and delivered by
the Company in connection herewith shall have been made or taken, except for any
post-sale filing that may be required under federal or state securities laws. In
addition to the documents set forth above, the Company
<PAGE> 11
6
shall have provided the Purchasers any other information or copies of documents
that they may reasonably request.
2.04 Conditions Precedent to Additional Closing. Subject to the provisions
of Section 1.05(b), there shall be no conditions precedent to the respective
several obligations of the Purchasers to purchase and pay for the Additional
Preferred Shares to be purchased at the Additional Closing, provided, however,
that in no event shall the Company sell (or request the purchase of) any
Additional Preferred Shares, and the Purchasers shall not be required to
purchase any Additional Preferred Shares, if prior to the Additional Closing (a)
the Company has filed a petition in bankruptcy (or performs the equivalent act
under relevant law), (b) a receiver and/or administrator (or equivalent) has
been appointed in respect of the whole of the Company's assets, (c) the Company
has ceased doing business in the normal course, (d) the Company has sought to
make a compromise, assignment, or other arrangement for the benefit of its
creditors, or (e) there has been filed any complaint, application or petition
against the Company seeking an order for relief or adjudication of bankruptcy
under the Bankruptcy Code with respect to the Company which complaint,
application or petition is not timely contested or, if timely contested, is not
dismissed within sixty (60) days of when filed.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY
The Company hereby represents and warrants as follows to the
Purchasers that, except as set forth in the Disclosure Schedule attached hereto
as Schedule III (the "Disclosure Schedules"):
3.01. Organization and Standing of the Company . The Company is a duly
organized and validly existing corporation in good standing under the laws of
the jurisdiction of its organization and has all requisite corporate power and
authority for the ownership and operation of its properties and for the carrying
on of its business as now conducted or as now proposed to be conducted. The
Company is duly licensed or qualified and in good standing as a foreign
corporation authorized to do business in all jurisdictions wherein the character
of the property owned or leased, or the nature of the activities conducted, by
it makes such licensing or qualification necessary except where the failure to
be so qualified would not have a material adverse effect on the business and
operating results of the Company taken as a whole (a "Material Adverse Effect").
3.02. Corporate Action. The Company has all necessary corporate power and
has taken all corporate action required to make all the provisions of this
Agreement, the Shares and any other agreements and instruments executed in
connection herewith and therewith be the valid and enforceable obligations of
the Company, enforceable in accordance with their terms. Sufficient authorized
but unissued shares of Common Stock have been reserved by appropriate corporate
action in connection with the prospective conversion of the Preferred
<PAGE> 12
7
Shares at the initial conversion price, and the issuance of the Preferred Shares
is not, and the issuance of the Converted Shares upon the conversion of the
Preferred Shares will not be, subject to preemptive rights or other preferential
rights in any present or future stockholders of the Company and will not
conflict with any provision of any agreement or instrument to which the Company
is a party or by which it or its property is bound.
3.03. Governmental Approvals. Except for the filing of any notice
subsequent to the Initial Closing that may be required under applicable state
and/or Federal securities laws (which, if required, shall be filed on a timely
basis), no authorization, consent, approval, license, exemption of or filing or
registration with any court or governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, is or will be necessary
for the execution and delivery by the Company of this Agreement, for the offer,
issue, sale and delivery of the Preferred Shares, or for the performance by the
Company of its obligations under this Agreement or the Shares.
3.04. Litigation. Except as set forth in Schedule 3.04, there is no
litigation or governmental proceeding or investigation pending or, to the
knowledge of the Company, threatened against the Company affecting any of its
respective properties or assets, or, to the knowledge of the Company, against
any officer, Key Employee or the holder of more than 3% of the capital stock of
the Company relating to such person's performance of duties in his capacities as
such or relating to his stock ownership in the Company or otherwise relating to
the business of the Company, nor, to the knowledge or belief of the Company, has
there occurred any event or does there exist any condition on the basis of which
any such litigation, proceeding or investigation might properly be instituted.
The Company is not in default, and, to the knowledge of the Company, no officer,
Key Employee or holder of more than 3% of the capital stock of the Company is in
default, with respect to any order, writ, injunction, decree, ruling or decision
of any court, commission, board or other government agency that could reasonably
be expected to result in a Material Adverse Effect. There are no actions or
proceedings pending or, to the knowledge of the Company, threatened (or any
basis therefor known to the Company) which could reasonably be expected to
result, either in any case or in the aggregate, in a Material Adverse Effect on
the business, operations, affairs or condition of the Company or in its
properties or assets taken as a whole, or which might call into question the
validity of this Agreement, any of the Shares, or any action taken or to be
taken pursuant hereto or thereto. The foregoing sentences include, without
limiting their generality, actions pending or threatened (or any basis therefor
known to the Company) involving the prior employment of any of the Company's
officers or employees or their use in connection with the Company's respective
businesses of any information or techniques allegedly proprietary to any of
their former employers.
3.05. Certain Agreements of Officers and Key Employees.
(a) To the Company's knowledge, no officer or Key Employee of the
Company is in violation of any term of any employment contract, patent
disclosure agreement, proprietary information agreement, noncompetition
agreement, or any other contract or agreement or any restrictive covenant
relating to the right of any such officer or Key
<PAGE> 13
8
Employee to be employed by the Company because of the nature of the business
conducted or to be conducted by the Company or relating to the use of trade
secrets or proprietary information of others, and to the Company's knowledge,
the continued employment of the Company's officers and Key Employees does not
subject the Company or any Purchaser to any claim of any third party.
(b) To the knowledge of the Company, no officer of the Company nor
any Key Employee of the Company whose termination, either individually or in the
aggregate, would have a Material Adverse Effect, has expressed any present
intention of terminating his employment in such capacity.
3.06. Compliance with Other Instruments. The Company is in compliance in
all respects with the terms and provisions of this Agreement and of its
Certificate of Incorporation and By-laws, and in all material respects with the
terms and provisions of all material mortgages, indentures, leases, agreements
and other instruments, if any, by which it is bound or to which it or any of its
respective properties or assets are subject. The Company is in compliance in all
material respects with all judgments, decrees, governmental orders, statutes,
rules or regulations by which it is bound or to which any of its respective
properties or assets are subject. Neither the execution, issuance and delivery
of this Agreement or the Shares, nor the consummation of any transaction
contemplated hereby or thereby, has constituted or resulted in or will
constitute or result in a default or violation of any term or provision of any
of the foregoing documents, instruments, judgments, agreements, decrees, orders,
statutes, rules and regulations.
3.07. ERISA. The Company makes no contributions to any employee pension
benefit plans for its respective employees which are subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA").
3.08. Transactions with Affiliates. Except (i) as contemplated hereby or
consented to by the Purchasers in accordance with this Agreement, (ii) as set
forth on Schedule 3.08 and (iii) for employment agreements in the ordinary
course of business, there are no loans, leases, royalty agreements or other
continuing transactions between any officer, employee or director of the Company
or any Person owning 5% or more of any class of capital stock of the Company or
any member of the immediate family of such officer, employee, director or
stockholder or any corporation or other entity controlled by such officer,
employee, director or stockholder or a member of the immediate family of such
officer, employee, director or stockholder.
3.09. Assumptions or Guarantees of Indebtedness of Other Persons. Except
as contemplated hereby or consented to by the Purchasers in accordance with this
Agreement, the Company has not assumed, guaranteed, endorsed or otherwise become
directly or contingently liable on (including, without limitation, liability by
way of agreement, contingent or otherwise, to purchase, to provide funds for
payment, to supply funds to or otherwise invest in the debtor or otherwise to
assure the creditor against loss), any Indebtedness of any other Person.
<PAGE> 14
9
3.10. Investments in Other Persons. Except (i) as contemplated hereby or
consented to by the Purchasers in accordance with this Agreement, (ii) as set
forth on Schedule 3.10 and (iii) for advances for employee expenses in the
ordinary course of business, the Company has not made any loan or advance to any
Person which is outstanding on the date of this Agreement, nor is it committed
or obligated to make any such loan or advance, nor does the Company own any
capital stock, assets comprising the business of, obligations of, or any
interest in, any Person except as disclosed in this Agreement. The Company has
no Subsidiaries.
3.11. Securities Act of 1933. The Company has complied and will comply
with all applicable federal and state securities laws in connection with the
offer, issuance and sale of the Shares. Neither the Company nor anyone acting on
its behalf has or will sell, offer to sell or solicit offers to buy the Shares
or similar securities to, or solicit offers with respect thereto from, or enter
into any preliminary conversations or negotiations relating thereto with, any
Person, so as to bring the issuance and sale of the Shares under the
registration provisions of the Securities Act and applicable state securities
laws.
3.12. Disclosure. Neither this Agreement nor any other agreement,
document, certificate or written statement furnished to the Purchasers or their
counsel by or on behalf of the Company in connection with the transactions
contemplated hereby contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements contained herein
or therein not misleading. There is no fact within the knowledge of the Company
which has not been disclosed herein or in writing by it to the Purchasers and
which materially adversely affects, or in the future in the Company's opinion
may reasonably be expected to materially adversely affect the business,
properties, assets or condition, financial or otherwise, of the Company.
3.13. Brokers or Finders. Except as set forth on Schedule 3.13, no Person
has or will have, as a result of the transactions contemplated by this
Agreement, any right, interest or valid claim against or upon the Company for
any commission, fee or other compensation as a finder or broker because of any
act or omission by the Company or any of its agents.
3.14. Capitalization; Status of Capital Stock. The Company has a total
authorized capitalization consisting of (i) 11,500,000 shares of Common Stock,
$.01 par value, of which 7,517,505 shares are issued and outstanding and (ii)
1,487,843 shares of Preferred Stock, $.01 par value, all of which shares are
designated as Series A Convertible Preferred Stock, of which no shares are
issued and outstanding on the date hereof, without giving effect to the
transactions contemplated hereby. A complete list of the capital stock of the
Company which has been previously issued and the names in which such capital
stock is registered on the stock transfer books of the Company is set forth in
Schedule 3.14 hereto. All the outstanding shares of capital stock of the Company
have been duly authorized, are validly issued and are fully paid and
non-assessable. The Preferred Shares, when issued and delivered in accordance
with the terms hereof and after payment of the purchase price therefor, and the
Converted Shares, when issued and delivered upon conversion of the Preferred
Shares, will be duly authorized, validly issued, fully-paid and non-assessable.
Except as otherwise set forth in Schedule 3.14,
<PAGE> 15
10
no options, warrants, subscriptions or purchase rights of any nature to acquire
from the Company shares of capital stock or other securities are authorized,
issued or outstanding, nor is the Company obligated in any other manner to issue
shares of its capital stock or other securities except as contemplated by this
Agreement. Except as set forth in Schedule 3.14, there are no restrictions on
the transfer of shares of capital stock of the Company other than those imposed
by relevant federal and state securities laws and as otherwise contemplated by
this Agreement, the Stockholders' Agreement referred to in Section 2.02(f) and
the Registration Rights Agreement referred to in Section 2.02(j). Except as set
forth in Schedule 3.14, to the Company's knowledge and other than as provided in
the above-referenced Stockholders' Agreement, there are no agreements,
understandings, trusts or other collaborative arrangements or understandings
concerning the voting of the capital stock of the Company. Except as set forth
in Schedule 3.14, to the Company's knowledge, there are no agreements,
understandings, trusts or other understandings concerning transfers of the
capital stock of the Company except for the aforementioned Stockholders'
Agreement, the aforementioned Registration Rights Agreement and except as
contemplated by this Agreement. The offer and sale of all capital stock and
other securities of the Company issued before the Initial Closing complied with
or were exempt from all applicable federal and state securities laws and no
stockholder has a right of rescission with respect thereto.
3.15. Registration Rights. Except for (i) the rights granted to the
Purchasers pursuant to Registration Rights Agreement referred to in Section
2.02(j) hereof and (ii) as set forth in Schedule 3.15, no Person has demand or
other rights (which such rights shall be effective subsequent to the Initial
Closing) to cause the Company to file any registration statement under the
Securities Act relating to any securities of the Company or any right to
participate in any such registration statement.
3.16. Insurance. The Company carries insurance covering its properties and
businesses customary for the type and scope of its properties and businesses,
but in any event in amounts sufficient to prevent the Company from becoming a
co-insurer.
3.17. Books and Records The books of account, ledgers, order books,
records and documents of the Company accurately and completely reflect all
material information relating to its business, the location and collection of
its assets, and the nature of all transactions giving rise to the obligations or
accounts receivable of the Company.
3.18 Title to Assets, Patents. The Company has good and marketable title
in fee to such of its fixed assets, if any, as are real property, and good and
merchantable title to all of its other material assets, free of any mortgages,
pledges, charges, liens, security interests or other encumbrances, except those
indicated in Schedule 3.18. The Company enjoys peaceful and undisturbed
possession under all leases under which it is operating, and all said leases are
valid and subsisting and in full force and effect. The Company knows of no
adverse claim that would interfere with the Company's right to use the patents,
patent rights, permits, licenses, trade secrets, trademarks, trademark rights,
trade names or trade name rights or franchises, copyrights, inventions, software
and intellectual property rights being used to conduct its business as now
operated and as now proposed to be operated (a list of the patent and
<PAGE> 16
11
trademark applications made by the Company is attached hereto as Schedule 3.18);
and the Company has no reason to believe that the conduct of the Company's
business as now operated and as now proposed to be operated conflicts or will
conflict with valid patents, patent rights, permits, licenses, trade secrets,
trademarks, trademark rights, trade names or trade name rights or franchises,
copyrights, inventions, and intellectual property rights of any other Person,
except as noted in Schedule 3.18. To the Company's knowledge, no product or
process presently used or proposed to be manufactured, marketed, offered, sold
or used by the Company will violate any license or infringe on any intellectual
property rights of any other person; and the Company's intellectual property
rights and the operation or proposed operation of the Company's business is not
known by the Company to conflict with the asserted rights of others, and there
does not exist any known basis for any such conflict, except as noted in
Schedule 3.18. The Company owns or has the right to use all of the back office
and graphic user interface software necessary to run its website and any graphic
or textual content thereof and has the right to use and include any graphic or
text on such website. No claim is known by the Company to be pending or
threatened to the effect that any such intellectual property owned or licensed
by the Company, or which the Company otherwise has the right to use, is invalid
or unenforceable by the Company, as applicable, and the Company has no reason to
believe that any patents or intellectual property rights owned or used by the
Company may be invalid. Except as set forth on Schedule 3.18, the Company has no
obligation known by the Company to compensate any Person for the use of any such
patents or rights, and the Company has not granted any Person any license or
other rights to use in any manner any of the patents or rights of the Company,
whether requiring the payment of royalties or not.
3.19. Compliance with Law; Permits.
(a) Except as set forth on Schedule 3.19, the Company (i) is in
compliance in all material respects with all applicable federal, state and local
laws, rules, regulations, ordinances and policies; and (ii) is not in default
under any applicable order, writ injunction or decree of any court or
governmental authority or having jurisdiction over the Company.
(b) Schedule 3.19 sets forth a true and complete list of each
material permit, license, order or other authorization of federal, state, local
or foreign governmental or regulatory bodies held by the Company (other than
state corporation qualifications) in the conduct of its business (collectively
the "Permits"), together with the issuing authority and the date of expiration.
To the knowledge of the Company, the Permits constitute all of the permits,
licenses, orders and other authorizations and approvals required to permit the
Company to own and lease its properties and assets and to conduct its business
as it is currently conducted, except where the failure to obtain any such
permit, license, order or other authorization would not have a Material Adverse
Effect on the Company. All of the Permits are in full force and effect and the
Company currently operates within the limits thereof except where the failure to
so operate would not have a Material Adverse Effect, and there are no
proceedings pending or, to the knowledge of the Company, threatened, which could
reasonably be expected to result in the revocation, cancellation, suspension,
non-renewal or any material adverse modification of any of the Permits. The
Company has filed all reports
<PAGE> 17
12
and has paid all fees required to obtain and maintain the Permits except where
the failure to so file or pay such fees would not have a Material Adverse
Effect.
3.20. Financial Information. Except as set forth on Schedule 3.20, the
reviewed financial statements of the Company as of January 31, 1998 and the
unaudited financial statements of the Company as of July 31, 1998, attached
hereto as Schedule 3.20, present fairly the financial position of the Company as
of the dates thereof and the results of operations for the periods covered
thereby (subject, in the case of such unaudited financial statements, to normal
year-end audit adjustments) and have been prepared in accordance with generally
accepted accounting principles consistently applied, except, in the case of
unaudited financial statements, for normal year-end adjustments and the absence
of footnotes not customarily included in such statements. The Company does not
know of any liability, contingent or otherwise, not adequately reflected in or
reserved against in the aforesaid financial statements or in the notes thereto.
Except as set forth in Schedule 3.20, since July 31, 1998, (i) there has been no
material adverse change in the business, assets or conditions, financial or
otherwise, operations or prospects of the Company; (ii) the business,
conditions, operations or prospects of the Company and its properties or assets
have not been adversely affected as the result of any legislative or regulatory
changes, no revocation or change in any franchise, permit, license or right to
do business, or no other event or occurrence, whether or not insured against;
and (iii) the Company has not entered into any material transaction other than
in the ordinary course of business, made any distribution on its capital stock
or redeemed or repurchased any of its capital stock.
3.21. Taxes. The Company has completely and correctly prepared and timely
filed all federal, state, foreign and other tax returns required under the laws
of any applicable jurisdiction to be filed by them, have paid or made provision
for the payment of all taxes due from the Company, and all additional
assessments (whether or not shown on such returns), and adequate provisions have
been made and are reflected in the Company's financial statements for all
current taxes and other charges to which the Company is subject and which are
not currently due and payable. None of the federal income tax returns of the
Company have been audited by the Internal Revenue Service. The Company knows of
no additional assessments or adjustments pending or threatened against the
Company for any period, nor of any basis for any such assessment or adjustment.
3.22. Other Agreements. Except as set forth in Schedule 3.22, the Company
is not a party to any written or oral:
(a) distributor, dealer or manufacturer's representative contract or
agreement which is not terminable on less than ninety (90) days' notice without
cost or other liability to the Company (except for contracts which, in the
aggregate, are not material to the business of the Company);
(b) sales contract which entitles any customer to a rebate or right
of set-off or which varies in any material respect from the Company's standard
form contracts;
<PAGE> 18
13
(c) contract with any labor union (and, to the knowledge of the
Company, no organizational effort is being made with respect to any of its
employees);
(d) contract or other commitment with any supplier containing any
provision permitting any party other than the Company to renegotiate the price
or other terms, or containing any pay-back or other similar provision, upon the
occurrence of a failure by the Company to meet its respective obligations under
the contract when due or the occurrence of any other event;
(e) contract for the future purchase of fixed assets or for the
future purchase of materials, supplies or equipment in excess of its normal
operating requirements;
(f) contract for the employment of any officer, individual, employee
or other person (whether of a legally binding nature or in the nature of
informal understandings) on a full-time or consulting basis which is not
terminable on notice without cost or other liability to the Company except
accrued vacation pay;
(g) bonus, pension, profit-sharing, retirement, hospitalization,
insurance, stock purchase, stock option or similar plan, contract or
understanding pursuant to which benefits are provided to any employee of the
Company (other than group insurance plans applicable to employees generally);
(h) agreement or indenture relating to the borrowing of money or to
the mortgaging or pledging of, or otherwise placing a lien or security interest
on, any asset of the Company;
(i) agreement, or group of related agreements with the same party or
any group of affiliated parties, under which the Company has advanced or agreed
to advance money or has agreed to lease any property as lessee or lessor;
(j) agreement or obligation (contingent or otherwise) to issue or
sell or to repurchase or otherwise acquire or retire any share of its capital
stock or any of its other equity securities (other than listed in Schedule
3.14);
(k) assignment, license or other agreement with respect to any form
of intangible property;
(l) other contract or group of related contacts with the same party
involving more than $50,000 or continuing over a period of more than six months
from the date or dates thereof (including renewals or extensions of options with
another party), which contract or group of contracts is not terminable by the
Company without penalty upon notice of thirty (30) days or less, but excluding
any contract or group of contracts with a customer of the Company for the sale,
lease or rental of the Company's products or services if such contract or group
of contracts was entered into by the Company in the ordinary course of business;
or
<PAGE> 19
14
(m) other Material Agreement.
Except as set forth on Schedule 3.22, the Company has in all material respects
performed all the actions required to be performed by it to date, has received
no notice of default and is not in default under any lease, agreement or
contract now in effect to which the Company is a party or by which it or its
property may be bound, except for any such breach the effect of which is not
material to the business or financial condition of the Company. The Company has
no present expectation or intention of not fully performing all its respective
obligations under each such lease, contract or other agreement, and the Company
has no knowledge of any breach or anticipated breach by the other party to any
contract or commitment to which the Company is a party.
3.23. License Agreement. The Company owns or possesses (or has the right
to possess) adequate licenses or other rights to use all trademarks, trade
names, trademark applications, service marks, service mark applications and
other proprietary rights currently used in the business of the Company.
3.24. Year 2000 Compliance. Each system, comprised of software, hardware,
databases or embedded control systems (microprocessor controlled or controlled
by any robotic or other device) (collectively, a "System") that constitutes any
material part of, or is used in connection with the use, operation or enjoyment
of, any material tangible or intangible asset or real property of the Company
(with the exception of third party systems used by the Company's suppliers of
merchandise and vendors) will not be materially adversely affected by the advent
of the year 2000, the advent of the twenty-first century or the transition from
the twentieth century through the year 2000 and into the twenty-first century.
The Company has no reason to believe that it may incur material expenses arising
from or relating to the failure of any of its Systems (with the exception of
third party systems used by the Company's suppliers of merchandise and vendors)
as a result of the advent of the year 2000, the advent of the twenty-first
century or the transition from the twentieth century through the year 2000 and
into the twenty-first century. Each material System of the Company (with the
exception of third party systems used by the Company's suppliers of merchandise
and vendors) is able to accurately process date data, including, but not limited
to, calculating, comparing and sequencing from, into and between the twentieth
century (through year 1999), the year 2000 and the twenty-first century,
including leap year calculations. Furthermore, the Company shall use its
commercially reasonable efforts to ensure that its "Call and Fulfillment Center"
will not be materially adversely affected by the advent of the year 2000 and
shall use its best efforts to contact all of its suppliers of merchandise and
vendors to assess whether or not they will be materially adversely affected by
the advent of the year 2000.
ARTICLE IV
COVENANTS OF THE COMPANY
<PAGE> 20
15
4.01. Affirmative Covenants of the Company Other Than Reporting
Requirements. Without limiting any other covenants and provisions hereof, the
Company covenants and agrees that until the consummation of a Qualified Public
Offering, it will perform and observe the following covenants and provisions,
and will cause each Subsidiary, if and when such Subsidiary exists, to perform
and observe such of the following covenants and provisions as are applicable to
such Subsidiary:
(a) Payment of Taxes and Trade Debt. Pay and discharge, and cause
each Subsidiary to pay and discharge, all taxes, assessments and
governmental charges or levies imposed upon it or upon its income, profits
or business, or upon any properties belonging to it, prior to the date on
which penalties attach thereto, and all lawful claims which, if unpaid,
might become a lien or charge upon any properties of the Company or any
Subsidiary, provided that neither the Company nor any Subsidiary shall be
required to pay any such tax, assessment, charge, levy or claim which is
being contested in good faith and by appropriate proceedings if the
Company or any Subsidiary shall have set aside on its books sufficient
reserves, if such reserve is required by generally accepted accounting
practices. Pay and cause each Subsidiary to pay, when due, or in
conformity with customary trade terms, all lease obligations, all trade
debt, and all other Indebtedness incident to the operations of the Company
or its Subsidiaries, except such as are being contested in good faith and
by proper proceedings and the Company or Subsidiary concerned shall have
set aside on its books sufficient reserves, if such reserve is required by
generally accepted accounting practices.
(b) Maintenance of Insurance. Obtain and maintain and cause each
Subsidiary to maintain, from responsible and reputable insurance companies
or associations term life insurance policies on the lives of any Key
Employee as may be determined (with respect to identity, amount and terms)
by Brand Equity Ventures I, L.P. ("Brand Equity"), with the proceeds
thereof payable to the order of the Company. Maintain, and cause each
Subsidiary to maintain, insurance with reputable insurance companies or
associations in such amounts and covering such risks as is customarily
carried by companies engaged in similar businesses and owning similar
properties in the same general areas in which the Company or such
Subsidiary operates, but in any event in amounts sufficient to prevent the
Company or Subsidiary from becoming a co-insurer.
(c) Preservation of Corporate Existence. Preserve and maintain, and
cause each Subsidiary to preserve and maintain, its corporate existence,
rights, franchises and privileges in the jurisdiction of its
incorporation, and qualify and remain qualified, and cause each Subsidiary
to qualify and remain qualified, as a foreign corporation in each
jurisdiction in which such qualification is necessary or desirable in view
of its business and operations or the ownership or lease of its
properties; provided, however, that nothing in this Section 4.01(c) shall
be deemed to preclude any merger, consolidation, liquidation or sale
(subject to it not being a sale of all of the assets of the Company and
its Subsidiaries, taken as a whole) of any Subsidiary if such action is
approved by the Board of Directors as being in the best interests of the
Company. Preserve and maintain, and cause each Subsidiary to preserve and
maintain, all licenses and other rights to use patents, processes,
licenses, permits, trademarks, trade names, inventions, intellectual
property rights or
<PAGE> 21
16
copyrights owned or possessed by it and deemed by the Company to be
necessary to the conduct of its business or the business of any
Subsidiary.
(d) Compliance with Laws. Comply, and cause each Subsidiary to
comply, with the requirements of all applicable laws, rules, regulations
and orders of any governmental authority, noncompliance with which could
materially adversely affect its business or condition, financial or
otherwise.
(e) Inspection. Permit, during normal business hours following
reasonable request and notice, each of the Purchasers or any agents or
representatives thereof, to examine and make copies of and extracts from
the records and books of account of, and visit and inspect the properties
of the Company and any Subsidiary, to discuss the affairs, finances and
accounts of the Company and any Subsidiary with any of its officers,
directors or Key Employees and independent accountants, and consult with
and advise the management of the Company and any Subsidiary as to their
affairs, finances and accounts, during normal business hours. Each
Purchaser agrees that it will use its best efforts to maintain the
confidentiality of any information so obtained by it which is not
otherwise available from other sources, subject to the disclosure of
information of a non-technical nature, including financial information,
which such Purchaser discloses to its partners and/or shareholders
generally.
(f) Keeping of Records and Books of Account. Keep, and cause each
Subsidiary to keep, adequate records and books of account in which
complete entries will be made in accordance with generally accepted
accounting principles consistently applied, reflecting all material
financial transactions of the Company and any Subsidiary, and in which,
for each fiscal year, all proper reserves for depreciation, depletion,
returns of merchandise, obsolescence, amortization, taxes, bad debts and
other purposes in connection with its business and in accordance with
industry practice shall be made.
(g) Maintenance of Properties. Maintain and preserve, and cause each
Subsidiary to maintain and preserve, all of its properties and assets,
necessary or useful in the proper conduct of its business, in working
order and condition, ordinary wear and tear excepted; provided, however,
that nothing in this Section 4.01(g) shall prevent the Company or any
Subsidiary from discontinuing the operation and maintenance of any such
properties, if such discontinuance, in the judgment of the Board of
Directors of the Company, is desirable in the conduct of its business.
(h) Compliance with ERISA. Comply, and cause each Subsidiary to
comply, with all minimum funding requirements applicable to any pension,
employee benefit plans or employee contribution plans which are subject to
ERISA or to the Internal Revenue Code of 1986 (the "Code"), and comply,
and cause each Subsidiary to comply, in all other material respects with
the provisions of ERISA and the Code, and the rules and regulations
thereunder, which are applicable to any such plan. Neither the Company nor
any Subsidiary will permit any event or condition to exist which could
permit any such plan
<PAGE> 22
17
to be terminated under circumstances which would cause the lien provided
for in Section 4068 of ERISA to attach to the assets of the Company or any
Subsidiary.
(i) Budgets Approval. Not later than 60 days prior to the
commencement of each fiscal year, prepare and submit to, and obtain the
approval of a majority of the Board of Directors, a business plan and
monthly operating budgets in reasonable detail for each fiscal year,
including capital and operating expense budgets, cash flow projections and
profit and loss projections, all itemized in reasonable detail (including
itemization of provisions for officers' compensation). The budget and
business plan shall be reviewed by the Company periodically, and all
changes therein and all material deviations therefrom shall be resubmitted
to the Board of Directors.
(j) The Board of Directors. Hold meetings of the Company's Board of
Directors on a monthly basis unless otherwise determined by a majority of
the Board of Directors, but in any event not less than on a quarterly
basis. Subject to the terms of the Stockholders' Agreement, use its best
efforts to cause the size of the Company's Board of Directors to be
maintained at seven (7) directors, consisting of: (i) three (3) nominees
designated by the holders of a majority of the Common Stock (one of whom
shall be the Chief Executive Officer of the Company), who shall initially
be James K. Johnson, Jr., Matthew C. Diamond and Samuel A. Gradess (the
"Common Stock Directors"); (ii) one nominee designated by Brand Equity and
elected by the holders of the Series A Preferred Stock, voting as a
separate class, who initially shall be David Yarnell (the "Purchasers'
Representative"); and (iii) three (3) nominees designated by (x) the
Founders (provided that each such Founder remains employed by the Company
and continues to own at least seventy-five percent (75%) of the securities
of the Company owned by him as of the date of this Agreement) and (y)
Brand Equity (each an "Outside Director"), (a) one of whom shall be a
representative of the holders of the Company's outstanding notes and
warrants issued in the May 1998 financing of the Company, who shall
initially be Peter Graham, for the first three (3) years following the
date of this Agreement and, after such period, shall be a person
unaffiliated with the Company, (b) one of whom shall be experienced in the
Internet/"e-commerce" field and unaffiliated with the Company, and (c) one
of whom shall be a non-employee with relevant industry experience who
shall initially be Robert Kerson or an individual (reasonably acceptable
to the other Directors and Brand Equity) referred by Robert Kerson for the
first three (3) years following the date of this Agreement and, after such
period, shall be a non-employee with relevant industry experience. Permit
Brand Equity to designate two representatives who may attend meetings of
the Board of Directors as observers (each an "Observer"). Establish a
Compensation Committee of the Board of Directors, consisting of the
Purchasers' Representative and an Outside Director and an observer, who
shall be one of the Common Stock Directors and who may attend meetings of
the Compensation Committee as an observer unless the Compensation
Committee is discussing any of the Common Stock Directors in their
respective capacities with the Company. Establish an Audit Committee of
the Board of Directors, consisting of the Purchasers' Representative and
an Outside Director, which will review the annual financial statements of
the Company with its independent auditors.
<PAGE> 23
18
Promptly pay all direct out-of-pocket expenses reasonably incurred by each
director of the Company and each Observer in attending each meeting of the
Board of Directors or any committee thereof.
(k) Stockholders and Voting Agreement. Not permit or allow any
additional Persons to become parties to that certain Stockholders and
Voting Agreement dated as of June 30, 1997, as amended, with the exception
of those certain option and/or warrant holders specified on Schedule 3.14
hereto who have already become contractually obligated to join such
agreement, so that such agreement shall not govern the issuance of any
other new shares of capital stock of the Company.
(l) Agreements of Officers and Employees. Cause each Key Employee of
the Company and each of its Subsidiaries to execute and deliver a
Non-Competition Agreement in form and substance of Exhibit 2.02M.
(m) By-laws. The Company shall at all times cause its By-laws to
provide (i) that, unless otherwise required by the laws of the State of
Delaware, (x) any two directors or (y) any holder or holders of at least
25% of the outstanding shares of Purchased Shares, shall have the right to
call a meeting of the Board of Directors or stockholders and (ii) that
upon the occurrence of an Event of Default the Board of Directors shall
remove the Chief Executive Officer of the Company and the Purchasers'
Representative shall have the right to designate a new Chief Executive
Officer, subject to the approval of the Common Stock Directors, provided,
however, that such Common Stock Directors shall only have the right to
veto two (2) such candidates for the position of Chief Executive Officer
at the time of an Event of Default. The Company shall at all times
maintain provisions in its By-laws or Certificate of Incorporation
indemnifying all directors against liability to the maximum extent
permitted under the laws of the State of Delaware.
(n) Children's Online Privacy Protection Act. The Company shall
comply with the Children's Online Privacy Protection Act of 1998 when such
act becomes effective.
(o) Brokers or Finders. The Company shall send notice by December 1,
1998 to Ladenburg Thalmann & Co. Inc. "Ladenburg" of the termination of
the Company's letter agreement, dated October 12, 1998, with Ladenburg.
4.02. Negative Covenants of the Company. Without limiting any other
covenants and provisions hereof, the Company covenants and agrees that, until
the consummation of a Qualified Public Offering, it will comply with and observe
the following covenants and provisions, and will cause each Subsidiary, if and
when such Subsidiary exists, to comply with and observe such of the following
covenants and provisions as are applicable to such Subsidiary, and will not,
without the consent of seventy-five percent (75%) in interest of the holders of
the Purchased Shares (in connection with such covenants and provisions, if
consent of the Purchasers or the Purchasers' Representative is needed, the
Purchasers shall use their reasonable efforts to either respond in a timely
fashion or cause the Purchasers' Representative to respond in a timely fashion):
<PAGE> 24
19
(a) Indebtedness. Create, incur, assume or suffer to exist, or
permit any Subsidiary to create, incur, assume or suffer to exist, any
liability with respect to Indebtedness (excluding letters of credit or
indemnities for letters of credit issued by others) for money borrowed
which exceeds in the aggregate $1,000,000 with the exception of (i) those
certain notes issued in May, 1998 for a total of $3,810,000, (ii)
Indebtedness to a commercial bank or commercial lender of up to $3,000,000
which is collateralized solely by the inventory or accounts receivable of
the Company and (iii) up to $2,000,000 of Indebtedness for capital
expenditures which shall be secured by the specific assets of such capital
expenditure and no other assets, shall be non-recourse in nature and not
guaranteed by the Company.
(b) Merger. Merge with or into any other entity where the Company is
the surviving entity, or agree to do or permit any Subsidiary to do so
unless: (i) such merger occurs (x) prior to December 24, 1999 and any
shares of the capital stock of the Company issued as consideration in
connection with such merger have a fair market value, as reasonably
determined by the Board of Directors, which is greater than $4.00 per
share, (y) on or after December 24, 1999 and prior to December 24, 2000
and any shares of the capital stock of the Company issued as consideration
in connection with such merger have a fair market value, as reasonably
determined by the Board of Directors, which is greater than $5.00 per
share, or (z) on or after December 24, 2000 and any shares of the capital
stock of the Company issued as consideration in connection with such
merger have a fair market value, as reasonably determined by the Board of
Directors, which is greater than $6.00 per share; (ii) no more than ten
percent (10%) of the voting power of the Company is transferred to
stockholders who where not stockholders of the Company prior to such
merger and such merger is approved by the Company's Board of Directors; or
(iii) over ten percent (10%) and not more than thirty percent (30%) of the
voting power of the Company is transferred to stockholders who where not
stockholders of the Company prior to such merger and (x) at least a
majority of the Board of Directors, including the Purchasers'
Representative has approved such merger or (y) the affirmative vote of all
members of the Board of Directors with the exception of the Purchasers'
Representative has been received for the merger provided, that if there
are less than six (6) members of the Board of Directors at any time only
subsection (x) hereof shall apply to this section (iii).
(c) Assumptions or Guarantees of Indebtedness of Other Persons.
Assume, guarantee, endorse or otherwise become directly or contingently
liable on, or permit any Subsidiary to assume, guarantee, endorse or
otherwise become directly or contingently liable on (including, without
limitation, liability by way of agreement, contingent or otherwise, to
purchase, to provide funds for payment, to supply funds to or otherwise
invest in the debtor or otherwise to assure the creditor against loss) any
Indebtedness of any other Person, except for (i) guarantees by endorsement
of negotiable instruments for deposit or collection in the ordinary course
of business, or guarantees for the benefit of any wholly-owned Subsidiary
and (ii) guarantees in an aggregate amount of not more than $100,000,
unless approved by the Board of Directors, including the Purchasers'
Representative.
<PAGE> 25
20
(d) Vesting of Reserved Employee Shares. Grant to any of its
employees options or other rights to purchase Reserved Employee Shares
which will become exercisable or vest, as the case may be, at a rate in
excess of 25% per annum from the date of such grant (i) unless otherwise
authorized by the Purchasers' Representative or (ii) with the exception of
grants of up to 100,000 Reserved Employee Shares (outstanding or exercised
at any one time), in the aggregate, provided, further, that none of such
100,000 Reserved Employee Shares shall be granted to the Founders of the
Company.
(e) Consideration for Issuances of Common Stock. Except as approved
by the Purchasers' Representative, issue, sell or exchange, agree to
issue, sell or exchange, or reserve or set aside for issuance, sale or
exchange, shares of its Common Stock without consideration or for non-cash
consideration; except for (i) Common Stock or upon any subdivision or
combination of shares of Common Stock or (ii) the issuance of any shares
of Common Stock upon conversion of the Purchased Shares.
(f) Chief Executive Officer. Hire a Chief Executive Officer of the
Company who has not received the prior approval of (i) at least a majority
of the Board of Directors, including the Purchasers' Representative or
(ii) the affirmative vote of all members of the Board of Directors with
the exception of the Purchasers' Representative provided, however, that if
there are less than six (6) members of the Board of Directors at any time
only subsection (i) hereof shall apply.
4.03. Reporting Requirements. Until the consummation of a Qualified Public
Offering, the Company will furnish the following to each Person who holds at
least 50,000 of the Shares issued pursuant to this Agreement; provided, however
that the Company will furnish the information and reports described in
subsections (b), (c) and (h) below to each Person who holds any of the Shares
issued pursuant to this Agreement; provided, further, however, that any
transferee that receives information pursuant to this section and is not a
Purchaser hereunder shall be subject to the provisions contained in the last
sentence of Section 4.01(e):
(a) Monthly Reports. As soon as available and in any event within 30
days after the end of each calendar month, consolidated balance sheets of the
Company and its Subsidiaries as of the end of such month and consolidated
statements of income and retained earnings of the Company and its Subsidiaries
for such month and for the period commencing at the end of the previous fiscal
year and ending with the end of such month, setting forth in each case in
comparative form the corresponding figures for the corresponding period of the
preceding fiscal year, and including comparisons to monthly budgets, a summary
of the aging of the Company's accounts receivable and accounts payable, a cash
flow analysis for such month, a schedule showing each expenditure of a capital
nature in excess of $50,000 during such month, all in reasonable detail and duly
certified (subject to year-end audit adjustments) by the chief financial officer
of the Company as having been prepared consistent with the financial records of
the Company and in accordance with its past practices;
<PAGE> 26
21
(b) Quarterly Reports. As soon as available and in any event within
45 days after the end of each of the first three quarters of each fiscal year of
the Company, consolidated balance sheets of the Company and its Subsidiaries as
of the end of such quarter and consolidated statements of income and retained
earnings and of changes in financial position of the Company and its
Subsidiaries for such quarter and for the period commencing at the end of the
previous fiscal year and ending with the end of such quarter, setting forth in
each case in comparative form the corresponding figures for the corresponding
period of the preceding fiscal year, and including comparisons to quarterly
budgets, all in reasonable detail and duly certified (subject to year-end audit
adjustments) by the chief financial officer of the Company as having been
prepared in accordance with generally accepted accounting principles
consistently applied (except that such interim financial statements may be
without notes and subject to year-end adjustments);
(c) Annual Reports. As soon as available and in any event within 90
days after the end of each fiscal year of the Company, a copy of the annual
audit report for such year for the Company and its Subsidiaries, including
therein consolidated balance sheets of the Company and its Subsidiaries as of
the end of such fiscal year and consolidated statements of income and retained
earnings and of changes in financial position of the Company and its
Subsidiaries for such fiscal year, setting forth in each case in comparative
form the corresponding figures for the preceding fiscal year, reported on by,
and accompanied by an opinion of independent certified public accountants of
recognized national standing approved by a majority of the Board of Directors;
(d) Budgets. As soon as available after approval by the Board of
Directors, a business plan and monthly operating budgets for the forthcoming
fiscal year, which shall have been submitted to the Board of Directors at least
60 days prior to such fiscal year for approval;
(e) Notice of Adverse Changes. Promptly after the occurrence thereof
and in any event within 10 days after the Company has knowledge of each
occurrence, notice of any material adverse change in the operations or financial
condition of the Company or any default in any material agreement to which the
Company is a party;
(f) Written Reports. Promptly upon receipt or publication thereof,
any written reports submitted to the Company by independent certified public
accountants in connection with an annual or interim audit of the books of the
Company and its Subsidiaries made by such accountants or by consultants or other
experts in connection with such consultant's or other expert's review of the
Company's operations or industry, and written reports prepared by the Company to
comply with other investment or loan agreements;
(g) Notice of Proceedings. Promptly after the commencement thereof,
notice of all actions, suits and proceedings before any court or governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, affecting the Company or any Subsidiary of the type described in
Section 3.04;
<PAGE> 27
22
(h) Stockholders' and SEC Reports. Promptly upon sending, making
available, or filing the same, such reports and financial statements as the
Company or any Subsidiary shall send or make available to the stockholders of
the Company or file with the Securities and Exchange Commission; and
(i) Other Information. Such other information respecting the
business, properties or the condition or operations, financial or other, of the
Company or any of its Subsidiaries as any such holder may from time to time
reasonably request.
ARTICLE V
RIGHT OF FIRST REFUSAL
5.01. Right of First Refusal. The Company shall not issue, sell or
exchange, agree or obligate itself to issue, sell or exchange, or reserve or set
aside for issuance, sale or exchange, any (i) shares of Common Stock, (ii) any
other equity security of the Company, including without limitation, shares of
Series A Preferred Stock, (iii) any debt security of the Company (other than a
bank line of credit with no equity feature) including without limitation, any
debt security which by its terms is convertible into or exchangeable for any
equity security of the Company, (iv) any security of the Company that is a
combination of debt and equity, or (v) any option, warrant or other right to
subscribe for, purchase or otherwise acquire any such equity security or any
such debt security of the Company, unless in each case the Company shall have
first offered to sell such securities (the "Offered Securities") to the
Purchasers as follows: The Company shall offer to sell to each Purchaser (a)
that portion of the Offered Securities as the number of shares of Common Stock
(including all shares of capital stock convertible into Common Stock on a fully
diluted basis) then held by such Purchaser bears to the total number of shares
of Common Stock outstanding (including all shares of capital stock convertible
into Common Stock on a fully-diluted basis) immediately prior to the subsequent
offering in question (the "Basic Amount"), provided, that for purposes of this
calculation the conversion price of each share of Series A Preferred Stock, as
set forth in Paragraph 5 of Article Fourth of the Company's Certificate of
Incorporation shall be deemed to be the lesser of $2.402 or the then applicable
conversion price of each share of Series A Preferred Stock, and (b) to each
Purchaser such additional portion of the Offered Securities as such Purchaser
shall indicate it will purchase should the other Purchasers subscribe for less
than their respective Basic Amounts (the "Undersubscription Amount"), at a price
and on such other terms as shall have been specified by the Company in writing
delivered to such Purchaser, as the case may be, (the "Offer"), which Offer by
its terms shall remain open and irrevocable for a period of thirty (30) days
from receipt of the offer.
5.02. Notice of Acceptance. Notice of each Purchaser's intention to
accept, in whole or in part, any Offer made pursuant to Section 5.01 shall be
evidenced by a writing signed by such Purchaser and delivered to the Company
prior to the end of the 30-day period of such offer, setting forth such of the
Purchaser's Basic Amount as such Purchaser elects to purchase and, if such
Purchaser shall elect to purchase all of its Basic Amount, such
Undersubscription Amount
<PAGE> 28
23
as such Purchaser shall elect to purchase (the "Notice of Acceptance"). If the
Basic Amounts subscribed for by all Purchasers are less than the aggregate Basic
Amounts the Purchasers are entitled to purchase pursuant to Section 5.01, then
each Purchaser who has set forth Undersubscription Amounts in its Notice of
Acceptance shall be entitled to purchase, in addition to the Basic Amounts
subscribed for, all Undersubscription Amounts it has subscribed for; provided,
however, that should the Undersubscription Amounts subscribed for exceed the
difference between the aggregate of the Basic Amounts and the Basic Amounts
subscribed for (the "Available Undersubscription Amount"), each Purchaser who
has subscribed for any Undersubscription Amount shall be entitled to purchase
only that portion of the Available Undersubscription Amount as the
Undersubscription Amount subscribed for by such Purchaser bears to the total
Undersubscription Amounts subscribed for by all Purchasers, subject to rounding
by the Board of Directors to the extent it reasonably deems necessary.
5.03. Conditions to Acceptances and Purchase.
(a) Permitted Sales of Refused Securities. In the event that Notices
of Acceptance are not given by the Purchasers in respect of all the Offered
Securities, the Company shall not be obligated to sell the part of such Offered
Securities as to which a Notice of Acceptance has not been given by the
Purchaser (the "Refused Securities"), and the Company shall have 90 days from
the expiration of the period set forth in Section 5.01 to sell all or any part
of the Refused Securities to any person or persons pursuant to the terms of the
Offer, but only in all respects upon terms and conditions, including, without
limitation, unit price and interest rates, which are no more favorable, in the
aggregate, to such other Person or Persons or less favorable to the Company than
those set forth in the Offer.
(b) Reduction in Amount of Offered Securities. In the event the
Company shall propose to sell less than all the Refused Securities (any such
sale to be in the manner and on the terms specified in Section 5.03(a) above),
then each Purchaser may, at its sole option and in its sole discretion, reduce
the number of, or other units of the Offered Securities specified in its
respective Notices of Acceptance to any amount which shall be less than the
amount of the Offered Securities which the Purchaser elected to purchase
pursuant to Section 5.02. In the event that any Purchaser so elects to reduce
the number or amount of Offered Securities specified in its respective Notices
of Acceptance, the Company may not sell or otherwise dispose of more than the
reduced amount of the Offered Securities until such securities have again been
offered to the Purchasers in accordance with Section 5.01.
(c) Closing. Upon the closing of the sale to such other Person or
Persons of all or less than all the Refused Securities, the Purchasers shall
purchase from the Company, and the Company shall sell to the Purchasers (upon
full payment for such shares), the number of Offered Securities specified in the
Notices of Acceptance, as reduced pursuant to Section 5.03(b) if the Purchasers
have so elected, upon the terms and conditions specified in the Offer. The
purchase by the Purchasers of any Offered Securities is subject in all cases to
the preparation, execution and delivery by the Company and the Purchasers of a
purchase agreement relating to such Offered Securities reasonably satisfactory
in form and substance to the Purchasers and their respective counsel.
<PAGE> 29
24
5.04. Further Sale. In each case, any Offered Securities not purchased by
the Purchasers or other Person or Persons in accordance with Section 5.03 may
not be sold or otherwise disposed of until they are again offered to the
Purchasers under the procedures specified in Sections 5.01, 5.02 and 5.03.
5.05. Termination of Right of First Refusal. The rights of the Purchasers
under this Article V shall terminate immediately prior to the consummation of a
Qualified Public Offering.
5.06 Exception. The rights of the Purchasers under this Article V shall
not apply to:
(a) Common Stock issued as a stock dividend to holders of Common
Stock or upon any subdivision or combination of shares of Common Stock or issued
upon conversion of the Series A Preferred Stock into Common Stock,
(b) Series A Preferred Stock issued as a dividend to holders of
Series A Preferred Stock upon any subdivision or combination of shares of Series
A Preferred Stock,
(c) Series A Preferred Stock issued at the Additional Closing;
(d) the Converted Shares,
(e) up to 871,352 shares of Common Stock, or options exercisable
therefor, issued or issuable to officers, employees, directors or consultants
for the Company or any Subsidiary pursuant to a stock option plan approved by
the Board of Directors of the Company for the benefit of the Company's or a
Subsidiary's officers, employees, directors and/or consultants,
(f) Common Stock issued pursuant to the acquisition of another
corporation by the Company by merger (whereby the Company owns no less than
fifty-one percent (51%) of the voting power of such corporation) or purchase of
substantially all of its stock or assets, or
(g) up to 448,581 shares of Common Stock issuable to the holders of
those certain Warrants issued in May, 1998.
(h) up to 10,000 shares of Common Stock issuable to Ronald Demer
pursuant to a warrant dated March 11, 1998.
ARTICLE VI
DEFINITIONS AND ACCOUNTING TERMS
6.01. Certain Defined Terms. As used in this Agreement, the following
terms shall have the following meanings (such meanings to be equally applicable
to both the singular and plural forms of the terms defined):
<PAGE> 30
25
"Agreement" means this Series A Preferred Stock Purchase Agreement as from
time to time amended and in effect between the parties, including all Exhibits
hereto.
"Board of Directors" means the board of directors of the Company as
constituted from time to time.
"Brand Equity" means Brand Equity Ventures I, L.P.
"Series A Preferred Stock" means the Series A Convertible Preferred Stock
of the Company, $.01 par value, having the rights, powers, privileges and
preferences set forth in Exhibit 1.01A hereto.
"Initial Closing" shall have that meaning attributable to it in Section
1.05 of this Agreement.
"Additional Closing" shall have the meaning attributable to it in Section
1.05 of this Agreement.
"Common Stock" includes (a) the Company's Common Stock, $.01 par value, as
authorized on the date of this Agreement, (b) any other capital stock of any
class or classes (however designated) of the Company, authorized on or after the
date hereof, the holders of which shall have the right, without limitation as to
amount, either to all or to a share of the balance of current dividends and
liquidating dividends after the payment of dividends and distributions on any
shares entitled to preference, and the holders of which shall ordinarily, in the
absence of contingencies or in the absence of any provision to the contrary in
the Company's Certificate of Incorporation, be entitled to vote for the election
of a majority of directors of the Company (even though the right so to vote has
been suspended by the happening of such a contingency or provision), and (c) any
other securities into which or for which any of the securities described in (a)
or (b) may be converted or exchanged pursuant to a plan of recapitalization,
reorganization, merger, sale of assets or otherwise.
"Company" means and shall include Alloy Designs, Inc., a Delaware
corporation and its successors and assigns.
"Consolidated" when used with reference to any term defined herein means
that term as applied to the accounts of the Company and its Subsidiaries
consolidated in accordance with generally accepted accounting principles.
"Converted Shares" shall have that meaning attributable to it in Section
1.03 of this Agreement.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Event of Default" means the occurrence of (i) an additional financing
round initially priced at a per share price below $1.413, (ii) a default under
any material bank or debt obligation that
<PAGE> 31
26
has caused the acceleration of such indebtedness or the termination of the bank
or debt agreement, subject to a reasonable cure period, or (iii) any material
violation of this Agreement, subject to a cure within 20 days of notice of such
default.
"Founders" means James K. Johnson, Jr., Matthew C. Diamond and Samuel A.
Gradess.
"Indebtedness" means all liabilities, contingent and otherwise, which
should, in accordance with generally accepted accounting principles, be
classified upon the obligor's balance sheet (or the notes thereto) as
liabilities, but in any event including liabilities secured by any mortgage on
property owned or acquired subject to such mortgage, whether or not the
liability secured thereby shall have been assumed, and also including (i) all
guarantees, endorsements and other contingent obligations, in respect of
Indebtedness of others, whether or not the same are or should be so reflected in
said balance sheet (or the notes thereto), except guarantees by endorsement of
negotiable instruments for deposit or collection or similar transactions in the
ordinary course of business and (ii) the present value of any lease payments due
under leases required to be capitalized in accordance with applicable Statements
of Financial Accounting Standards, determined by discounting all such payments
at the interest rate determined in accordance with applicable Statements of
Financial Accounting Standards.
"Key Employee" means and includes the Chief Executive Officer, the Chief
Operating Officer, the President, any Vice-President and the Treasurer of the
Company, the president or Chief Executive Officer of any division or Subsidiary
of the Company, or any other individual so designated by the Board of Directors
of the Company, including without limitation each Founder.
"Material Agreement" means every contract not made in the Company's
ordinary course of business which is material to the Company and is to be
performed in whole or in part at or after the date of this Agreement including,
without limitation, (i) any contract to which directors, officers, employees or
security holders are parties other than contracts involving only the purchase or
sale of current assets having determinable market prices, at such market price;
(ii) any contract upon which the Company's business is substantially dependent,
as in the case of continuing contracts to sell the major part of the Company's
products or services or to purchase the major part of the Company's requirements
of goods, services or raw materials or any franchise or license or other
agreement to use a patent, formula, trade secret, process or trade name upon
which the Company's business depends to a material extent; (iii) any contract
calling for the acquisition or sale of any property, plant or equipment for a
consideration exceeding 15 percent of such fixed assets of the Company on a
consolidate basis; (iv) any material lease; and (v) any management contract or
any compensatory plan, contract or arrangement, including but not limited to
plans relating to options, warrants or rights, pension, retirement or deferred
compensation or bonus, incentive or profit sharing (or if not set forth in any
formal document, a written description thereof) in which any director or any of
the officers of the Company participates shall be deemed material and any other
management contract or any other compensatory plan, contract, or arrangement in
which any other officer of the Company participates unless immaterial in amount
or significance.
<PAGE> 32
27
"Person" means an individual, corporation, partnership, joint venture,
trust, or unincorporated organization, or a government or any agency or
political subdivision thereof.
"Purchased Shares" shall have that meaning attributable to it in Section
1.01 of this Agreement.
"Purchaser" and "Purchasers" shall have the meanings attributable to such
terms in Section 1.01 of this Agreement and shall include the original
Purchasers and also any other holder of any of the Shares.
"Qualified Public Offering" means a fully underwritten, firm commitment
public offering pursuant to an effective registration under the Securities Act
covering the offer and sale by the Company of its Common Stock in which the
aggregate net proceeds to the Company exceed $15,000,000, in which the price per
share of such Common Stock equals or exceeds a price per share representing a
valuation of the Company of not less than $75 million.
"Reserved Employee Shares" means shares of Common Stock, not to exceed in
the aggregate 871,352 shares (appropriately adjusted to reflect stock splits,
stock dividends, combinations of shares and the like with respect to the Common
Stock) reserved by the Company for issuance pursuant to stock option
arrangements for employees, directors or consultants of the Company, all under
arrangements approved by the Board of Directors.
"Securities Act" means the Securities Act of 1933 and the rules and
regulations of the Securities and Exchange Commission (or of any other Federal
agency then administering the Securities Act) thereunder, all as the same shall
be in effect at the time.
"Shares" shall have that meaning attributable to it in Section 1.04 of
this Agreement.
"Subsidiary" or "Subsidiaries" means any corporation or trust of which the
Company and/or any of its other Subsidiaries (as herein defined) directly or
indirectly owns at the time at least fifty percent (50%) of the outstanding
capital stock of such corporation or trust other than directors' qualifying
shares.
6.02. Accounting Terms. All accounting terms not specifically defined
herein shall be construed in accordance with generally accepted accounting
principles consistently applied, and all financial data submitted pursuant to
this Agreement shall be prepared in accordance with such principles.
ARTICLE VII
MISCELLANEOUS
<PAGE> 33
28
7.01. No Waiver; Cumulative Remedies. No failure or delay on the part of
any party to this Agreement in exercising any right, power or remedy hereunder
shall operate as a waiver thereof; nor shall any single or partial exercise of
any such right, power or remedy preclude any other or further exercise thereof
or the exercise of any other right, power or remedy hereunder. The remedies
herein provided are cumulative and not exclusive of any remedies provided by
law.
7.02. Amendments, Waivers and Consents. Any provision in this Agreement to
the contrary notwithstanding, and except as hereinafter provided, changes in or
additions to this Agreement may be made, and compliance with any covenant or
provision set forth herein may be omitted or waived, if the Company (i) shall
obtain consent thereto in writing from the holder or holders of seventy-five
percent (75%) in interest of the Purchased Shares, and (ii) shall deliver copies
of such consent in writing to any holders who did not execute such consent. Any
waiver or consent may be given subject to satisfaction of conditions stated
therein and any waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given.
7.03. Addresses for Notices. All notices, requests, demands and other
communications provided for hereunder shall be in writing (including telegraphic
communication) and mailed, telegraphed or delivered to each applicable party at
the address set forth in Exhibit 1.01 hereto or at such other address as to
which such party may inform the other parties in writing in compliance with the
terms of this Section.
If to any other holder of the Shares: at such holder's address for notice
as set forth in the register maintained by the Company, or, as to each of the
foregoing, at the addresses set forth on Exhibit 1.01 hereto or at such other
address as shall be designated by such Person in a written notice to the other
parties complying as to delivery with the terms of this Section.
If to the Company: at the address set forth on page 1 hereof, or at such
other address as shall be designated by the Company in a written notice to the
other parties complying as to delivery with the terms of this Section, with a
copy to: Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, PC, One Financial
Center, Boston, MA 02111, attention Michael Balfe.
All such notices, requests, demands and other communications shall, when
mailed (which mailing must be accomplished by first class mail, postage prepaid;
express overnight courier service; or registered mail, return receipt requested)
or telegraphed, be effective three days after deposited in the mails or
delivered to the telegraph company, respectively, addressed as aforesaid, unless
otherwise provided herein.
7.04. Costs, Expenses and Taxes. The Company agrees to pay (i) the
reasonable fees and out-of-pocket expenses of Testa, Hurwitz & Thibeault, LLP,
counsel for the Purchasers, with respect to the preparation, execution and
delivery of this Agreement and (ii) the reasonable out-of-pocket expenses with
respect to certain due diligence matters incurred by the Purchasers in
connection with their investment hereto (not to exceed $50,000 in the aggregate
for Sections (i) and (ii) hereof). In addition, the Company shall pay any and
all stamp and other taxes payable or determined to be payable in connection with
the execution and delivery of this Agreement, the
<PAGE> 34
29
issuance of the Purchased Shares and the other instruments and documents to be
delivered hereunder or thereunder, and agrees to save the Purchasers harmless
from and against any and all liabilities with respect to or resulting from any
delay in paying or omission to pay such taxes.
7.05. Binding Effect; Assignment. This Agreement shall be binding upon and
inure to the benefit of the Company and the Purchasers and their respective
heirs, successors and assigns, except that the Company shall not have the right
to delegate any of its respective obligations hereunder or to assign its
respective rights hereunder or any interest herein without the prior written
consent of the holders of at least seventy-five percent (75%) in interest of the
Purchased Shares.
7.06. Survival of Representations and Warranties. All representations and
warranties made in this Agreement, the Shares, or any other instrument or
document delivered in connection herewith or therewith, shall survive the
execution and delivery hereof or thereof until the delivery by the Company of
the audited financial statements for the year ended January 31, 2000.
7.07. Prior Agreements. This Agreement, together with the Exhibits and
Schedules hereto, constitutes the entire agreement between the parties and
supersedes any prior understandings or agreements concerning the purchase and
sale of the Shares.
7.08. Severability. The provisions of this Agreement and the terms of the
Series A Preferred Stock are severable and, in the event that any court of
competent jurisdiction shall determine that any one or more of the provisions or
part of a provision contained in this Agreement or the Series A Preferred Stock
shall, for any reason, be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provision or part of a provision of this Agreement or the terms of the
Series A Preferred Stock; but this Agreement and the terms of the Series A
Preferred Stock shall be reformed and construed as if such invalid or illegal or
unenforceable provision, or part of a provision, had never been contained
herein, and such provisions or part reformed so that it would be valid, legal
and enforceable to the maximum extent possible.
7.09. Governing Law. This Agreement shall be construed and enforced in
accordance with and governed by the General Corporation Law of the State of
Delaware as to matters within the scope thereof and as to all other matters
shall be governed by and construed in accordance with the internal law of The
Commonwealth of Massachusetts.
7.10. Headings. Article, Section and subsection headings in this Agreement
are included herein for convenience of reference only and shall not constitute a
part of this Agreement for any other purpose.
7.11. Counterparts. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument, and any of the parties hereto may execute this Agreement by signing
any such counterpart.
<PAGE> 35
30
7.12. Further Assurances. From and after the date of this Agreement, upon
the request of any Purchaser or the Company, the Company and the Purchasers
shall execute and deliver such instruments, documents and other writings as may
be reasonably necessary or desirable to confirm and carry out and to effectuate
fully the intent and purposes of this Agreement and the Shares.
7.13 Indemnification. The Company shall, with respect to the
representations, warranties and agreement made by it herein, indemnify, defend
and hold the Purchasers harmless against all liability, loss or damage, together
with all reasonable costs and expenses related thereto (including legal and
accounting fees and expenses), arising from the untruth, inaccuracy or breach of
any such representations, warranties or agreements of the Company. Without
limiting the generality of the foregoing, the Purchasers shall be deemed to have
suffered liability, loss or damage as a result of the untruth, inaccuracy or
breach of any such representations or warranties if such liability, loss or
damage shall be suffered by the Company as a result of, or in connection with,
such untruth, inaccuracy or breach of any facts or circumstances constituting
such untruth, inaccuracy or breach.
7.14 Changes in Common Stock or Preferred Stock. If, and as often as,
there is any change in the Common Stock or the Preferred Stock by way of a stock
split, stock dividend, combination or reclassification, or through a merger,
consolidation, reorganization or recapitalization, or by any other means,
appropriate adjustment shall be made in the provisions hereof including without
limitation an equitable adjustment of all per share prices herein, so that the
right and privileges granted hereby shall continue with respect to the Common
Stock, the Preferred Stock or the price per share as so changed.
[Remainder of Page Intentionally Left Blank]
<PAGE> 36
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
ALLOY DESIGNS, INC.,
a Delaware Corporation
By:
------------------------------
Title:
---------------------------
PURCHASERS:
BRAND EQUITY VENTURES I, L.P.
By: BRAND EQUITY PARTNERS I, LLC
By:
------------------------------
Member Manager
---------------------------------
J. Edward Diamond
<PAGE> 37
Exhibit 1.01
Schedule of Purchasers
<TABLE>
<CAPTION>
Initial Closing Additional Closings
--------------- -------------------
Name Initial Additional Aggregate
Preferred Shares Purchase Price Preferred Shares Purchase Price Purchase Price
---------------- -------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Brand Equity Ventures I, L.P. 737,287 $2,500,140.22 737,286 $2,500,136.83 $5,000,277.05
Three Pickwick Plaza
Greenwich, CT 06830
Attn: Mr. David Yarnell
J. Edward Diamond 13,270 $44,998.57 0 $0.00 $44,998.57
P.O. Box 9187
Canton, OH 44711
------------ ------------- ---------- ------------- -------------
TOTAL: 750,557 $2,545,138.79 737,286 $2,500,136.83 $5,045,275.62
</TABLE>
<PAGE> 1
Execution Copy
Exhibit 10.39
REGISTRATION RIGHTS AGREEMENT
November 24, 1998
To each of the several Purchasers named in
Exhibit 1.01 to the Series A Convertible Preferred
Stock Purchase Agreement of even date herewith
(the "Purchasers")
Dear Madams and Sirs:
This will confirm that in consideration of the Purchasers' agreement on
the date hereof to purchase up to 1,487,843 shares (the "Preferred Shares") of
Series A Convertible Preferred Stock, par value $.01 per share ("Preferred
Stock"), of Alloy Designs, Inc., a Delaware corporation (the "Company"),
pursuant to the Series A Convertible Preferred Stock Purchase Agreement of even
date herewith (the "Purchase Agreement") between the Company and you, and as an
inducement to you to consummate the transactions contemplated by the Purchase
Agreement, the Company covenants and agrees with each of you as follows:
1. Certain Definitions. As used in this Agreement, the following terms
shall have the following respective meanings:
"Commission" shall mean the Securities and Exchange Commission, or
any other federal agency at the time administering the Securities Act.
"Common Stock" shall mean the Common Stock, par value $.01 per
share, of the Company, as constituted as of the date of this Agreement.
"Conversion Shares" shall mean shares of Common Stock issued or
issuable upon conversion of the Preferred Shares, and any shares of capital
stock received in respect thereof.
"Exchange Act" shall mean the Securities Exchange Act of 1934 or any
similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Purchasers" shall mean those persons listed on Exhibit 1.01 to the
Purchase Agreement.
"Registration Expenses" shall mean the expenses so described in
Section 8.
<PAGE> 2
-2-
"Restricted Stock" shall mean (1) the Conversion Shares, excluding
Conversion Shares which have been (a) registered under the Securities Act
pursuant to an effective registration statement filed thereunder and disposed of
in accordance with the registration statement covering them or (b) publicly sold
pursuant to Rule 144 under the Securities Act.
"Securities Act" shall mean the Securities Act of 1933 or any
similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Selling Expenses" shall mean the expenses so described in Section
8.
2. Restrictive Legend. Each certificate representing Preferred Shares,
Conversion Shares or Restricted Stock shall, except as otherwise provided in
this Section 2 or in Section 3, be stamped or otherwise imprinted with a legend
substantially in the following form:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933 or applicable state securities laws.
These securities have been acquired for investment and not with a view to
distribution or resale, and may not be sold mortgaged, pledged, hypothecated or
otherwise transferred without an effective registration statement for such
securities under the Securities Act of 1933 and applicable state securities
laws, or the availability of an exemption from the registration provisions of
the Securities Act of 1933 and applicable state securities laws."
A certificate shall not bear such legend if in the opinion of counsel reasonably
satisfactory to the Company the securities being sold thereby may be publicly
sold without registration under the Securities Act.
3. Notice of Proposed Transfer. Prior to any proposed transfer of any
Preferred Shares, Conversion Shares or Restricted Stock (other than under the
circumstances described in Sections 4, 5 or 6), the holder thereof shall give
written notice to the Company of its intention to effect such transfer. Each
such notice shall describe the manner of the proposed transfer and, if requested
by the Company, shall be accompanied by an opinion of counsel reasonably
satisfactory to the Company to the effect that the proposed transfer may be
effected without registration under the Securities Act, whereupon the holder of
such stock shall be entitled to transfer such stock in accordance with the terms
of its notice; provided, however, that no such opinion of counsel shall be
required for a transfer to one or more partners of the transferor (in the case
of a transferor that is a partnership), to one or more members of the transferor
(in the case of a transferor that is a limited liability company) or to an
affiliated corporation (in the case of a transferor that is a corporation);
provided, further, however, that any transferee other than a partner or
affiliate of the transferor shall execute and deliver to the Company a
representation letter in form reasonably satisfactory to the Company's counsel
to the effect that the transferee is acquiring Restricted Stock for its own
account, for investment purposes and without any view to distribution thereof.
Each certificate for Preferred Shares or Conversion Shares transferred as above
provided shall bear the legend set forth in Section 2, except that such
certificate shall not bear such legend if (i) such transfer is in accordance
with
<PAGE> 3
-3-
the provisions of Rule 144 (or any other rule permitting public sale without
registration under the Securities Act) or (ii) the opinion of counsel referred
to above is to the further effect that the transferee and any subsequent
transferee (other than an affiliate of the Company) would be entitled to
transfer such securities in a public sale without registration under the
Securities Act. The restrictions provided for in this Section 3 shall not apply
to securities which are not required to bear the legend prescribed by Section 2
in accordance with the provisions of that Section.
4. Required Registration.
(a) Beginning at any time three years from the date of this
Agreement, the holders of Restricted Stock constituting at least seventy-five
percent (75%) in interest of the total shares of Restricted Stock then
outstanding may request the Company to register under the Securities Act all or
any portion of the shares of Restricted Stock held by such requesting holder or
holders for sale in the manner specified in such notice, provided that the
aggregate price to the public of such offering would exceed $5,000,000 and
provided that if such request occurs prior to the Company's initial public
offering such request shall be subject to the opinion of the managing
underwriter that such an offering would not adversely affect the marketing of
such shares. For purposes of this Section 4 and Sections 5, 6, 13(a) and 13(d),
the term "Restricted Stock" shall be deemed to include the number of shares of
Restricted Stock which would be issuable to a holder of Preferred Shares upon
conversion of all shares of Preferred Stock held by such holder at such time;
provided, however, that the only securities which the Company shall be required
to register pursuant hereto shall be shares of Common Stock; provided, further,
however, that, in any underwritten public offering contemplated by this Section
4 or Sections 5 and 6, the holders of Preferred Shares shall be entitled to sell
such Preferred Shares to the underwriters for conversion and sale of the shares
of Common Stock issued upon conversion thereof. Notwithstanding anything to the
contrary contained herein, no request may be made under this Section 4 within
180 days after the effective date of a registration statement filed by the
Company covering a firm commitment underwritten public offering in which the
holders of Restricted Stock shall have been entitled to join pursuant to
Sections 5 or 6.
(b) Following receipt of any notice under this Section 4, the
Company shall immediately notify all holders of Restricted Stock and Preferred
Shares from whom notice has not been received and such holders shall then be
entitled within 30 days thereafter to request the Company to include in the
requested registration all or any portion of their shares of Restricted Stock.
The Company shall use its best efforts to register under the Securities Act, for
public sale in accordance with the method of disposition described in paragraph
(a) above, the number of shares of Restricted Stock specified in such notice
(and in all notices received by the Company from other holders within 30 days
after the giving of such notice by the Company). The Company shall be obligated
to register Restricted Stock pursuant to this Section 4 on two occasions only;
provided, however, that such obligation shall be deemed satisfied only when a
registration statement covering all shares of Restricted Stock specified in
notices received as aforesaid for sale in accordance with the method of
disposition specified by the requesting holders, shall have become effective or
if such registration statement has been
<PAGE> 4
-4-
withdrawn prior to the consummation of the offering at the request of the
Investors (other than as a result of a material adverse change in the business
or financial condition of the Company) and, if such method of disposition is a
firm commitment underwritten public offering, all such shares shall have been
sold pursuant thereto. The Company shall not be obligated to register, pursuant
to this Section 4, the Restricted Stock of any holder who fails to provide
promptly to the Company such information as the Company may reasonably request
at any time to enable the Company to comply with any applicable law or
regulation or to facilitate preparation of the registration statement.
(c) The Company (or at the option of the Company, the holders of
Common Stock) shall be entitled to include in any registration statement
referred to in this Section 4, for sale in accordance with the method of
disposition specified by the requesting holders, shares of Common Stock to be
sold by the Company for its own account or such other holders, except as and to
the extent that, in the opinion of the managing underwriter (if such method of
disposition shall be an underwritten public offering), such inclusion would
adversely affect the marketing of the Restricted Stock to be sold. Except for
registration statements on Form S-4, S-8 or any successor thereto, the Company
will not file with the Commission any other registration statement with respect
to its Common Stock, whether for its own account or that of other stockholders,
from the date of receipt of a notice from requesting holders pursuant to this
Section 4 until the completion of the period of distribution of the registration
contemplated thereby.
(d) If the holders requesting such registration intend to distribute
the Restricted Stock covered by their request by means of an underwriting, they
shall so advise the Company as a part of their request made pursuant to this
Section 4 and the Company shall include such information in the written notice
referred to in paragraph (b) above. The right of any holder to registration
pursuant to this Section 4 shall be conditioned upon such holder's agreeing to
participate in such underwriting and to permit inclusion of such holder's
Restricted Stock in the underwriting. If such method of disposition is an
underwritten public offering, the holders of at least a majority in interest of
the shares of Restricted Stock to be sold in such offering may designate the
managing underwriter of such offering, subject to the approval of the Company,
which approval shall not be unreasonably withheld or delayed. A holder may elect
to include in such underwriting all or a part of the Restricted Stock it holds.
(e) If in the opinion of the managing underwriter the inclusion of
all of the Restricted Stock requested to be registered under this Section would
adversely affect the marketing of such shares, after any shares to be sold by
the Company or other holders of Common Stock have been excluded, shares to be
sold by the holders of Restricted Stock shall be excluded in such manner that
the shares to be sold shall be allocated among the selling holders pro rata
based on their ownership of Restricted Stock.
5. Incidental Registration. If the Company at any time (other than
pursuant to Section 4 or Section 6) proposes to register any of its securities
under the Securities Act for sale to the public, whether for its own account or
for the account of other security holders or both (except with respect to
registration statements on Forms S-4, S-8 or another form not
<PAGE> 5
-5-
available for registering the Restricted Stock for sale to the public), each
such time it will give written notice to all holders of outstanding Restricted
Stock of its intention so to do. Upon the written request of any such holder
received by the Company within 30 days after the giving of any such notice by
the Company to register any of its Restricted Stock, the Company will use its
best efforts to cause the Restricted Stock as to which registration shall have
been so requested to be included in the securities to be covered by the
registration statement proposed to be filed by the Company, all to the extent
requisite to permit the sale or other disposition by the holder (in accordance
with such written request) of such Restricted Stock so registered. In the event
that any registration pursuant to this Section 5 shall be, in whole or in part,
an underwritten public offering of Common Stock, the number of shares of
Restricted Stock to be included in such an underwriting may be reduced (pro rata
among the requesting holders based upon the number of shares of Restricted Stock
held by such requesting holders) if and to the extent that the managing
underwriter shall be of the opinion that such inclusion would adversely affect
the marketing of the securities to be sold by the Company therein; provided,
however, that such number of shares of Restricted Stock shall not be reduced if
any shares are to be included in such underwriting for the account of any person
other than the Company or requesting Purchasers holding Restricted Stock.
Notwithstanding the foregoing provisions, the Company may withdraw any
registration statement referred to in this Section 5 without thereby incurring
any liability to the holders of Restricted Stock.
6. Registration on Form S-3. If at any time (i) a holder or holders of
Restricted Stock then outstanding request that the Company file a registration
statement on Form S-3 or any successor thereto for a public offering of all or
any portion of the shares of Restricted Stock held by such requesting holder or
holders, the reasonably anticipated aggregate price to the public of which would
exceed $750,000, and (ii) the Company is a registrant entitled to use Form S-3
or any successor thereto to register such shares, then the Company shall use its
best efforts to register under the Securities Act on Form S-3 or any successor
thereto, for public sale in accordance with the method of disposition specified
in such notice, the number of shares of Restricted Stock specified in such
notice. Whenever the Company is required by this Section 6 to use its best
efforts to effect the registration of Restricted Stock, each of the procedures
and requirements of Section 4 (including but not limited to the requirement that
the Company notify all holders of Restricted Stock from whom notice has not been
received and provide them with the opportunity to participate in the offering)
shall apply to such registration, provided, however, that there shall be no
limitation on the number of registrations on Form S-3 which may be requested and
obtained under this Section 6.
(b) Notwithstanding anything to the contrary set forth in this
Agreement, the Company's obligation under this Agreement to register Restricted
Stock under the Securities Act on registration statements ("Registration
Statements") may, upon the reasonable determination of the Board of Directors
made only once during any 12-month period, be suspended in the event and during
such period as unforeseen circumstances (including without limitation (i) an
underwritten primary offering by the Company (which includes no secondary
offering) if the Company is advised in writing by its underwriters that the
registration of the Restricted Stock would have a material adverse effect on the
Company's offering, or (ii) pending negotiations relating to, or consummation
of, a transaction or the occurrence of an
<PAGE> 6
-6-
event which would require additional disclosure of material information by the
Company in Registration Statements or such other filings, as to which the
Company has a bona fide business purpose for preserving confidentiality or which
renders the Company unable to comply with Securities and Exchange Commission
(the "SEC") requirements) exist (such unforeseen circumstances being hereinafter
referred to as a "Suspension Event") which would make it impractical or
unadvisable for the Company to file the Registration Statements or such other
filings or to cause such to become effective. Such suspension shall continue
only for so long as such event is continuing but in no event for a period longer
than ninety (90) days. The Company shall notify the Purchasers of the existence
and nature of any Suspension Event.
7. Registration Procedures. If and whenever the Company is required by the
provisions of Sections 4, 5 or 6 to use its best efforts to effect the
registration of any shares of Restricted Stock under the Securities Act, the
Company will, as expeditiously as possible:
(a) prepare and file with the Commission a registration statement
(which, in the case of an underwritten public offering pursuant to Section 4,
shall be on Form S-1 or other form of general applicability satisfactory to the
managing underwriter selected as therein provided) with respect to such
securities and use its best efforts to cause such registration statement to
become and remain effective for the period of the distribution contemplated
thereby (determined as hereinafter provided);
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective for
the period specified in paragraph (a) above and comply with the provisions of
the Securities Act with respect to the disposition of all Restricted Stock
covered by such registration statement in accordance with the sellers' intended
method of disposition set forth in such registration statement for such period;
(c) furnish to each seller of Restricted Stock and to each
underwriter such number of copies of the registration statement and each such
amendment and supplement thereto (in each case including all exhibits) and the
prospectus included therein (including each preliminary prospectus) as such
persons reasonably may request in order to facilitate the public sale or other
disposition of the Restricted Stock covered by such registration statement;
(d) use its best efforts to register or qualify the Restricted Stock
covered by such registration statement under the securities or "blue sky" laws
of such jurisdictions as the sellers of Restricted Stock or, in the case of an
underwritten public offering, the managing underwriter reasonably shall request;
provided, however, that the Company shall not for any such purpose be required
to qualify generally to transact business as a foreign corporation in any
jurisdiction where it is not so qualified or to consent to general service of
process in any such jurisdiction;
(e) use its best efforts to list the Restricted Stock covered by
such registration statement with any securities exchange on which the Common
Stock of the Company is then listed;
<PAGE> 7
-7-
(f) immediately notify each seller of Restricted Stock and each
underwriter under such registration statement, at any time when a prospectus
relating thereto is required to be delivered under the Securities Act, of the
happening of any event of which the Company has knowledge as a result of which
the prospectus contained in such registration statement, as then in effect,
includes an untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading in light of the circumstances then existing, and promptly prepare
and furnish to such seller a reasonable number of copies of a prospectus
supplemented or amended so that, as thereafter delivered to the purchasers of
such Restricted Stock, such prospectus shall not include an 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 in light of the
circumstances then existing;
(g) if the offering is underwritten and at the request of any seller
of Restricted Stock, use its best efforts to furnish to such seller on the date
that Restricted Stock is delivered to the underwriters for sale pursuant to such
registration: (i) a copy of an opinion dated such date of counsel representing
the Company for the purposes of such registration, addressed to the underwriters
and to such seller, to such effect as reasonably may be requested by counsel for
the underwriters, and (ii) a letter dated such date from the independent public
accountants retained by the Company, addressed to the underwriters and to such
seller, stating that they are independent public accountants within the meaning
of the Securities Act and that, in the opinion of such accountants, the
financial statements of the Company included in the registration statement or
the prospectus, or any amendment or supplement thereof, comply as to form in all
material respects with the applicable accounting requirements of the Securities
Act, and such letter shall additionally cover such other financial matters
(including information as to the period ending no more than five business days
prior to the date of such letter) with respect to such registration as such
underwriters reasonably may request;
(h) upon reasonable notice and at reasonable times make available
for inspection by each seller of Restricted Stock, any underwriter participating
in any distribution pursuant to such registration statement, and any attorney,
accountant or other agent retained by such seller or underwriter, reasonable
access to all financial and other records, pertinent corporate documents and
properties of the Company, as such parties may reasonably request, and cause the
Company's officers, directors and employees to supply all information reasonably
requested by any such seller, underwriter, attorney, accountant or agent in
connection with such registration statement;
(i) cooperate with the selling holders of Restricted Stock and the
managing underwriters, if any, to facilitate the timely preparation and delivery
of certificates representing Restricted Stock to be sold, such certificates to
be in such denominations and registered in such names as such holders or the
managing underwriters may request at least two business days prior to any sale
of Restricted Stock; and
<PAGE> 8
-8-
(j) permit any holder of Restricted Stock which holder, in the sole
and exclusive judgment, exercised in good faith, of such holder, might be deemed
to be a controlling person of the Company, to participate in good faith in the
preparation of such registration or comparable statement and to require the
insertion therein of material, furnished to the Company in writing, which in the
reasonable judgment of such holder and its counsel should be included.
For purposes of Section 7(a) and 7(b) and of Section 4(c), the
period of distribution of Restricted Stock in a firm commitment underwritten
public offering shall be deemed to extend until each underwriter has completed
the distribution of all securities purchased by it, and the period of
distribution of Restricted Stock in any other registration shall be deemed to
extend until the earlier of the sale of all Restricted Stock covered thereby and
180 days after the effective date thereof.
In connection with each registration hereunder, the sellers of
Restricted Stock will furnish to the Company in writing such information
requested by the Company with respect to themselves and the proposed
distribution by them as reasonably shall be necessary in order to assure
compliance with federal and applicable state securities laws and to make the
registration statement correct, accurate and complete in all respects with
respect to such sellers; provided, however, that this requirement shall not be
deemed to limit any disclosure obligation arising out of any seller's
relationship to the Company if one of such seller's agents or affiliates is an
officer, director or control person of the Company. In addition, the sellers
shall, if requested by the Company, execute such other agreements, which are
reasonably satisfactory to them and which shall contain such provisions as may
be customary and reasonable in order to accomplish the registration of the
Restricted Stock.
In connection with each registration pursuant to Sections 4, 5 or 6
covering an underwritten public offering, the Company and each seller agree to
enter into a written agreement with the managing underwriter selected in the
manner herein provided in such form and containing such provisions as are
customary in the securities business for such an arrangement between such
underwriter and companies of the Company's size and investment stature.
8. Expenses. All expenses incurred by the Company in complying with
Sections 4, 5 and 6, including, without limitation, all registration and filing
fees, printing expenses, fees and disbursements of counsel and independent
public accountants for the Company, fees and expenses (including counsel fees)
incurred in connection with complying with state securities or "blue sky" laws,
fees and expenses of one counsel for the selling holders of Restricted Stock in
connection with the registration of Restricted Stock, fees of the National
Association of Securities Dealers, Inc., transfer taxes, fees of transfer agents
and registrars, costs of any insurance which might be obtained, but excluding
any Selling Expenses, are called "Registration Expenses." All underwriting
discounts and selling commissions applicable to the sale of Restricted Stock and
the fees and expenses of more than one counsel for the selling holders of
Restricted Stock in connection with the registration of Restricted Stock are
called "Selling Expenses."
<PAGE> 9
-9-
The Company will pay all Registration Expenses in connection with
each registration statement under Sections 4, 5 or 6. All Selling Expenses in
connection with each registration statement under Sections 4, 5 or 6 shall be
borne by the participating sellers in proportion to the number of shares sold by
each, or by such participating sellers other than the Company (except to the
extent the Company shall be a seller) as they may agree.
9. Indemnification.
(a) In the event of a registration of any of the Restricted Stock
under the Securities Act pursuant to Sections 4, 5 or 6, the Company will, to
the extent permitted by law, indemnify and hold harmless each holder of
Restricted Stock, its officers and directors, each underwriter of such
Restricted Stock thereunder and each other person, if any, who controls such
seller or underwriter within the meaning of the Securities Act, against any
losses, claims, damages or liabilities, joint or several, to which such holder,
officer, director, underwriter or controlling person may become subject under
the Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon (i)
any untrue statement or alleged untrue statement of any material fact contained
in any registration statement under which such Restricted Stock was registered
under the Securities Act pursuant to Sections 4, 5 or 6, any preliminary
prospectus or final prospectus contained therein, or any amendment or supplement
thereof, (ii) any blue sky application or other document executed by the Company
specifically for that purpose or based upon written information furnished by the
Company filed in any state or other jurisdiction in order to qualify any or all
of the Restricted Stock under the securities laws thereof (any such application,
document or information herein called a "Blue Sky Application"), (iii) 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, (iv)
any violation by the Company or its agents of any rule or regulation promulgated
under the Securities Act applicable to the Company or its agents and relating to
action or inaction required of the Company in connection with such registration,
or (v) any failure to register or qualify the Restricted Stock in any state
where the Company or its agents has affirmatively undertaken or agreed in
writing that the Company (the undertaking of any underwriter chosen by the
Company being attributed to the Company) will undertake such registration or
qualification on the seller's behalf (provided that in such instance the Company
shall not be so liable if it has undertaken its best efforts to so register or
qualify the Restricted Stock) and will reimburse each such holder, and such
officer and director, each such underwriter and each such controlling person for
any legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the Company will not be liable in any such case (i) if
and to the extent that any such loss, claim, damage or liability arises out of
or is based upon an untrue statement or alleged untrue statement or omission or
alleged omission so made in conformity with information furnished by any such
seller, any such underwriter or any such controlling person in writing
specifically for use in such registration statement or prospectus, or (ii) in
the case of a sale directly by such holder of Restricted Stock (including a sale
of such Restricted Stock through any underwriter retained by such holder of
Restricted Stock to engage in a distribution solely on behalf of such holder of
<PAGE> 10
-10-
Restricted Stock), such untrue statement or alleged untrue statement or omission
or alleged omission was contained in a preliminary prospectus and corrected in a
final or amended prospectus, and such holder of Restricted Stock failed to
deliver a copy of the final or amended prospectus at or prior to the
confirmation of the sale of Restricted Stock to the person asserting any such
loss, claim, damage or liability in any case where such delivery is required by
the Securities Act or any state securities laws.
(b) In the event of a registration of any of the Restricted Stock
under the Securities Act pursuant to Sections 4, 5 or 6, each seller of such
Restricted Stock thereunder, severally and not jointly, will indemnify and hold
harmless the Company, each person, if any, who controls the Company within the
meaning of the Securities Act, each officer of the Company who signs the
registration statement, each director of the Company, each other holder of
Restricted Stock, each underwriter and each person who controls any underwriter
within the meaning of the Securities Act, against all losses, claims, damages or
liabilities, joint or several, to which the Company or such officer, director,
other seller, underwriter or controlling person may become subject under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
the registration statement under which such Restricted Stock was registered
under the Securities Act pursuant to Sections 4, 5 or 6, any preliminary
prospectus or final prospectus contained therein, or any amendment or supplement
thereof, or any Blue Sky Application or arise out of or are 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, and
will reimburse the Company and each such officer, director, other seller,
underwriter and controlling person for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability or action, provided, however, that such seller will be
liable hereunder in any such case if and only to the extent that any such loss,
claim, damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in reliance upon
and in conformity with information pertaining to such seller, as such, furnished
in writing to the Company by such seller specifically for use in such
registration statement or prospectus, and provided, further, however, that the
liability of each seller hereunder shall be limited to the proportion of any
such loss, claim, damage, liability or expense which is equal to the proportion
that the public offering price of the shares sold by such seller under such
registration statement bears to the total public offering price of all
securities sold thereunder, but not in any event to exceed the proceeds received
by such seller from the sale of Restricted Stock covered by such registration
statement.
(c) Promptly after receipt by an indemnified party hereunder of
notice of the commencement of any action, such indemnified party shall, if a
claim in respect thereof is to be made against the indemnifying party hereunder,
notify the indemnifying party in writing thereof, but the omission so to notify
the indemnifying party shall not relieve it from any liability which it may have
to such indemnified party other than under this Section 9 and shall only relieve
it from any liability which it may have to such indemnified party under this
Section 9 if and to the extent the indemnifying party is prejudiced by such
omission. In case
<PAGE> 11
-11-
any such action shall be brought against any indemnified party and it shall
notify the indemnifying party of the commencement thereof, the indemnifying
party shall be entitled to participate in and, to the extent it shall wish, to
assume and undertake the defense thereof with counsel satisfactory to such
indemnified party, and, after notice from the indemnifying party to such
indemnified party of its election so to assume and undertake the defense
thereof, the indemnifying party shall not be liable to such indemnified party
under this Section 9 for any legal expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation and of liaison with counsel so selected; provided,
however, that, 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 the interests of the indemnified party reasonably may be deemed
to conflict with the interests of the indemnifying party, the indemnified party
shall have the right to select a separate counsel and to assume such legal
defenses and otherwise to participate in the defense of such action, with the
expenses and fees of such separate counsel and other expenses related to such
participation to be reimbursed by the indemnifying party as incurred.
(d) In order to provide for just and equitable contribution to joint
liability under the Securities Act in any case in which either (i) any holder of
Restricted Stock exercising rights under this Agreement, or any controlling
person of any such holder, makes a claim for indemnification pursuant to this
Section 9 but is judicially determined (by the entry of a final judgment or
decree by a court of competent jurisdiction and the expiration of time to appeal
or the denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 9 provides for
indemnification in such case, or (ii) contribution under the Securities Act may
be required on the part of any such selling holder or any such controlling
person in circumstances for which indemnification is provided under this Section
9, then, and in each such case, the Company and such holder will contribute to
the aggregate losses, claims, damages or liabilities to which they may be
subject (after contribution from others) in such proportion so that such holder
is responsible for the portion represented by the percentage that the public
offering price of its Restricted Stock offered by the registration statement
bears to the public offering price of all securities offered by such
registration statement, and the Company is responsible for the remaining
portion; provided, however, that, in any such case, (A) no such holder of
Restricted Stock will be required to contribute any amount in excess of the
proceeds received from the sale of all such Restricted Stock offered by it
pursuant to such registration statement; and (B) no person or entity guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) will be entitled to contribution from any person or entity who
was not guilty of such fraudulent misrepresentation.
(e) The indemnities provided in this Section 9 shall survive the
transfer of any Restricted Stock by such holder.
10. Changes in Common Stock or Preferred Stock. If, and as often as, there
is any change in the Common Stock or the Preferred Stock by way of a stock
split, stock dividend, combination or reclassification, or through a merger,
consolidation, reorganization or recapitalization, or by any other means,
appropriate adjustment shall be made in the provisions
<PAGE> 12
-12-
hereof so that the rights and privileges granted hereby shall continue with
respect to the Common Stock or the Preferred Stock as so changed.
11. Rule 144 Reporting. With a view to making available the benefits of
certain rules and regulations of the Commission which may at any time permit the
sale of the Restricted Stock to the public without registration, at all times
after 90 days after any registration statement covering a public offering of
securities of the Company under the Securities Act shall have become effective,
the Company agrees to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act;
(b) use its best efforts to file with the Commission in a timely
manner all reports and other documents required of the Company under the
Securities Act and the Exchange Act; and
(c) furnish to each holder of Restricted Stock forthwith upon
request a written statement by the Company as to its compliance with the
reporting requirements of such Rule 144 and of the Securities Act and the
Exchange Act, a copy of the most recent annual or quarterly report of the
Company, and such other reports and documents so filed by the Company as such
holder may reasonably request in availing itself of any rule or regulation of
the Commission allowing such holder to sell any Restricted Stock without
registration.
12. Representations and Warranties of the Company. The Company represents
and warrants to you as follows:
(a) The execution, delivery and performance of this Agreement by the
Company have been duly authorized by all requisite corporate action and will not
violate any provision of law, any order of any court or other agency of
government, the Charter or By-laws of the Company or any provision of any
indenture, agreement or other instrument to which it or any or its properties or
assets is bound, conflict with, result in a breach of or constitute (with due
notice or lapse of time or both) a default under any such indenture, agreement
or other instrument or result in the creation or imposition of any lien, charge
or encumbrance of any nature whatsoever upon any of the properties or assets of
the Company.
(b) This Agreement has been duly executed and delivered by the
Company and constitutes the legal, valid and binding obligation of the Company,
enforceable in accordance with its terms, except to the extent the
indemnification provisions herein may be deemed not enforceable.
13. Miscellaneous.
(a) All covenants and agreements contained in this Agreement by or
on behalf of any of the parties hereto shall bind and inure to the benefit of
the respective successors and assigns of the parties hereto (including without
limitation transferees of any
<PAGE> 13
-13-
Preferred Shares or Restricted Stock), whether so expressed or not; provided,
however, that registration rights conferred herein on the holders of Preferred
Shares or Restricted Stock shall only inure to the benefit of a transferee of
Preferred Shares or Restricted Stock if (i) there is transferred to such
transferee at least 50,000 shares of Restricted Stock (appropriately adjusted
for any subdivision or combination) originally issued pursuant to the Purchase
Agreement to the direct or indirect transferor of such transferee or (ii) such
transferee is a partner, shareholder or affiliate of a party hereto and
provided, further, that such transferee executes a writing agreeing to be bound
by the provisions of this Agreement.
(b) All notices, requests, consents and other communications
hereunder shall be in writing and shall be mailed by certified or registered
mail, return receipt requested, postage prepaid, or telexed, in the case of
non-U.S. residents, addressed as follows:
if to the Company or any other party hereto, at the address of such
party set forth in the Purchase Agreement or in a certain Stockholders'
Agreement by and among the parties hereto dated as of the date hereof with a
copy to the Company's counsel as indicated therein;
if to any subsequent holder of Preferred Shares or Restricted Stock,
to it at such address as may have been furnished to the Company in writing by
such holder;
or, in any case, at such other address or addresses as shall have been furnished
in writing to the Company (in the case of a holder of Preferred Shares or
Restricted Stock) or to the holders of Preferred Shares or Restricted Stock (in
the case of the Company) in accordance with the provisions of this paragraph.
(c) This Agreement shall be construed and enforced in accordance
with and governed by the General Corporation Law of the State of Delaware as to
matters within the scope thereof, and as to all other matters shall be governed
by and construed in accordance with the internal law of The Commonwealth of
Massachusetts.
(d) This Agreement may not be amended or modified, and no provision
hereof may be waived, without the written consent of the Company and the holders
of at least seventy-five percent (75%) in interest of the then outstanding
shares of Restricted Stock. Notwithstanding the foregoing, no such amendment or
modification shall be effective if and to the extent that such amendment or
modification grants to any one or more Purchasers any rights more favorable than
any rights granted to all other Purchasers or otherwise treats any one or more
Purchasers differently than all other Purchasers.
(e) This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
(f) The obligations of the Company to register shares of Restricted
Stock under Sections 4, 5 or 6 shall terminate six years after completion of an
underwritten public
<PAGE> 14
-14-
offering of shares of Common Stock in which the net proceeds received by the
Company shall be at least $15 million and the per share price paid by the public
for such shares shall represent a valuation of the Company of not less than
$75,000,000.
(g) If requested in writing by the underwriters for the initial
underwritten public offering of securities of the Company, each holder of
Restricted Stock who is a party to this Agreement shall agree not to sell
publicly any shares of Restricted Stock or any other shares of Common Stock
(other than shares of Restricted Stock or other shares of Common Stock being
registered in such offering), without the consent of such underwriters, for a
period of not more than 180 days following the effective date of the
registration statement relating to such offering; provided, however, that all
persons entitled to registration rights with respect to shares of Common Stock
who are not parties to this Agreement and all executive officers and directors
of the Company shall also have agreed not to sell publicly their Common Stock
under the circumstances and pursuant to the terms set forth in this Section
13(g).
(h) The Company shall not grant to any third party any registration
rights comparable to or more favorable than any of those contained herein, so
long as any of the registration rights under this Agreement remains in effect.
(i) If any provision of this Agreement shall be held to be illegal,
invalid or unenforceable, such illegality, invalidity or unenforceability shall
attach only to such provision and shall not in any manner affect or render
illegal, invalid or unenforceable any other provision of this Agreement, and
this Agreement shall be carried out as if any such illegal, invalid or
unenforceable provision were not contained herein.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.]
<PAGE> 15
-15-
Please indicate your acceptance of the foregoing by signing and returning
the enclosed counterpart of this letter, whereupon this Agreement shall be a
binding agreement between the Company and you.
Very truly yours,
ALLOY DESIGNS, INC.
By:
--------------------------
Name:
Title:
AGREED TO AND ACCEPTED as of the date
first above written.
Purchasers named in Exhibit 1.01 to
the Purchase Agreement:
BRAND EQUITY VENTURES I, L.P.
By: Brand Equity Partners I, LLC,
General Partner
By:
------------------------------
Manager
- ----------------------------------
J. Edward Diamond
<PAGE> 1
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.
/s/ Arthur Andersen LLP
---------------------------
Arthur Andersen LLP
New York, New York
March 9, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Alloy Online, Inc. as of January 31, 1998 and 1999 and
for the three years in the period ended January 31, 1999 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> JAN-31-1999 JAN-31-1998 JAN-31-1997
<PERIOD-START> FEB-01-1998 FEB-01-1997 FEB-01-1996
<PERIOD-END> JAN-31-1999 JAN-31-1998 JAN-31-1997
<CASH> 2,983,283 2,320,548 0
<SECURITIES> 0 0 0
<RECEIVABLES> 157,788 0 0
<ALLOWANCES> 12,312 0 0
<INVENTORY> 810,354 512,006 0
<CURRENT-ASSETS> 6,897,800 3,137,941 0
<PP&E> 201,482 24,958 0
<DEPRECIATION> 23,465 2,084 0
<TOTAL-ASSETS> 7,407,055 3,166,476 0
<CURRENT-LIABILITIES> 1,631,655 687,411 0
<BONDS> 3,985,340 0 0
0 0 0
4,836,387 0 0
<COMMON> 75,175 68,867 36,000
<OTHER-SE> (3,121,502) 2,410,198 95,692
<TOTAL-LIABILITY-AND-EQUITY> 7,407,055 3,166,476 0
<SALES> 10,085,832 1,799,992 25,020
<TOTAL-REVENUES> 10,210,397 1,799,992 25,020
<CGS> 5,486,018 1,050,136 16,885
<TOTAL-COSTS> 10,849,329 2,648,834 126,443
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 364,116 0 0
<INCOME-PRETAX> (6,364,323) (1,864,610) (118,308)
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> (6,364,323) (1,864,610) (118,308)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (6,364,323) (1,864,610) (118,308)
<EPS-PRIMARY> (0.85) (.37) (.03)
<EPS-DILUTED> (0.81) (.35) (.03)
</TABLE>
