<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 13, 1999
REGISTRATION NO. 333-74159
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 4 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ALLOY ONLINE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 5961 04-3310676
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
115 WEST 30TH STREET, #201
NEW YORK, NY 10001
(212) 244-4307
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
MATTHEW C. DIAMOND
CHIEF EXECUTIVE OFFICER
ALLOY ONLINE, INC.
115 WEST 30TH STREET, #201
NEW YORK, NY 10001
(212) 244-4307
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
WITH COPIES TO:
<TABLE>
<S> <C>
JONATHAN L. KRAVETZ, ESQ. ALEXANDER D. LYNCH, ESQ.
MINTZ, LEVIN, COHN, FERRIS, KENNETH R. MCVAY, ESQ.
GLOVSKY AND POPEO, P.C. BROBECK, PHLEGER & HARRISON LLP
ONE FINANCIAL CENTER 1633 BROADWAY, 47TH FLOOR
BOSTON, MA 02111 NEW YORK, NY 10019
(617) 542-6000 (212) 581-1600
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN
ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED MAY 13, 1999
[ALLOY ONLINE CORPORATE LOGO]
3,700,000 SHARES
COMMON STOCK
Alloy Online, Inc. is offering 3,700,000 shares of our common stock. This
is our initial public offering and no public market currently exists for our
shares. The shares we are offering have been approved for quotation on the
Nasdaq National Market under the symbol "ALOY". We anticipate that the initial
public offering price will be between $12.00 and $14.00 per share.
------------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
------------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public Offering Price....................................... $ $
Underwriting Discounts and Commissions...................... $ $
Proceeds to Alloy Online.................................... $ $
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Alloy Online, Inc. has granted the underwriters a 30-day option to purchase
up to an additional 555,000 shares of common stock to cover over-allotments.
BancBoston Robertson Stephens Inc. expects to deliver the shares of common stock
to purchasers on , 1999.
------------------------------
BANCBOSTON ROBERTSON STEPHENS
VOLPE BROWN WHELAN & COMPANY
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
LADENBURG THALMANN & CO. INC.
THE DATE OF THIS PROSPECTUS IS , 1999.
<PAGE> 3
[Pictures of Generation Y boys and girls]
[Alloy Online Logo]
Today in alloy/shop/get free e-mail/connect/do it yourself/music & movies/advice
& articles/fashion & beauty/sports/alloy e-zine
Providing community, content and commerce to Generation Y, the 56 million boys
and girls between the ages of 10 and 24.
[Alloy Online Logo]
1. today in alloy
2. shop
3. get free e-mail
4. connect
5. do it yourself
6. music
7. TV & movies
8. advice & articles
9. fashion & beauty
10. sports
11. alloy e-zine free
12. get a free catalog
13. win prizes
[Pictures of Generation Y boys and girls]
Generation Y is the first generation to grow up using the internet as a
primary medium for information, entertainment, communication and shopping.
I'm so psyched about the fresh gear i just got from you guys -- i can't find any
of this stylie stuff at my mall. [SIGNATURE]
Hey Alloy! You guys totally rock. You've got my surf gear, my fave lip gloss and
those butterfly clips i dig! [SIGNATURE]
<Dragongirl> hey SK8. Check out my homepage on alloyonline.
<Sk8guy> since when do you know html?
<Dragongirl> don't know it, don't have to! plus I get to host chats on my page!!
I'll email you bout it.
<Sk8guy> wait don't email me it goes to my dad's account.
<Dragongirl> that stinks, get free email at www.alloy.com
<Sk8guy> i'm on it.
<Dragongirl> kewl, look for me on the message boards too!
<PAGE> 4
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK.
UNTIL , 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS THAT BUY, SELL OR TRADE OUR COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
REQUIREMENT IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary..................................................... 4
Risk Factors................................................ 7
Forward-Looking Statements.................................. 15
Use of Proceeds............................................. 16
Dividend Policy............................................. 16
Capitalization.............................................. 17
Dilution.................................................... 18
Selected Financial Data..................................... 19
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 20
Business.................................................... 27
Management.................................................. 39
Certain Transactions........................................ 45
Principal Stockholders...................................... 48
Description of Capital Stock................................ 50
Shares Eligible for Future Sale............................. 53
Underwriting................................................ 55
Legal Matters............................................... 57
Experts..................................................... 57
Where You Can Find Additional Information................... 57
Index to Financial Statements............................... F-1
</TABLE>
------------------------------
"Alloy", "alloyonline.com" and "alloymail.com" are trademarks and service
marks of Alloy. All other trademarks, service marks or tradenames referred to in
this prospectus are the property of their owners.
3
<PAGE> 5
- --------------------------------------------------------------------------------
SUMMARY
Because this is only a summary, it does not contain all the information
that may be important to you. You should read the entire prospectus, including
"Risk Factors" and the Financial Statements and the related Notes, before
deciding to invest in our common stock.
ALLOY ONLINE
Alloy Online is a leading Web site providing community, content and
commerce to Generation Y, the 56 million boys and girls between the ages of 10
and 24. Alloy is a leading brand for this influential generation, which is
growing 19.5% faster than the overall U.S. population and accounts for more than
$250 billion of annual disposable income. Our Web site, www.alloy.com, is a
destination where Generation Y boys and girls can interact, share information,
explore compelling and relevant content and shop. We believe we have created one
of the largest and most vibrant Generation Y communities on the Internet. This
growing community drives merchandise sales, our principal source of revenues,
and positions us to be a leading channel for marketers that are increasingly
looking to the Internet to reach the boys and girls of Generation Y.
We created our Web site to meet the unique interests and tastes of
Generation Y. Features of our Web site include:
- Community -- we present an appealing environment for Generation Y boys
and girls to share their ideas, express their opinions and develop their
interests through a variety of free services such as e-mail accounts,
personal homepages, chat rooms, interactive advice forums and message
boards;
- Content -- we deliver continually refreshed and relevant Generation Y
content on subjects such as music, relationships, fashion, entertainment,
astrology, gossip and sports; and
- Commerce -- we market products and services in the major Generation Y
spending categories such as apparel, accessories, footwear, cosmetics,
music and magazines.
Since inception, we have experienced rapid growth. Our revenues, primarily
merchandise sales, have grown from $1.8 million in fiscal 1997 to $10.2 million
in fiscal 1998 and our net losses have increased from $1.9 million to $6.4
million for the same periods. Due to our unique blend of online services, our
Web site generated approximately 25 million page views in March 1999, up from
approximately 1.5 million in March 1998. Additionally, we have compiled
demographic information from approximately 480,000 users who have registered to
receive our bi-weekly electronic magazine, Alloy E-Zine. In August 1997, we
introduced our Alloy direct mail catalog to attract additional visitors to our
Web site, increase revenues and build recognition for the Alloy brand. During
1999, we expect to mail approximately 20 million catalogs to boys and girls of
Generation Y. Through our Web site and catalog distribution, we have developed a
database of approximately 2.2 million Generation Y boys and girls, enabling us
to effectively market to specific segments of our audience.
In addition to our sales of Generation Y-focused merchandise, our community
of Generation Y boys and girls presents an important opportunity for marketers.
Marketers are focusing on Generation Y because of their significant and growing
spending power and tendency to carry brand loyalties established at a young age
into adulthood. As a result, we intend to pursue sponsorship and other revenue
opportunities to connect these marketers and our Generation Y community.
Our objective is to become the leading Generation Y online destination. In
order to achieve this objective, we intend to pursue the following strategies:
- Maintain Single Brand Focus. We will continue to build Alloy as a
Generation Y lifestyle brand for both boys and girls known for compelling
community, content and commerce. By promoting our single, unified brand,
we maximize the impact of our marketing efforts.
- Pursue Additional Revenue Opportunities. We intend to generate
sponsorship and other revenues by capitalizing on our growing Generation
Y community.
- --------------------------------------------------------------------------------
4
<PAGE> 6
- --------------------------------------------------------------------------------
- Strengthen Co-ed Community. We will continue to foster dynamic boy-girl
interaction on our Web site. We believe that a strong co-ed focus is
critical to creating a successful Generation Y community and provides us
an important competitive advantage.
- Expand Internationally. We intend to pursue the significant
opportunities to serve the large and growing international Generation Y
population.
------------------------------
Our principal executive offices are located between New York's Silicon
Alley and the Garment District at 115 West 30th Street, Suite 201, New York, NY
10001. Our telephone number is (212) 244-4307.
------------------------------
Except as otherwise noted, all information in this prospectus:
- Reflects the automatic conversion of all of our outstanding shares of
convertible preferred stock into a total of 1,678,286 shares of common
stock upon the completion of this offering;
- Reflects a 1.128-for-1 stock split of all of our outstanding shares of
common stock to be effected immediately prior to the completion of this
offering; and
- Assumes no exercise of the underwriters' over-allotment option.
------------------------------
INFORMATION CONTAINED ON OUR WEB SITE SHOULD NOT BE CONSIDERED A PART OF THIS
PROSPECTUS.
- --------------------------------------------------------------------------------
5
<PAGE> 7
THE OFFERING
Common stock offered by Alloy...... 3,700,000 shares
Common stock to be outstanding
after the offering................. 14,231,774 shares
Use of proceeds.................... Marketing activities, capital
expenditures, expansion of our sales
force, repayment of debt and other
general corporate purposes, including
working capital. See "Use of Proceeds."
Nasdaq National Market symbol...... ALOY
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Set forth below are summary statements of operations data for the years
ended January 31, 1997, 1998 and 1999, and summary balance sheet data as of
January 31, 1999, on an actual basis and on a pro forma basis as adjusted to
give effect to:
- the sale by Alloy of 3,700,000 shares of common stock in this offering at
an assumed initial offering price of $13.00 per share, after deducting
the underwriting discounts and estimated offering expenses payable by
Alloy, and the application of the net proceeds from this offering;
- the repayment of promissory notes and the conversion of our convertible
preferred stock upon the completion of this offering; and
- the exercise of options to purchase 362,481 shares and warrants to
purchase 11,280 shares of common stock subsequent to January 31, 1999.
This information should be read in conjunction with the Financial
Statements and the corresponding Notes appearing elsewhere in this prospectus.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
--------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Total revenues......................................... $ 25 $ 1,800 $ 10,210
Gross profit........................................... 8 750 4,724
Loss from operations................................... (118) (1,899) (6,125)
Net loss............................................... $ (118) $ (1,865) $ (6,364)
Basic net loss per common share........................ $ (.03) $ (.33) $ (.75)
========== ========== ==========
Diluted net loss per common share...................... $ (.03) $ (.31) $ (.72)
========== ========== ==========
Weighted average common shares outstanding:
Basic............................................. 4,060,800 5,617,577 8,479,727
========== ========== ==========
Diluted........................................... 4,450,353 6,007,130 8,869,280
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31, 1999
-----------------------
PRO FORMA AS
ACTUAL ADJUSTED
------- ------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 2,983 $42,375
Working capital............................................. 5,266 44,658
Total assets................................................ 7,407 46,673
Promissory notes, net....................................... 3,945 --
Capital lease obligation, less current portion.............. 40 40
Convertible redeemable preferred stock, net................. 4,836 --
Total stockholders' (deficit) equity........................ (3,046) 45,001
</TABLE>
6
<PAGE> 8
RISK FACTORS
You should consider carefully the following risks before you decide to buy
our common stock. Our business, financial condition or results of operations
could be materially and adversely affected by any of the following risks.
RISKS RELATED TO OUR BUSINESS
WE HAVE A LIMITED OPERATING HISTORY ON WHICH TO EVALUATE OUR POTENTIAL FOR
FUTURE SUCCESS
We were incorporated in January 1996 and did not begin to generate
meaningful revenues until August 1997. Accordingly, we have only a limited
operating history upon which you can evaluate our business and prospects. You
must consider the risks and uncertainties frequently encountered by early stage
companies in new and rapidly evolving markets, such as electronic commerce. If
we are unsuccessful in addressing these risks and uncertainties, our business,
results of operations and financial condition will be materially and adversely
affected.
WE HAVE A HISTORY OF LOSSES, AND WE EXPECT LOSSES FOR THE FORESEEABLE FUTURE
Since our inception in January 1996, we have incurred significant net
losses, resulting primarily from costs related to developing our Web site and
database of Generation Y names, attracting users to our Web site and
establishing the Alloy brand. At January 31, 1999, we had an accumulated deficit
of $8.3 million. Because of our plans to invest heavily in marketing and
promotion, to hire additional employees, and to enhance our Web site and
operating infrastructure, we expect to incur significant net losses for the
foreseeable future. If our revenue growth is slower than we anticipate or our
operating expenses exceed our expectations, our losses will be significantly
greater. We may never achieve profitability.
OUR STOCK PRICE MAY BE ADVERSELY AFFECTED BY SIGNIFICANT FLUCTUATIONS IN OUR
QUARTERLY OPERATING RESULTS
Our revenues for the foreseeable future will remain primarily dependent on
sales of merchandise appearing in our catalogs and on our Web site, and
secondarily on sponsorship and advertising revenues. We cannot forecast with any
degree of certainty the number of visitors to our Web site, the extent of our
merchandise sales or the amount of sponsorship and advertising revenues.
We expect our operating results to fluctuate significantly from quarter to
quarter. We have already experienced the effects of seasonality on our
merchandise sales, which are generally lower in the first half of each year. We
believe that sponsorship and advertising sales in traditional media, such as
television and radio, generally are lower in the first and third calendar
quarters of each year. If similar seasonal and cyclical patterns emerge in
Internet sponsorship and advertising spending, these revenues may vary
significantly based on these patterns. See "Management's Discussion and Analysis
of Financial Condition and Operations."
Other factors which may cause our operating results to fluctuate
significantly from quarter to quarter include:
- our ability to attract new and repeat visitors to our Web site and
convert them into customers;
- price competition;
- the level of merchandise returns we experience;
- unanticipated cost increases or delays in shipping, transaction
processing and catalog production;
- unanticipated delays or cost increases with respect to product
introductions; and
- the costs, timing and impact of our sales and marketing initiatives.
7
<PAGE> 9
Because of these and other factors, we believe that quarter-to-quarter
comparisons of our results of operations are not good indicators of our future
performance. If our operating results fall below the expectations of securities
analysts and investors in some future periods, then our stock price may decline.
OUR BUSINESS WILL SUFFER IF WE FAIL TO KEEP CURRENT WITH GENERATION Y FASHION
AND LIFESTYLE TRENDS
Our continued success will depend on our ability to keep current with the
changing fashion tastes and interests of our Generation Y customers. If we fail
to anticipate, identify or respond to changes in styles, trends or brand
preferences of our customers, we are likely to experience reduced revenues from
merchandise sales. Moreover, the Alloy brand could be eroded by misjudgments in
merchandise selection or a failure to keep our community and content current
with the evolving preferences of our audience. These events would likely reduce
the number of visitors to our Web site and limit opportunities for sponsorship
and advertising sales. As a consequence of these developments, our business
would suffer.
OUR PLANNED ONLINE AND TRADITIONAL MARKETING CAMPAIGNS MAY NOT ATTRACT
SUFFICIENT ADDITIONAL VISITORS TO OUR WEB SITE OR MAY DETRACT FROM OUR IMAGE
With a portion of the proceeds of this offering, we plan to pursue
aggressive marketing campaigns online and in traditional media to promote the
Alloy brand and attract an increasing number of visitors to our Web site. We
believe that maintaining and strengthening the Alloy brand will be critical to
the success of our business. This investment in increased marketing carries with
it significant risks, including the following:
- Our advertisements may not properly convey the Alloy brand image, or may
even detract from our image. Unlike advertising on our Web site which
gives us immediate feedback and allows us promptly to adjust our
messages, advertising in print and broadcast media is less flexible.
These advertisements typically take longer and cost more to produce and
consequently have longer run times. If we fail to convey the optimal
message in these advertising campaigns, the impact may be more lasting
and more costly to correct.
- Even if we succeed in creating the right messages for our promotional
campaigns, these advertisements may fail to attract new visitors to our
Web site at levels commensurate with their costs. We may fail to choose
the optimal mix of television, radio, print and other media to cost-
effectively deliver our message. Moreover, if these efforts are
unsuccessful, we will face difficult and costly choices in deciding
whether and how to redirect our marketing dollars.
WE CURRENTLY LACK ADVERTISING SALES PERSONNEL AND WE MAY FAIL TO ESTABLISH AN
EFFECTIVE INTERNAL SALES ORGANIZATION TO ATTRACT SPONSORSHIP AND ADVERTISING
REVENUES
To date, we have relied principally on an outside advertising agency to
develop sponsorship and advertising opportunities. We believe that the growth of
sponsorship and advertising revenues will depend on our ability to establish an
aggressive and effective internal sales organization. In January 1999, we hired
a new Vice President, Business Development, and our internal sales team
currently has three members. We will need to substantially increase this sales
force in the coming year in order to execute our business plan. Our ability to
increase our sales force involves a number of risks and uncertainties, including
competition and the length of time for new sales employees to become productive.
If we do not develop an effective internal sales force, our business will be
materially and adversely affected.
WE RELY HEAVILY ON THIRD PARTIES FOR ESSENTIAL BUSINESS OPERATIONS AND
DISRUPTIONS OR FAILURES IN SERVICE MAY ADVERSELY AFFECT OUR ABILITY TO DELIVER
GOODS AND SERVICES TO OUR CUSTOMERS
General. We depend on third parties for important aspects of our business,
including:
- Internet access;
- development of software for new Web site features;
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<PAGE> 10
- content; and
- telecommunications.
We have limited control over these third parties, and we are not their only
client. We may not be able to maintain satisfactory relationships with any of
them on acceptable commercial terms. Further, we cannot be certain that the
quality of products and services that they provide may remain at the levels
needed to enable us to conduct our business effectively. Many of our agreements
with technology and content providers are on very favorable terms that do not
include license fees, but instead provide for revenue sharing. We may not be
able to renew these agreements on similar terms.
Reliance on OneSoft Corporation. We rely heavily on OneSoft Corporation to
maintain and operate our Web site in its facilities in Annandale, Virginia. This
system's continuing and uninterrupted performance is critical to our success.
Growth in the number of users accessing our Web site may strain its capacity,
and we rely on OneSoft to upgrade our system's capacity in the face of this
growth. OneSoft also provides our connection to the Internet. Sustained or
repeated system failures or interruptions of our Web site connection services
would reduce the attractiveness of our Web site to customers and advertisers and
could therefore have a material and adverse effect on our business.
Reliance on Harrison Fulfillment Services. We rely heavily on Harrison
Fulfillment Services, with operations located in Georgia and Tennessee, for the
performance of order processing, order fulfillment, customer service and
shipping. While other companies provide similar services that we could access, a
transition from Harrison Fulfillment Services could cause delays in these
critical aspects of our business operations. Disruptions or delays in these
services could discourage customers from ordering from us in the future and
could therefore have a material and adverse effect on our business.
OUR MANAGEMENT IS NEW AND MAY HAVE DIFFICULTY MANAGING OUR EXPECTED GROWTH
In order to execute our business plan, we must continue to grow
significantly. This growth will strain our personnel, management systems and
resources. To manage our growth, we must implement operational and financial
systems and controls and recruit, train and manage new employees. Some key
members of our management have only recently been hired. These individuals have
had little experience working with our management team. We cannot be certain
that we will be able to integrate new executives and other employees into our
organization effectively. In addition, there will be significant administrative
burdens placed on our management team as a result of our status as a public
company. If we do not manage growth effectively, our business, results of
operations and financial condition will be materially and adversely affected.
WE DEPEND ON OUR KEY PERSONNEL TO OPERATE OUR BUSINESS, AND WE MAY NOT BE ABLE
TO HIRE ENOUGH ADDITIONAL MANAGEMENT AND OTHER PERSONNEL AS OUR BUSINESS GROWS
Our performance is substantially dependent on the continued services and on
the performance of our executive officers and other key employees, particularly
Matthew C. Diamond, our Chief Executive Officer, James K. Johnson, Jr., our
Chief Operating Officer and Samuel A. Gradess, our Chief Financial Officer. The
loss of the services of any of our executive officers could materially and
adversely affect our business. Additionally, we believe we will need to attract,
retain and motivate talented management and other highly skilled employees to be
successful. Competition for employees that possess knowledge of both the
Internet industry and the Generation Y market is intense. We may be unable to
retain our key employees or attract, assimilate and retain other highly
qualified employees in the future.
INTENSE COMPETITION FROM INTERNET- AND CATALOG-BASED BUSINESSES MAY DECREASE OUR
MARKET SHARE, REVENUES AND GROSS MARGINS AND CAUSE OUR STOCK PRICE TO DECLINE
We face intense competition in electronic commerce, catalog sales and
online services. Our Web site and Alloy catalog compete for Generation Y
customers with traditional department store retailers, catalog retailers, direct
marketers, specialty apparel and accessory retailers and discount retailers.
This competition
9
<PAGE> 11
is likely to increase because it is not difficult to enter the online commerce
market, and current and new competitors can launch Web sites at relatively low
cost. Competition could result in price reductions for our products and
services, reduced margins or loss of market share. Consolidation within the
online commerce industry may also increase competition.
The market for Internet users and community services is highly competitive
and rapidly evolving. Competition for users and advertisers is intense and is
expected to increase significantly. There are no substantial barriers to entry
in these markets. Competition could result in fewer visitors to our Web site and
reduced sponsorship and advertising revenues.
Many of our existing competitors, as well as potential new competitors,
have longer operating histories, greater brand recognition, larger customer user
bases and significantly greater financial, technical and marketing resources
than we do. If we fail to compete effectively, our business will be materially
and adversely affected and our stock price will decline. See
"Business -- Competition."
WE MAY FAIL TO SUCCESSFULLY MANAGE AND USE OUR DATABASES OF WEB SITE USERS AND
CUSTOMERS
An important component of our business model involves the use of our lists
of catalog requesters and Web site registrants to more effectively target direct
marketing messages. We depend upon personal information we collect from our Web
site users for data we need to create direct mailing and e-mailing lists, tailor
our Web site offerings to the tastes of our Generation Y users and attract
marketers to our Web site. We must continuously expand and update our lists to
identify new, prospective Generation Y customers. Names derived from purchased
or rented lists may generate lower response rates and, therefore, a lower return
on our investment in these lists. We must also continually develop and refine
our techniques for segmenting these lists to maximize their usefulness to us and
our marketing partners. If we fail to capitalize on these important business
assets, our business model will be less successful. In addition, laws or
regulations that could impair our ability to collect user names and other
information on our Web site may adversely affect our business. For example, a
recently enacted federal law limits our ability to collect personal information
from Web site visitors who may be under age 13. See "Business -- Government
Regulation."
WE MUST EFFECTIVELY MANAGE OUR VENDORS TO MINIMIZE INVENTORY RISK AND MAINTAIN
OUR MARGINS
In order to fulfill our orders, we depend upon our vendors to produce
sufficient quantities of products according to schedule. We may maintain high
inventory levels in some categories of merchandise in an effort to maintain
satisfactory fulfillment rates for our customers. This may expose us to risk of
excess inventories and outdated merchandise, which could have a material and
adverse effect on our business. If we underestimate quantities and vendors
cannot restock, then we may disappoint customers who may turn to our
competitors. We also negotiate with our vendors to get the best quality
available at the best prices and increase our profit margins. Our failure to be
able to manage our vendors effectively would adversely affect our operating
results.
WE MAY FAIL TO ESTABLISH AND MAINTAIN STRATEGIC RELATIONSHIPS WITH OTHER WEB
SITES TO INCREASE NUMBERS OF WEB SITE USERS AND INCREASE OUR REVENUES
We intend to establish numerous strategic alliances with popular Web sites
to increase the number of visitors to our Web site. There is intense competition
for placements on these sites, and we may not be able to enter into these
relationships on commercially reasonable terms or at all. Even if we enter into
strategic alliances with other Web sites, they themselves may not attract
significant numbers of users. Therefore, our site may not receive additional
users from these relationships. Moreover, we may have to pay significant fees to
establish these relationships. Our inability to enter into new distribution
relationships or strategic alliances and expand our existing ones could have a
material and adverse effect on our business.
10
<PAGE> 12
WE MAY NOT BE ABLE TO ADAPT AS INTERNET TECHNOLOGIES AND CUSTOMER DEMANDS
CONTINUE TO EVOLVE
To be successful, we must adapt to rapidly changing Internet technologies
and continually enhance the features and services provided on our Web site. We
could incur substantial, unanticipated costs if we need to modify our Web site,
software and infrastructure to incorporate new technologies demanded by our
audience. We may use new technologies ineffectively or we may fail to adapt our
Web site, transaction-processing systems and network infrastructure to user
requirements or emerging industry standards. If we fail to keep pace with the
technological demands of our Web-savvy audience for new services, products and
enhancements, our users may not use our Web site and instead use those of our
competitors.
WE MAY NOT BE ABLE TO PROTECT AND ENFORCE OUR TRADEMARKS, WEB ADDRESSES AND
INTELLECTUAL PROPERTY RIGHTS
Our Alloy brand and our Web address, www.alloy.com, are critical to our
success. We have filed a trademark application for "Alloy", among other
trademark applications. We cannot guarantee that any of these trademark
applications will be granted. In addition, we may not be able to prevent third
parties from acquiring Web addresses that are confusingly similar to our
addresses, which could harm our business. See "Business -- Intellectual
Property."
WE WOULD LOSE REVENUES AND INCUR SIGNIFICANT COSTS IF OUR SYSTEMS OR MATERIAL
THIRD-PARTY SYSTEMS ARE NOT YEAR 2000 COMPLIANT
We have not devised a Year 2000 contingency plan. The failure of our
internal systems, or any material third-party systems, to be Year 2000 compliant
could have a material and adverse effect on our business, results of operations
and financial condition. Harrison Fulfillment Services, our fulfillment services
provider, has informed us that it is in the process of migrating our fulfillment
operations to a Year 2000-compliant system and that this will be completed by
July 1999. OneSoft Corporation, which maintains and operates our Web site and
provides our connection to the Internet, has informed us that its systems are
Year 2000 compliant. We have reviewed Quad Graphics and the United States Postal
Service Year 2000 readiness disclosures. Based on these disclosures, we believe
that both will be Year 2000 compliant by September 1999.
To date, we have not incurred any material costs in identifying or
evaluating Year 2000 compliance issues. However, we may fail to discover Year
2000 compliance problems in our systems that will require substantial revisions
or replacements. In the event that the fulfillment and operational facilities
that support our business, or our Web-hosting facilities, are not Year 2000
compliant, portions of our Web site may become unavailable and we would be
unable to deliver services to our users. In addition, there can be no assurance
that third-party software, hardware or services incorporated into our material
systems will not need to be revised or replaced, which could be time-consuming
and expensive. Our inability to fix or replace third-party software, hardware or
services on a timely basis could result in lost revenues, increased operating
costs and other business interruptions, any of which could have a material and
adverse effect on our business, results of operations and financial condition.
Moreover, the failure to adequately address Year 2000 compliance issues in our
software, hardware or systems could result in claims of mismanagement,
misrepresentation or breach of contract and related litigation, which could be
costly and time-consuming to defend.
In addition, there can be no assurance that governmental agencies, utility
companies, Internet access companies, third-party service providers and others
outside our control will be Year 2000 compliant. The failure by these entities
to be Year 2000 compliant could result in a systemic failure beyond our control,
including, for example, a prolonged Internet, telecommunications or electrical
failure, which could also prevent us from delivering our services to our users,
decrease the use of the Internet or prevent users from accessing our services,
any of which would have a material and adverse effect on our business, results
of operations and financial condition. See "Management's Discussion and Analysis
of Financial Statements and Results of Operations."
11
<PAGE> 13
WE MAY EXPERIENCE FLUCTUATIONS IN POSTAGE AND PAPER EXPENSES
Catalog production and distribution expenses represented approximately 47%
of our total revenues in the fiscal years ended January 31, 1998 and 1999. A
substantial portion of these expenses have been attributable to paper and
postage costs. Paper costs have increased an average of 4% over the two-year
period ending December 31, 1999. From July 1997 to the present, postage costs
have increased overall approximately 2.9%. Material increases in paper or
catalog delivery costs could have a material and adverse effect on our business.
WE MAY BE UNABLE TO IDENTIFY AND SUCCESSFULLY INTEGRATE POTENTIAL ACQUISITIONS
AND INVESTMENTS
We may acquire or make investments in complementary businesses, products,
services or technologies on an opportunistic basis when we believe they will
assist us in carrying out our business strategy. We do not have any present
understanding, nor are we having any discussions relating to any acquisition or
investment. If we buy a company, then we could have difficulty in assimilating
that company's personnel and operations. In addition, the key personnel of the
acquired company may decide not to work for us. If we acquire products, services
or technologies, we could have difficulty in assimilating them into our
operations. These difficulties could disrupt our ongoing business, distract our
management and employees and increase our expenses. Furthermore, we may have to
incur debt or issue equity securities to pay for any future acquisitions, the
issuance of which could be dilutive to our existing shareholders.
WE ARE VULNERABLE TO NEW TAX OBLIGATIONS THAT COULD BE IMPOSED ON ONLINE
COMMERCE TRANSACTIONS
We do not expect to collect sales or other similar taxes in respect of
shipments of goods into most states. However, various states or foreign
countries may seek to impose sales tax obligations on us and other online
commerce and direct marketing companies. A number of proposals have been made at
the state and local levels that would impose additional taxes on the sale of
goods and services through the Internet. These proposals, if adopted, could
substantially impair the growth of online commerce and cause purchasing through
our Web site to be less attractive to customers as compared to traditional
retail purchasing. The United States Congress has passed legislation limiting
for three years the ability of the states to impose taxes on Internet-based
transactions. Failure to renew this legislation could result in the imposition
by various states of taxes on online commerce. Further, states have attempted to
impose sales taxes on catalog sales from businesses such as ours. A successful
assertion by one or more states that we should have collected or be collecting
sales taxes on the sale of products could have a material and adverse effect on
our business.
12
<PAGE> 14
RISKS RELATED TO THE INTERNET INDUSTRY
WE ARE DEPENDENT ON THE CONTINUED DEVELOPMENT OF THE INTERNET INFRASTRUCTURE
Our industry is new and rapidly evolving. Our business would be adversely
affected if Web usage and online commerce does not continue to grow. Web usage
may be inhibited for a number of reasons, including:
- inadequate Internet infrastructure;
- inconsistent quality of service; or
- unavailability of cost-effective, high-speed service.
If Web usage grows, the Internet infrastructure may not be able to support
the demands placed on it by this growth, or its performance and reliability may
decline. In addition, Web sites, including ours, have experienced a variety of
interruptions in their service as a result of outages and other delays occurring
throughout the Internet network infrastructure. If these outages or delays
frequently occur in the future, Web usage, including usage of our Web site,
could grow slowly or decline.
OUR LONG-TERM SUCCESS DEPENDS ON THE DEVELOPMENT OF THE ONLINE COMMERCE MARKET,
AND ON THE INCREASED ONLINE PURCHASING OF GENERATION Y, BOTH OF WHICH ARE
UNCERTAIN
Our future revenues and profits substantially depend upon the widespread
acceptance and use of the Web as an effective medium of commerce by consumers.
Demand for recently introduced services and products over the Web and online
services is subject to a high level of uncertainty. The development of the Web
and online services as a viable commercial marketplace is subject to a number of
factors, including the following:
- online commerce is at an early stage and buyers may be unwilling to shift
their purchasing from traditional vendors to online vendors;
- insufficient availability of telecommunications services or changes in
telecommunications services could result in slower response times; and
- the inability of our target demographic group to have regular access to a
credit card could cause a slower growth in online commerce for us than
for companies targeting consumers in general.
ADOPTION OF THE INTERNET AS AN ADVERTISING MEDIUM IS UNCERTAIN
The growth of Internet sponsorships and advertising requires validation of
the Internet as an effective advertising medium. This validation has yet to
fully occur. In order for us to generate sponsorship and advertising revenues,
marketers must direct a significant portion of their budgets to the Internet
and, specifically, to our Web site. To date, sales of Internet sponsorships and
advertising represent only a small percentage of total advertising sales. Also,
technological developments could slow the growth of sponsorships and advertising
on the Internet. For example, widespread use of filter software programs that
limit access to advertising on our Web site from the Internet user's browser
could reduce advertising on the Internet. Our business, financial condition and
operating results would be adversely affected if the market for Internet
advertising fails to develop or develops slower than expected.
BREACHES OF SECURITY ON THE INTERNET MAY SLOW THE GROWTH OF ONLINE COMMERCE AND
WEB ADVERTISING AND SUBJECT US TO LIABILITY
The need to securely transmit confidential information (such as credit card
and other personal information) over the Internet has been a significant barrier
to online commerce and communications over the Web. Any well-publicized
compromise of security could deter more people from using the Web or from using
it to conduct transactions that involve transmitting confidential information,
such as purchases of goods or services. Furthermore, decreased traffic and
online sales as a result of general security concerns could cause advertisers to
reduce their amount of online spending. To the extent that our activities or the
activities of third-party contractors involve the storage and transmission of
information, such as credit card numbers, security breaches could disrupt our
business, damage our reputation and expose us to a risk of loss or litigation
and possible liability. We could be liable for claims based on unauthorized
purchases with
13
<PAGE> 15
credit card information, impersonation or other similar fraud claims. Claims
could also be based on other misuses of personal information, such as for
unauthorized marketing purposes. We may need to spend a great deal of money and
use other resources to protect against the threat of security breaches or to
alleviate problems caused by security breaches.
WE COULD FACE LIABILITY FOR INFORMATION DISPLAYED ON AND COMMUNICATIONS THROUGH
OUR WEB SITE
We may be subjected to claims for defamation, negligence, copyright or
trademark infringement or based on other theories relating to the information we
publish on our Web site. These types of claims have been brought, sometimes
successfully, against Internet companies as well as print publications in the
past. Based on links we provide to other Web sites, we could also be subjected
to claims based upon online content we do not control that is accessible from
our Web site. Claims may also be based on statements made and actions taken as a
result of participation in our chat rooms or as a result of materials posted by
members on bulletin boards at our Web site. We also offer e-mail services, which
may subject us to potential risks, such as:
- liabilities or claims resulting from unsolicited e-mail;
- lost or misdirected messages;
- illegal or fraudulent use of e-mail; or
- interruptions or delays in e-mail service.
These claims could result in substantial costs and a diversion of our
management's attention and resources.
EFFORTS TO REGULATE OR ELIMINATE THE USE OF MECHANISMS WHICH AUTOMATICALLY
COLLECT INFORMATION ON USERS OF OUR WEB SITE MAY INTERFERE WITH OUR ABILITY TO
TARGET OUR MARKETING EFFORTS AND TAILOR OUR WEB SITE OFFERINGS TO THE TASTES OF
OUR USERS
Web sites typically place a tracking program on a user's hard drive without
the user's knowledge or consent. These programs automatically collect data on
anyone visiting a Web site. Web site operators use these mechanisms for a
variety of purposes, including the collection of data derived from users'
Internet activity. Most currently available Web browsers allow users to elect to
remove these mechanisms at any time or to prevent this information from being
stored on their hard drive. In addition, some commentators, privacy advocates
and governmental bodies have suggested limiting or eliminating the use of these
tracking mechanisms. Any reduction or limitation in the use of this software
could limit the effectiveness of our sales and marketing efforts.
WE COULD FACE ADDITIONAL BURDENS ASSOCIATED WITH GOVERNMENT REGULATION OF AND
LEGAL UNCERTAINTIES SURROUNDING THE INTERNET
Any new law or regulation pertaining to the Internet, or the application or
interpretation of existing laws, could increase our cost of doing business or
otherwise have a material and adverse effect on our business, results of
operations and financial condition. Laws and regulations directly applicable to
Internet communications, commerce and advertising are becoming more prevalent.
The law governing the Internet, however, remains largely unsettled, even in
areas where there has been some legislative action. It may take years to
determine whether and how existing laws governing intellectual property,
copyright, privacy, obscenity, libel and taxation apply to the Internet. In
addition, the growth and development of online commerce may prompt calls for
more stringent consumer protection laws, both in the United States and abroad.
We also may be subject to future regulation not specifically related to the
Internet, including laws affecting direct marketers. See "Business -- Government
Regulation."
14
<PAGE> 16
RISKS RELATED TO THIS OFFERING
SHARES ELIGIBLE FOR FUTURE SALE BY OUR CURRENT STOCKHOLDERS MAY ADVERSELY AFFECT
OUR STOCK PRICE
If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options and warrants, in the
public market following the offering, then the market price of our common stock
could fall. Restrictions under the securities laws and lock-up agreements limit
the number of shares of common stock available for sale in the public market.
The holders of 10,372,442 shares of common stock and the holders of warrants and
options exercisable into a total of 1,310,060 shares of common stock have agreed
not to sell any of these securities for 180 days after the offering without the
prior written consent of BancBoston Robertson Stephens. However, BancBoston
Robertson Stephens may, in its sole discretion, release all or any portion of
the securities subject to these lock-up agreements.
We may shortly file a registration statement to register all shares of
common stock under our stock option plan. After this registration statement is
effective, shares issued upon exercise of stock options will be eligible for
resale in the public market without restriction.
ANTI-TAKEOVER PROVISIONS AND OUR RIGHT TO ISSUE PREFERRED STOCK COULD MAKE A
THIRD-PARTY ACQUISITION OF US DIFFICULT
Alloy is a Delaware corporation. Anti-takeover provisions of Delaware law
could make it more difficult for a third party to acquire control of us, even if
the change in control would be beneficial to stockholders. Our certificate of
incorporation provides that our board of directors may issue preferred stock
without stockholder approval. It also provides for a classified board, with each
board member serving a staggered three-year term. The issuance of preferred
stock and the existence of a classified board could make it more difficult for a
third party to acquire us.
OUR COMMON STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE AS IS TYPICAL OF INTERNET
COMPANIES
The market price of our common stock is likely to be highly volatile as the
stock market in general, and the market for Internet-related and technology
companies in particular, has been highly volatile. Investors may not be able to
resell their shares of our common stock following periods of volatility because
of the market's adverse reaction to volatility. The trading prices of many
technology and Internet-related companies' stocks have reached historical highs
within the last 52 weeks and have reflected valuations substantially above
historical levels. During the same period, these companies' stocks have also
been highly volatile and have recorded lows well below historical highs. We
cannot assure you that our stock will trade at the same levels of other Internet
stocks or that Internet stocks in general will sustain their current market
prices.
Factors that could cause volatility may include, among other things:
- announcements of technological innovations;
- changes in financial estimates by securities analysts;
- conditions or trends in the Internet industry; and
- changes in the market valuations of other Internet companies.
FORWARD-LOOKING STATEMENTS
This prospectus contains "forward-looking statements." These
forward-looking statements include, without limitation, statements about our
market opportunity, our strategies, competition, expected activities and
expenditures as we pursue our business plan, and the adequacy of our available
cash resources. Our actual results could differ materially from those expressed
or implied by these forward-looking statements as a result of various factors,
including the risk factors described above and elsewhere in this prospectus.
15
<PAGE> 17
USE OF PROCEEDS
The net proceeds we will receive from the sale of 3,700,000 shares of
common stock offered by us are estimated to be $43.4 million ($50.1 million if
the underwriters' over-allotment option is exercised in full) after deducting
the estimated underwriting discounts and commissions and offering expenses
payable by us and assuming a public offering price of $13.00 per share.
We currently intend to use the net proceeds of this offering as follows:
- to expand our national marketing campaigns in traditional and online
media;
- to continue to improve our Internet and systems infrastructure and
support;
- to further develop our online sales force;
- to repay in full approximately $4.2 million of 10% promissory notes due
upon completion of this offering, which indebtedness we incurred in May
1998 for working capital and general corporate purposes; and
- the balance for working capital and general corporate purposes, including
possible acquisitions of or investments in complementary businesses,
products or technologies.
Pending these uses, the net proceeds will be invested in short-term,
investment grade instruments, certificates of deposit or direct or guaranteed
obligations of the United States. There are no agreements or pending
negotiations with respect to any acquisitions, investments or similar
transactions.
DIVIDEND POLICY
We currently intend to retain earnings, if any, to fund the development and
growth of our business and do not anticipate paying cash dividends in the
foreseeable future. Payment of future dividends, if any, will be at the
discretion of our board of directors after taking into account various factors,
including our financial condition, operating results, current and anticipated
cash needs and plans for expansion.
16
<PAGE> 18
CAPITALIZATION
The following table sets forth, as of January 31, 1999, the capitalization
of Alloy on an actual basis, and on a pro forma as adjusted basis to give effect
to:
- the sale of 3,700,000 shares of common stock offered by us in this
offering at an assumed initial public offering price of $13.00 per
share, after deducting the underwriting discounts and commissions and
offering expenses payable by us, and the application of the net
proceeds from this offering;
- the conversion of our convertible preferred stock into a total of
1,678,286 shares of common stock upon the completion of this offering.
See "Use of Proceeds;" and
- the exercise of options to purchase 362,481 shares of common stock and
warrants to purchase 11,280 shares of common stock subsequent to
January 31, 1999, on a pro forma basis only.
This information should be read in conjunction with our Financial
Statements and the related Notes appearing elsewhere in this prospectus.
The following capitalization table excludes:
- 27,072 shares of common stock issuable upon the exercise of stock
options outstanding as of January 31, 1999 at a weighted average
exercise price of $.60 per share, which options have not been
exercised;
- 505,981 shares of common stock issuable upon the exercise of warrants
outstanding as of January 31, 1999 at a weighted average exercise
price of $5.04, which warrants have not yet been exercised;
- 780,160 shares of common stock issuable upon the exercise of stock
options granted after January 31, 1999 at a weighted average exercise
price of $11.66 per share; and
- 2,830,287 and 500,000 additional shares of common stock reserved for
issuance under our stock option plan and our employee stock purchase
plan, respectively.
<TABLE>
<CAPTION>
JANUARY 31, 1999
----------------------
PRO FORMA
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Promissory notes, net of unamortized discount............... $ 3,945 $ --
------- -------
Capital lease obligation, less current portion.............. 40 40
------- -------
Convertible redeemable preferred stock, $.01 par value,
1,487,843 shares authorized, issued and outstanding
actual; no shares authorized, issued and outstanding pro
forma as adjusted......................................... 4,836 --
------- -------
Stockholders' (deficit) equity:
Common stock, $.01 par value, 50,000,000 shares authorized
actual and pro forma as adjusted; 8,479,727 shares
issued and outstanding actual; 14,231,774 shares issued
and outstanding pro forma as adjusted.................. 85 142
Preferred stock, $.01 par value, 5,000,000 shares
authorized, actual and pro forma as adjusted; no shares
issued and outstanding actual and pro forma as
adjusted............................................... -- --
Additional paid-in capital.................................. 5,441 53,700
Accumulated deficit......................................... (8,347) (8,616)
Deferred compensation....................................... (225) (225)
------- -------
Total stockholders' (deficit) equity................... (3,046) 45,001
------- -------
Total capitalization................................ $ 5,775 $45,041
======= =======
</TABLE>
17
<PAGE> 19
DILUTION
The pro forma net tangible book value of Alloy as of January 31, 1999,
after giving effect to the conversion of our convertible preferred stock, was
$1.8 million, or $.18 per share of common stock. Pro forma net tangible book
value per share represents the amount of total tangible assets less total
liabilities, divided by the number of shares of common stock outstanding.
Assuming the sale by us of 3,700,000 shares of common stock offered in this
offering at an assumed public offering price of $13.00 per share, the
application of the estimated net proceeds from this offering and the exercise of
options to purchase 362,481 shares and warrants to purchase 11,280 shares of
common stock subsequent to January 31, 1999 our pro forma net tangible book
value as of January 31, 1999 would have been $45.0 million, or $3.16 per share
of common stock. This represents an immediate increase in pro forma net tangible
book value of $2.98 per share to our existing stockholders and an immediate
dilution in pro forma net tangible book value of $9.84 per share to new
investors. The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $13.00
Pro forma net tangible book value per share as of January
31, 1999............................................... $ .18
Pro forma increase attributable to new investors.......... 2.98
------
Pro forma net tangible book value per share after the
offering.................................................. 3.16
------
Pro forma dilution per share to new investors............... $ 9.84
======
</TABLE>
The following table summarizes, on a pro forma basis as of January 31,
1999, the total number of shares of common stock purchased from us, the total
consideration paid to us and the average consideration paid per share by
existing stockholders and by new investors:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders................ 10,531,774 74.0% $ 9,376,500 16.3% $ .89
New investors........................ 3,700,000 26.0 48,100,000 83.7 $13.00
---------- ---- ----------- ----
Total........................... 14,231,774 100% $57,476,500 100%
========== ==== =========== ====
</TABLE>
None of the foregoing tables or calculations assumes that any options or
warrants outstanding as of January 31, 1999 will be exercised other than the
362,481 options and 11,280 warrants referred to above. If all other outstanding
options and warrants were exercised on the date of the closing of this offering,
investors purchasing shares in this offering would suffer total dilution of
$9.40 per share.
18
<PAGE> 20
SELECTED FINANCIAL DATA
The following selected financial data for each of the years ended January
31, 1997, 1998 and 1999, and as of January 31, 1997, 1998 and 1999, were derived
from the financial statements of Alloy which have been audited by Arthur
Andersen LLP, independent accountants, whose report appears elsewhere herein.
Selected financial data should be read in conjunction with Alloy's Financial
Statements and the corresponding Notes, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and other financial information
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
--------------------------------------
1997 1998 1999
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA(2):
Net merchandise revenues.................................. $ 25 $ 1,800 $ 10,085
Sponsorship and other revenues............................ -- -- 125
--------- --------- ---------
Total revenues............................................ 25 1,800 10,210
Cost of goods sold........................................ 17 1,050 5,486
--------- --------- ---------
Gross profit.............................................. 8 750 4,724
Operating expenses:
Selling and marketing................................ 98 1,967 9,166
General and administrative........................... 28 682 1,683
--------- --------- ---------
Total operating expenses........................ 126 2,649 10,849
--------- --------- ---------
Loss from operations...................................... (118) (1,899) (6,125)
Interest income (expense), net............................ -- 34 (239)
--------- --------- ---------
Net loss.................................................. $ (118) $ (1,865) $ (6,364)
========= ========= =========
Basic net loss per common share(1)........................ $ (.03) $ (.33) $ (.75)
========= ========= =========
Diluted net loss per common share(1)...................... $ (.03) $ (.31) $ (.72)
========= ========= =========
Weighted average common shares outstanding:
Basic(1)............................................. 4,060,800 5,617,577 8,479,727
========= ========= =========
Diluted(1)........................................... 4,450,353 6,007,130 8,869,280
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31,
-----------------------------------
1997 1998 1999
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA(2):
Cash and cash equivalents................................. $ 19 $ 2,321 $ 2,983
Working capital........................................... 38 2,451 5,266
Total assets.............................................. 47 3,166 7,407
Promissory notes, net..................................... -- -- 3,945
Capital lease obligation, less current portion............ -- -- 40
Convertible redeemable preferred stock, net............... -- -- 4,836
Total stockholders' equity (deficit)...................... 42 2,479 (3,046)
</TABLE>
- ------------
(1) See Notes 2, 10 and 13 to the Financial Statements for an explanation of the
determination of the number of common shares used in computing the amount of
basic and diluted net loss per common share and net loss applicable to
common stockholders.
(2) There was no activity during the period from January 22, 1996 through
January 31, 1996. Accordingly, no Statement of Operations or Balance Sheet
Data have been presented.
19
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operation of Alloy should be read in conjunction with the Financial Statements
and the related Notes included elsewhere in this prospectus. This discussion
contains forward-looking statements that involve risks and uncertainties. Our
actual results may differ materially from those anticipated in these
forward-looking statements as a result of various factors, including, but not
limited to, those under "Risk Factors" and elsewhere in this prospectus.
OVERVIEW
Alloy Online is a leading Web site serving the unique interests and tastes
of Generation Y. Through our Web site, www.alloy.com, Generation Y boys and
girls can interact, share information, explore compelling and relevant content
and shop. Through our Web site and our Alloy direct mail catalog, we offer
Generation Y boys and girls a variety of merchandise, including boys and girls
apparel, accessories, footwear, music, cosmetics and magazine subscriptions.
Our revenues consist of merchandise revenues and sponsorship and other
revenues. We generate merchandise revenues through both our catalog and our Web
site. We generate sponsorship and other revenues primarily through the sale of
sponsorships, banner advertisements, co-marketing programs and other revenue
sharing arrangements on our Web site and in our catalog. Revenues from sales of
merchandise are recognized at the time products are shipped to customers.
Revenues from sponsorships, advertising and other arrangements are recognized
during the period in which the sponsorship or advertisement is displayed,
provided that no significant performance obligations remain and the collection
of the related receivable is probable. Revenues from sales of Internet
advertisements are recognized net of commissions paid to advertising sales firms
and to technology and content providers.
We were incorporated in January 1996, launched our Web site in August 1996
and began recognizing meaningful revenues in August 1997 following the
distribution of our first Alloy catalog. To date, the majority of our revenues
have been generated through merchandise sales. Sponsorship and other revenues
have not been material, but we expect these revenues to increase in future
periods as a result of our plan to increase visitors to our Web site and further
develop our marketing and sales team to capitalize on our sponsorship,
advertising and other revenue opportunities.
We incurred net losses of approximately $118,000 for the year ended January
31, 1997, $1.9 million for the year ended January 31, 1998 and $6.4 million for
the year ended January 31, 1999. At January 31, 1999, we had an accumulated
deficit of $8.3 million. The net losses and accumulated deficit resulted
primarily from the costs associated with developing our Web site and database of
Generation Y boys and girls, attracting users to our Web site and establishing
the Alloy brand. Because of our plans to invest heavily in marketing and
promotion, to hire additional employees and to develop our Web site and
operating infrastructure, we expect to incur significant net losses for the
foreseeable future. Although we have experienced revenue growth in recent
periods, this growth may not be sustainable and, therefore, these recent periods
should not be considered indicative of future performance. We may never achieve
significant revenues or profitability, or if we achieve significant revenues
they may not be sustained in future periods.
For purposes of the discussion below, the fiscal year ended January 31,
1997 is referred to as fiscal 1996; the fiscal year ended January 31, 1998 is
referred to as fiscal 1997; and the fiscal year ended January 31, 1999 is
referred to as fiscal 1998.
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<PAGE> 22
RESULTS OF OPERATIONS
The following table sets forth the statement of operations data for the
periods indicated as a percentage of revenues:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-------------------------
1997 1998 1999
------ ------ -----
<S> <C> <C> <C>
Net merchandise revenues.................................... 100.0% 100.0% 98.8%
Sponsorship and other revenues.............................. -- -- 1.2
------ ------ -----
Total revenues......................................... 100.0 100.0 100.0
Cost of goods sold.......................................... 67.5 58.3 53.7
------ ------ -----
Gross profit................................................ 32.5 41.7 46.3
Operating expenses:
Selling and marketing.................................. 393.7 109.3 89.8
General and administrative............................. 111.7 37.9 16.5
------ ------ -----
Total operating expenses............................... 505.4 147.2 106.3
------ ------ -----
Loss from operations........................................ (472.9) (105.5) (60.0)
Interest income (expense), net.............................. -- 1.9 (2.3)
------ ------ -----
Net loss.................................................... (472.9)% (103.6)% (62.3)%
====== ====== =====
</TABLE>
FISCAL YEARS ENDED JANUARY 31, 1997, JANUARY 31, 1998 AND JANUARY 31, 1999
Revenues
Merchandise Revenues. Net merchandise revenues increased from $25,000 in
fiscal 1996 to $1.8 million in fiscal 1997 and 460.3% to $10.1 million in fiscal
1998. The increase in merchandise sales in fiscal 1998 was due primarily to the
significant increase in the circulation of our Alloy catalog. This growth in
circulation was due to operating for a full 12 months in fiscal 1998 as compared
to six months in fiscal 1997 and a substantially larger database of Generation Y
boys and girls. Merchandise returns as a percentage of gross merchandise sales
were 9.3% in fiscal 1997 and fiscal 1998. Our net merchandise revenues in fiscal
1996 reflected our start-up status and lack of significant operations.
We experienced a significant increase in online merchandise orders in
fiscal 1998, which was driven by our catalog's expanded circulation and our
marketing efforts to attract additional visitors to our Web site. Online
merchandise orders in fiscal 1998 were approximately $712,000 as compared to
approximately $40,000 in online orders in fiscal 1997.
Sponsorship and Other Revenues. In fiscal 1998, we initiated sponsorship
and advertising programs to take advantage of the increased number of visitors
to our Web site and our introduction of new online services. As a result,
sponsorship and other revenues amounted to $125,000 in fiscal 1998 as compared
to immaterial revenues in fiscal 1997.
Cost of Goods Sold
Cost of goods sold consists of the cost of the merchandise sold by Alloy
plus the freight cost to deliver the merchandise to the warehouse. Our cost of
goods sold increased from $17,000 in fiscal 1996 to $1.1 million in fiscal 1997
and 422.4% to $5.5 million in fiscal 1998. The increase in cost of goods sold in
fiscal 1998 as compared to fiscal 1997 was due primarily to the increase in
product sales volume. The increase in costs of goods sold in fiscal 1997 as
compared to fiscal 1996 was due to our start-up status and lack of significant
operations in fiscal 1996.
Alloy's gross profit as a percentage of total revenues increased from 32.5%
in fiscal 1996 to 41.7% in fiscal 1997 and to 46.3% in fiscal 1998 due to higher
merchandise markups, increased sales of products at full prices via our catalog
and our Web site and increased sponsorship revenues, which generally have higher
gross margins.
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<PAGE> 23
Operating Expenses
Selling and Marketing. Selling and marketing expenses consist primarily of
Alloy catalog production and mailing costs, our call center and fulfillment
operations expenses, salaries of our sales and marketing personnel, marketing
costs, telecommunications costs and expenses related to the development and
maintenance of our Web site. These expenses increased from $98,000 in fiscal
1996 to $2.0 million in fiscal 1997 and 366.0% to $9.2 million in fiscal 1998
due to the growth in our sales, catalog circulation and Web site development. As
a percentage of total revenues, our selling and marketing expenses declined from
109.3% in fiscal 1997 to 89.8% in fiscal 1998. The decrease resulted primarily
from reduced fulfillment expenses associated with our renegotiated fulfillment
contract effective in August 1998 and a lower proportion of catalog request
calls to merchandise orders. Fulfillment expenses rose from $778,000 in fiscal
1997 to $2.7 million in fiscal 1998, but as a percentage of total revenues fell
from 43.2% in fiscal 1997 to 26.9% in fiscal 1998. In fiscal 1996, our selling
and marketing expenses represented 394.0% of our total revenues due to
significant costs associated with starting up the business, which were expensed
in full in this period. Internet-related expenses increased from $19,000 in
fiscal 1997 to $662,000 in fiscal 1998, including $382,000 of costs we incurred
in establishing an Internet-based e-mail service which we replaced with a more
cost-efficient third-party product, together with increased Web site development
and maintenance costs and promotion expenses.
We expect selling and marketing expenses to increase significantly in
future periods. These increases will be principally related to hiring additional
sales and marketing personnel and increased spending on advertising in a variety
of media to increase brand awareness, attract additional visitors to our Web
site and grow online merchandise sales. There can be no assurance that these
increased expenditures will result in increased visitors to our Web site or
additional sales.
General and Administrative. General and administrative expenses consist
primarily of salaries and related costs for our executive, administrative,
finance and business development personnel, as well as support services and
professional service fees. These expenses increased from $28,000 in fiscal 1996
to $682,000 in fiscal 1997 and 146.7% to $1.7 million in fiscal 1998. As a
percentage of total revenues, our general and administrative expenses decreased
from 111.7% in fiscal 1996 to 37.9% in fiscal 1997 and to 16.5% in fiscal 1998.
The increase in general and administrative expenses in dollar terms in each
period was primarily due to the increased personnel required to support and grow
our business. Our general and administrative expenses in fiscal 1997 were
affected by the non-cash expense of $312,000 associated with stock option awards
to a consultant. Excluding this expense, our general and administrative expenses
in fiscal 1997 were 20.6% of total revenues for the period. Our general and
administrative expenses in fiscal 1996 were associated with starting up our
business in this period, which we expensed in full. We expect general and
administrative expenses to grow as we hire additional personnel and incur
additional expenses related to the growth of our business and our operations as
a public company.
Loss from Operations
As described above, we have invested heavily to build the Alloy brand, grow
our customer database, enhance and attract visitors to our Web site and increase
the number of our employees to support a growing operation. For the foregoing
reasons, our loss from operations increased from $118,000 in fiscal 1996 to $1.9
million in fiscal 1997 and 222.5% to $6.1 million in fiscal 1998.
Interest (Expense) Income, Net
Interest income net of expense includes income from our cash and cash
equivalents and from investments and expenses related to our financing
obligations. We generated net interest income of $34,000 in fiscal 1997 due to
our cash balances resulting from our common stock offerings in this period. In
fiscal 1998, we incurred net interest expense of $239,000 due to the interest
expense resulting from our issuance of promissory notes in May 1998, which
exceeded our interest earned on cash balances held. We did not generate interest
income or incur interest expense in fiscal 1996.
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<PAGE> 24
SELECTED UNAUDITED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly statement of operations
data for each of the six quarters ended January 31, 1999. In the opinion of
management, the unaudited financial results include all adjustments, consisting
only of normal recurring adjustments, necessary for the fair presentation of our
results of operations for those periods. The quarterly data should be read in
conjunction with the Financial Statements and the related Notes appearing
elsewhere in this prospectus. The results of operations for any quarter are not
necessarily indicative of the results of operations for any future period.
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED (UNAUDITED)
--------------------------------------------------------------------
OCT. 31, JAN. 31, APR. 30, JUL. 31, OCT. 31, JAN. 31,
1997 1998 1998 1998 1998 1999
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net merchandise revenues......... $ 401 $1,396 $ 1,353 $ 2,082 $ 3,215 $3,436
Sponsorship and other revenues... -- -- -- 5 46 73
------- ------ ------- ------- ------- ------
Total revenues................... 401 1,396 1,353 2,087 3,261 3,509
Cost of goods sold............... 263 783 906 1,200 1,665 1,715
------- ------ ------- ------- ------- ------
Gross profit..................... 138 613 447 887 1,596 1,794
Operating expenses:
Selling and marketing....... 567 1,193 1,517 2,483 2,879 2,287
General and
administrative............ 336 244 265 509 517 392
------- ------ ------- ------- ------- ------
Total operating
expenses............. 903 1,437 1,782 2,992 3,396 2,679
------- ------ ------- ------- ------- ------
Loss from operations............. (765) (824) (1,335) (2,105) (1,800) (885)
Interest income (expense), net... 16 18 22 (60) (101) (100)
------- ------ ------- ------- ------- ------
Net loss......................... $ (749) $ (806) $(1,313) $(2,165) $(1,901) $ (985)
======= ====== ======= ======= ======= ======
PERCENTAGE OF TOTAL REVENUES
--------------------------------------------------------------------
Net merchandise revenues......... 100.0% 100.0% 99.9% 99.8% 98.6% 97.9%
Sponsorship and other revenues... -- -- 0.1 0.2 1.4 2.1
------- ------ ------- ------- ------- ------
Total revenues................... 100.0 100.0 100.0 100.0 100.0 100.0
Cost of goods sold............... 65.6 56.1 66.9 57.5 51.0 48.9
------- ------ ------- ------- ------- ------
Gross profit..................... 34.4 43.9 33.1 42.5 49.0 51.1
Operating expenses:
Selling and marketing....... 141.5 85.5 112.1 118.9 88.3 65.2
General and
administrative............ 84.0 17.5 19.6 24.4 15.8 11.2
------- ------ ------- ------- ------- ------
Total operating
expenses............. 225.5 103.0 131.7 143.3 104.1 76.4
------- ------ ------- ------- ------- ------
Loss from operations............. (191.1) (59.0) (98.6) (100.8) (55.1) (25.3)
Interest income (expense), net... 4.1 1.3 1.6 (2.9) (3.1) (2.8)
------- ------ ------- ------- ------- ------
Net loss......................... (187.1)% (57.7)% (97.0)% (103.7)% (58.2)% (28.1)%
======= ====== ======= ======= ======= ======
</TABLE>
Our revenues have been increasing as a result of increased catalog
circulation and visitors to our Web site supported by our growing database of
customers, Alloy E-Zine subscribers and catalog requesters. The improvement in
our gross margins reflects more efficient merchandise sourcing, increased
merchandise markups and improved merchandise sell-through. Operating expenses
have generally increased in dollar terms during the quarters presented. Selling
and marketing expenses have increased as revenues, advertising and catalog
production and circulation have increased. Selling and marketing expenses peaked
in the fiscal quarter ended October 31, 1998 due to high catalog circulation
during the period. General and administrative expenses have risen as a result of
increased personnel and the increased operating costs of our growing business.
General and administrative costs increased in the fiscal quarters ended October
31, 1997, July 31, 1998 and October 31, 1998 due to stock option awards to a
consultant.
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<PAGE> 25
We expect our quarterly revenues, margins and results of operations to
fluctuate significantly in the future. In addition, the results of any quarter
do not indicate results that should be expected for a full fiscal year. If our
revenues, margins or operating results fall below the expectations of securities
analysts and investors in some future periods, then the price of our common
stock could decline.
SEASONALITY
Our historical revenues and operating results have varied significantly
from quarter to quarter due to seasonal fluctuations in consumer purchasing
patterns. Sales of apparel, accessories and footwear through our Alloy catalog
have been higher in our third and fourth fiscal quarters, containing the key
back-to-school and holiday selling seasons, than our first and second quarters.
It is difficult to ascertain the effects of seasonality with respect to our
online merchandise sales, but we expect that similar seasonal trends will
develop in our online sales to those we have experienced in our catalog sales.
We believe that advertising sales in traditional media, such as television and
radio, generally are lower in the first and third calendar quarters of each
year. If similar seasonal and cyclical patterns emerge in Internet advertising,
our revenues and operating results also may vary significantly based upon these
patterns.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily through the sale of equity and
debt securities as we have generated negative cash flow from operations since
our inception. To date, we have received approximately $13 million in net
proceeds from the sale of common stock, convertible preferred stock and
promissory notes. At January 31, 1999, we had approximately $3.0 million in cash
and cash equivalents and a $2.5 million cash receivable from the sale of
convertible preferred stock, which was paid in full on February 1, 1999. Our
principal commitments consist of obligations under our promissory notes and our
capital and operating leases.
We manage our working capital position to increase liquidity and reduce
risk. All merchandise sales are made against an authorized credit card or check.
We manage our merchandise inventory with a view to fast re-order flexibility
with our vendors. This approach allows us to reduce the amount of inventory on
hand and limit our exposure to overstock positions.
Net cash used in operating activities was $5.3 million in fiscal 1998, $1.7
million in fiscal 1997 and $138,000 in fiscal 1996. The principal use of cash
for all periods was to fund our losses from operations.
Cash used in investing activities has consisted of capital expenditures for
computers, office furniture and equipment. A significant portion of our computer
equipment is leased. Lease terms range from 24 to 30 months with monthly
payments. In lieu of interest under the lease, we issued a stock purchase
warrant to the lessor. As of January 31, 1999, the remaining aggregate
obligation under the capital lease was $113,000.
Net cash provided by financing activities was $5.9 million in fiscal 1998,
$4.1 million in fiscal 1997 and $160,000 in fiscal 1996. Cash provided by
financing activities has consisted of sales of our common stock, convertible
preferred stock and promissory notes, offset by payments of our capitalized
lease obligation.
We currently anticipate that we will continue to experience significant
growth in our operating expenses for the foreseeable future and that our
operating expenses will be a material use of our cash resources. We believe that
our existing working capital and cash flows from operations will be sufficient
to meet our anticipated cash needs for working capital and capital expenditures
through the quarter ending April 30, 2000. If cash generated from operations is
insufficient to satisfy our cash needs, we may be required to raise additional
funds. If we raise additional funds through the issuance of equity securities,
our existing shareholders may experience significant dilution. Furthermore,
additional financing may not be available when needed or, if available,
financing may not be on terms favorable to us or our stockholders. If financing
is not available when required or is not available on acceptable terms, we may
be unable to develop or enhance our products or services. In addition, we may be
unable to take advantage of business opportunities or respond to competitive
pressures. Any of these events could have a material and adverse effect on our
business, results of operations and financial condition.
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<PAGE> 26
IMPACT OF THE YEAR 2000
Many currently installed computer systems and software products are coded
to accept or recognize only two digit entries in the date code field. These
systems may recognize a date using "00" as the year 1900 rather than the year
2000. As a result, computer systems and/or software used by many companies and
governmental agencies may need to be upgraded to comply with Year 2000
requirements or risk system failure or miscalculations causing disruptions of
normal business activities.
State of Readiness. The four third-party vendors upon whom we materially
rely are Harrison Fulfillment Services, our fulfillment services and call center
provider, OneSoft Corporation, which maintains our Web site and provides our
connection to the Internet, Quad/Graphics, Inc., our commercial printer and the
United States Postal Service, our mail carrier. We have sought confirmation from
these four vendors that their systems are Year 2000 compliant. Harrison
Fulfillment Services has informed us that it is in the process of migrating our
fulfillment operations to a Year 2000-compliant system and that this will be
completed by July 1999. OneSoft has informed us that its systems are Year 2000
compliant. We have reviewed Year 2000 readiness disclosure statements prepared
by Quad/Graphics and the U.S. Postal Service. According to the Year 2000
readiness disclosure statement prepared by the U.S. Postal Service, remediation
on 135 of 141 severe and critical systems has been completed. As of the first
quarter of 1999, Quad/Graphics reports in its Year 2000 readiness statement that
it has completed a full Year 2000 imaging system test on live work with no
failures. Quad/Graphics also reports that ongoing live Year 2000 tests of the
press systems have not yet produced any failures. We believe, from information
provided in the Year 2000 disclosures, that both the U.S. Postal Service and
Quad/Graphics will be Year 2000 compliant by September 1999.
We do not expect to experience any material adverse effects on our
business, financial condition or results of operations from any other vendor,
distributor or supplier who may experience Year 2000 problems.
We have completed an internal assessment of all material information
technology and non-information technology systems at our headquarters, including
our accounting software, our network server and related software, our personal
computers and related software and our telephone system. We believe that all of
these systems either are or will be made Year 2000 compliant. The majority of
our material information technology and non-information technology systems are
PC-based, and therefore, are currently Year 2000 compliant. We are not currently
aware of any Year 2000 problems relating to these systems which would have a
material adverse effect on our business, financial condition or results of
operations. Any systems discovered to be non-compliant will be made Year 2000
compliant through normal upgrades of our software or hardware, or, when
necessary, replacement of our software or hardware.
Costs. To date, we have not incurred any material costs in identifying or
evaluating Year 2000 compliance issues. Most of our expenses have related to,
and are expected to continue to relate to, the upgrades or replacements, when
necessary, of software or hardware, as well as costs associated with time spent
by employees in the evaluation process and Year 2000 compliance matters
generally. These expenses are included in our capital expenditures budget and
are not expected to be material to our financial position or results of
operations. These expenses, however, if higher than anticipated, could have a
material and adverse effect on our business, results of operations and financial
condition.
Risks. There can be no assurance that we will not discover Year 2000
compliance problems in our systems that will require substantial revisions or
replacements. In the event that the fulfillment and operational facilities that
support our business, or our Web-hosting facilities, are not Year 2000
compliant, we may be unable to deliver goods or services to our customers and
portions of our Web site may become unavailable. In addition, there can be no
assurance that third-party software, hardware or services incorporated into our
material systems will not need to be revised or replaced, which could be time-
consuming and expensive. Our inability to fix or replace third-party software,
hardware or services on a timely basis could result in lost revenues, increased
operating costs and other business interruptions, any of which could have a
material and adverse effect on our business, results of operations and financial
condition. Moreover, the failure to adequately address Year 2000 compliance
issues in our software,
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<PAGE> 27
hardware or systems could result in claims of mismanagement, misrepresentation
or breach of contract and related litigation, which could be costly and
time-consuming to defend.
In addition, there can be no assurance that governmental agencies, utility
companies, Internet access companies and others outside our control will be Year
2000 compliant. The failure by these entities to be Year 2000 compliant could
result in a systemic failure beyond our control, including, for example, a
prolonged Internet, telecommunications or electrical failure, which could also
prevent us from delivering our services to our users, decrease the use of the
Internet or prevent users from accessing our services, any of which would have a
material and adverse effect on our business, results of operations and financial
condition.
Contingency Plan. As discussed above, we are engaged in an ongoing Year
2000 assessment and do not currently have a contingency plan to deal with the
worst case scenario that might occur if technologies on which we depend are not
Year 2000 compliant and fail to operate effectively after the Year 2000. The
results of our Year 2000 compliance evaluation and the responses received from
distributors, suppliers and other third parties with which we conduct business
will be taken into account in determining the need for and nature and extent of
any contingency plans.
If our present efforts to address the Year 2000 compliance issues discussed
above are not successful, or if distributors, suppliers and other third parties
with which we conduct business do not successfully address such issues, our
users could seek alternate suppliers of our products and services. Any material
Year 2000 problem could require us to incur significant unanticipated expenses
to remedy and could divert our management's time and attention, either of which
could have a material and adverse effect on our business, operating results and
financial condition.
RECENT ACCOUNTING PRONOUNCEMENTS
In the quarter ended April 30, 1998, we adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of financial
statements. The adoption of SFAS No. 130 did not have an effect on our financial
position or results of operations.
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 131, "Disclosure About Segments of an Enterprise and Related Information,"
which is effective for fiscal years beginning after December 15, 1997. SFAS No.
131 requires that public companies report information about operating segments
in their annual financial statements and in subsequent condensed financial
statements of interim periods issued to shareholders. This statement also
requires that public companies report information about their products and
services, the geographic areas in which they operate and their major customers.
Reportable operating segments are determined based on the management approach,
as defined by SFAS No. 131. The management approach is based on the way that the
chief operating decision-maker organizes the segments within an enterprise for
making operating decisions and assessing performance. We currently operate under
two segments, merchandise revenues and sponsorship and other revenues. However,
we have not provided segment disclosure for the periods presented because
sponsorship and other revenues only accounted for approximately 1% of total
revenues in fiscal 1998.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. SFAS
No. 133 is effective for fiscal years beginning after June 15, 1999. We do not
use derivatives and therefore this new pronouncement is not applicable.
The FASB is currently addressing significant current practices relating to
accounting for stock-based compensation awards under APB 25. The FASB is also
addressing the accounting for the repricing of stock options. Tentatively, the
FASB has decided that awards to non-employee directors would be charged to
operations based upon the fair value of the award.
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<PAGE> 28
BUSINESS
OUR BUSINESS
Alloy Online is a leading Web site providing community, content and
commerce to Generation Y, the 56 million boys and girls between the ages of 10
and 24. Through our Web site, www.alloy.com, Generation Y boys and girls can
interact, share information, explore compelling and relevant content and shop
for a variety of merchandise, including boys and girls apparel, accessories,
footwear, music, cosmetics and magazine subscriptions. Due to our unique blend
of online services, our Web site generated approximately 25 million page views
in March 1999, up from approximately 1.5 million in March 1998, and
approximately 480,000 users have registered to receive our weekly electronic
magazine, Alloy E-Zine. We believe our Web site represents one of the largest
and most vibrant Generation Y communities on the Internet. This growing
community drives merchandise sales, our principal source of revenues, and
positions us to be a leading channel for marketers that are increasingly looking
to the Internet to reach this growing and influential consumer group.
INDUSTRY BACKGROUND
The Internet
Growth of the Internet and Online Commerce. The Internet has rapidly
become a significant global medium for communications, entertainment, news,
information and commerce. International Data Corporation, a market research
firm, estimates the number of users accessing the Web will increase from
approximately 100 million in 1998 to approximately 320 million by the end of
2002. As Internet use has grown, shopping online has become increasingly
popular, and the number of people who buy products and services on the Internet
is growing rapidly. According to International Data Corporation, online commerce
transactions to the home are expected to increase from approximately $11 billion
in 1998 to approximately $94 billion in 2002.
Emergence of Community Web Sites. An important development on the Internet
has been the emergence of community Web sites. Community sites provide a single
online destination where like-minded users can interact and quickly find
pertinent information, products and services related to their particular
interests or needs. Community sites generally offer free services including
access to e-mail accounts, chat rooms, message boards, news and entertainment.
Through these features, online communities seek to establish a close
relationship with their audience and evolve over time according to the interests
of their members. As a result, we believe that users tend to be loyal to and
spend more time online at community sites.
Growth of Online Advertising. The Web has become an attractive medium for
advertisers, offering a level of targetability, flexibility, interactivity and
measurability not available in traditional media. The Web enables advertisers to
demographically target their messages to specific groups of consumers as well as
to change their advertisements frequently in response to market factors, current
events and consumer feedback. Moreover, advertisers can track more accurately
the effectiveness of their advertising messages by receiving reports of the
number of advertising "impressions" delivered to consumers and the resulting
"click-through" rate to their Web sites. Jupiter Communications, Inc. estimates
that the amount of Internet advertising in the U.S. will grow from approximately
$1.9 billion in 1998 to $7.7 billion by 2002, a compound annual growth rate of
42%.
Online Direct Marketing. The Internet permits the capture of valuable
customer demographic and preference information. This allows direct marketers to
target electronic offers of products and services directly to consumers with
desirable characteristics and interests. Direct marketers have traditionally
relied on print media, mail and telemarketing to reach their customers. By
virtue of the Internet, direct marketers are able to increase response rates and
reduce the cost per transaction.
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<PAGE> 29
Generation Y
The Growing Economic Importance of Generation Y. In the United States,
Generation Y is made up of the 56 million boys and girls between the ages of 10
and 24. The United States Census Bureau projects that Generation Y will continue
to grow through 2015 when it will reach 63.5 million people, an increase of
12.8% from its 1998 level. Over the next 12 years, the Census Bureau estimates
that the growth of Generation Y will outpace the growth of the general
population by 19.5%. Generation Y also accounts for more than $250 billion in
annual disposable income. We believe approximately 70% of Generation Y's
disposable income is discretionary.
Popularity of the Internet with Generation Y. Generation Y is the first
generation to grow up with the Internet as a part of daily life. The Internet's
graphical user interface, robust communication capabilities, dynamic content,
and ability to rapidly disseminate and access information make it a popular
medium for Generation Y. Based on eMarketer estimates, we believe that the
number of teens and college students who regularly access the Internet at least
twice a week for an hour or more will rise from an estimated 12.0 million in
1998 to 22.3 million by the year 2000. Industry analysts believe that increasing
numbers of teens on the Internet will translate into increasing dollars for
online retailers. According to eMarketer, in 1998, teens spent $143 million
online, or one-quarter of 1% of their total annual expenditures on products and
services. eMarketer further estimates that teen online spending will increase to
$268 million this year, climbing to $1.3 billion by 2002.
The Need for a Comprehensive Generation Y Online Destination. The Internet
has created an ideal medium for Generation Y to gather, access information and
communicate with one another. However, we believe Generation Y is underserved by
the offerings on the Internet. While numerous Web sites provide some Generation
Y-specific content and commerce, most fail to provide the breadth and depth of
youth-oriented content that Generation Y seeks because these sites focus on a
broader audience. We believe Generation Y seeks a Web site that integrates:
- Community -- an environment in which to socialize with peers and to voice
opinions away from parents and other adults;
- Content -- dynamic information and entertainment about relevant
Generation Y topics such as music, relationships, fashion, entertainment,
astrology, gossip and sports; and
- Commerce -- products and services that appeal specifically to the tastes
of Generation Y presented in an appealing and trusted environment.
Generation Y also presents an important opportunity for advertisers and
direct marketers. Marketers are focusing on this group because of Generation Y's
significant and growing spending power and tendency to carry brand loyalties
established at a young age into adulthood. However, we believe that this group
is difficult for marketers to reach online because of the dispersed nature of
the Generation Y Internet audience. To maximize the impact of their marketing
dollars, advertisers seek to bring their messages to places on the Internet
where Generation Y congregates. In addition, direct marketers seek a Web site
with the ability to capture valuable demographic and customer preference
information to enable them more effectively to target their product and service
offerings to Generation Y. As a result, we believe that a vibrant and growing
Generation Y community can serve as a valuable conduit to advertisers and direct
marketers targeting this group.
THE ALLOY SOLUTION
Alloy is a leading online destination focused exclusively on Generation Y.
We have built a feature-rich Web site that addresses Generation Y's needs for
community, content and commerce. Our Web site is a destination where Generation
Y boys and girls can interact, share information, explore compelling and
relevant content and shop. These online services are reinforced by our widely
recognized Alloy brand which serves as a popular reference for the Generation Y
lifestyle. With approximately 25 million page views in March 1999, we believe
that we have aggregated one of the largest and most vibrant Generation
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<PAGE> 30
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.
We satisfy the needs of Generation Y through a site with the following
attributes:
- Community. Based on the feedback of our visitors, our community is a
"cool" environment for Generation Y boys and girls to interact, share
their ideas, express their opinions and develop their interests. We
facilitate communication among our Web site users through a variety of
free interactive services such as e-mail, instant messaging and real-time
chat. Additionally, we provide member-generated interactive content areas
such as personal homepage hosting services, topical message boards and
opinion polls and surveys. Our Generation Y-focused editorial staff also
provides advice in areas of interest to users, such as relationships and
fashion, in a forum where our users can express their opinions. We
believe that the sense of community we promote fosters loyalty among our
users and increases the amount of time they spend on our site.
- Content. Our Web site provides regularly updated content on topics of
interest to Generation Y boys and girls, including music, relationships,
celebrities, horoscopes, gossip, fashion trends, current events, sports
and a variety of other key topics. Our professional editorial staff
aggregates content from a variety of sources and develops an edited
presentation of the most compelling and relevant Generation Y content.
Additionally, our editors create selected original content in specific
areas of interest to our users. We believe that by continually refreshing
our content we have positioned Alloy as a daily online information and
entertainment source for Generation Y.
- Commerce. Our community and content services attract a significant
number of Generation Y users to our Web site and enable us to provide a
trusted, appealing environment in which to shop. Alloy offers Generation
Y a wide range of products that are specifically geared to their
interests and tastes. We currently offer boys and girls apparel,
outerwear, accessories, footwear, music, cosmetics and magazine
subscriptions. To encourage first-time and repeat Web purchases, we also
offer frequent product promotions and specials. Our product offerings are
selected from a wide range of the most popular brands and are continually
updated to keep pace with trends and seasons. We offer many of the same
products through our Alloy catalog frequently distributed throughout the
year. We believe the catalog not only adds significantly to our sales but
also is a key driver of additional users to our Web site.
- Targeted cost-effective medium for advertisers and direct marketers. As
a leading online destination for Generation Y, Alloy provides marketers
with a powerful channel to target this important consumer group. Our Web
site is organized around specific content areas that allow marketers to
deliver highly targeted messages to users with specific interests.
Additionally, as a result of our large online user base, we are able to
compile valuable demographic and customer preference information. With
approximately 480,000 registered users, of which approximately 127,000
are boys, we offer direct marketers the ability to effectively reach
their targeted consumer group. We currently offer marketers run-of-site
and premium placement advertisements, sponsorship of an electronic
newsletter, space in our widely circulated Alloy lifestyle catalog and
sponsorship of special contests.
OUR STRATEGY
Alloy's objective is to become the leading Generation Y online destination.
We intend to achieve our objective through the following strategies:
Maintain Single Brand Focus. We will continue to build Alloy as a single
brand known for high quality, Generation Y-focused community, content and
commerce for both boys and girls. Rather than dividing our marketing resources
across multiple brands and Web sites, we seek to maximize the impact of our
marketing efforts by promoting a single brand. We believe this allows us to
attract visitors to our Web site and build customer loyalty rapidly and
efficiently. We intend to initiate a national campaign in traditional and online
media and continue to use our popular Alloy catalog to reinforce the Alloy
brand.
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Pursue Additional Revenue Opportunities. We intend to increase online
revenues by taking advantage of our targeted community, our database, our proven
direct marketing capabilities and our substantial experience in marketing to
Generation Y. We intend to expand our product and service offerings to create
multiple and recurring revenue streams. These revenue streams may include:
- sales of additional product categories;
- sales of advertising and sponsorships on our Web site; and
- sales of third-party services.
Strengthen Co-ed Community. We will continue to foster a community that
appeals to both boys and girls. We believe that a successful Generation Y
community site is largely dependent on dynamic boy-girl interaction. We will
continue to create an engaging environment for youths of both sexes to meet and
"hang out" by presenting information, products and services that have co-ed
appeal.
Continue to Improve User Experience. We intend to enhance the appeal of
our Web site by aggressively developing our content, services and
community-oriented features. We aggregate, edit and continually refresh high
quality and popular information, products and services to satisfy the evolving
interests and tastes of Generation Y. Recent content additions to our Web site
include Homework 911, a homework assistance resource and AstroStation, a
personalized astrology service. Recent technology-driven enhancements to our Web
site include Personal Homepages, a do-it-yourself homepage service and
AlloyLink, an instant messaging service. We also intend to provide more
personalized features and to make the user interface as easy-to-use, engaging
and fast as possible.
Attract Additional Visitors to Our Web Site. We intend to attract an
increasing number of visitors to our Web site through promotional campaigns in
traditional and online media. Through traditional media, we will continue to
market aggressively our Web site via our Alloy catalog, which leverages our
integrated direct mail and online offerings. We also intend to initiate new
campaigns via broadcast and print media. Online, we intend to increase our
advertising and expand our content syndication and other relationships with
heavily-trafficked Web sites. We also intend to explore cross-promotional
opportunities and product tie-ins that attract additional visitors to our Web
site.
Enhance Web Site and Technology Infrastructure. We will continue to invest
in infrastructure technologies and transaction-processing systems to support our
expected growth. We will continue to incorporate third-party technologies that
will efficiently and effectively support our fulfillment, commerce, transaction
processing and communications capabilities. We also intend to increase the
automation and efficiency of our supply chain and fulfillment activities to
enhance our customers' shopping experience.
Expand Internationally. Based on preliminary test marketing, we believe
that significant opportunities exist to address the global adoption of the
Internet and the international demand for Generation Y-focused community,
content and commerce. The size of Generation Y internationally and the emergence
of a global youth culture that is heavily influenced by the U.S. present
substantial overseas opportunities. We believe that an early presence in these
markets will enhance our long-term competitive position. We intend to explore
these opportunities to extend the reach of the Alloy brand and to create
strategic relationships in important international markets.
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OUR WEB SITE
Our homepage, www.alloy.com, contains five main areas that satisfy
Generation Y's needs for community, content and commerce. The majority of the
features and services of our Web site are accessible by all users; however,
registration is required for access to a number of our free community services.
Each of the features described below corresponds to the boxes on the picture of
our homepage.
Alloy Online Homepage Picture
1. Today in Alloy. This channel of our Web site contains daily features,
including the latest news, celebrity gossip, horoscopes, special promotional
offers, user surveys and more.
- News and Gossip -- daily headlines and celebrity gossip focusing on
music, movies and TV;
- Horoscopes -- daily horoscopes, love scopes, celebrity horoscopes and
Chinese astrology;
- Special Promotions -- daily special Alloy product promotions;
- Today's Trivia -- a daily trivia question where users can win prizes;
- Alloy Poll -- Generation Y-focused survey questions;
- Trend of the Day -- a chosen Alloy user reports on fashion trends in his
or her town; and
- Joke of the Day -- a chosen daily joke submitted by an Alloy user.
2. Shop. This is the main purchasing area of our Web site where online
shopping is designed to be fun, safe and simple. We carry over 300 different
products from over 70 vendors that include boys and girls apparel, outwear,
footwear, accessories, music, magazines and cosmetics.
- Shop -- shop online for our merchandise;
- Great Deals -- special opportunities to purchase products at reduced
prices in "Bargain Basement," "Deal of the Day" and "After School
Specials";
- Get a Free Catalog -- allows users to order the Alloy catalog online;
- Alloy Magstand -- special magazine subscription offers;
- Alloy Tunes -- Alloy-compiled compact disc offers; and
- Alloy Glam -- hair and makeup product offerings.
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3. Get Free E-mail. We provide free e-mail service for our users.
4. Connect. This channel contains a number of the community-oriented features
for our Web site.
- Alloy Chat -- multiple areas where Generation Y boys and girls are able
to communicate with one another via text messages in real time;
- Message Boards -- topic specific areas, such as "general hang" and "hook
up" and special interest areas such as skateboarding and music where
registered users can communicate with one another via text messages;
- Alloy Homepages -- allows registered users to create personal Web pages
with text, pictures, links and opinions;
- Fashion Diva -- interactive forum for fashion tips and advice moderated
by our fashion expert Carrie B;
- Ask Tucker and Ask Fiona -- interactive advice forums moderated by Tucker
and Fiona, our columnists on school, relationships, friendships and other
Generation Y subjects; and
- Dig or Dis -- an area where our registered users can express their
opinions on current Generation Y trends.
5. Do it Yourself. This channel of our Web site encourages our users to
contribute their own content.
- Art Gallery -- user-submitted photographs, drawings and paintings;
- Be a Critic -- user-submitted reviews of movies, music and books;
- Guest Editor -- editorial commentary contributed by a different user each
week;
- Poetry Pages -- user-submitted poetry;
- Post Your Stories -- user-submitted stories; and
- Zine Zone -- links to selected user homepages.
6. Music. This channel presents updated music-related news about bands,
artists, CDs, events and concert schedules.
7. TV & Movies. This channel presents news and features about television and
movies.
- Alloy TV -- Generation Y-focused programming via streaming audio and
video; and
- Movie Previews -- Trailers from the latest hit movies.
8. Advice & Articles. This channel highlights our advice columns and special
articles.
- Ask Tucker and Ask Fiona;
- Quiz -- fun quizzes about Generation Y Life;
- Homework 911 -- a resource to help with homework and school;
- Trauma Central -- highlights embarrassing, yet humorous, moments in our
users' lives; and
- Search -- a custom teen Internet search engine.
9. Fashion & Beauty. This channel highlights the latest in Generation Y fashion
and beauty trends.
- Virtual Makeover -- weekly online fashion and makeup advice based on
photographs submitted by Alloy users;
- Model Interviews -- interviews with the latest Alloy models;
- Fashion Scopes -- updated fashion advice based on users' astrological
signs; and
- Trend of the Day -- a chosen Alloy user reports on fashion trends in his
or her town.
10. Alloy Sports. This channel provides updated news about Generation Y sports
including skateboarding, snowboarding and other sports.
11. Alloy E-Zine. This channel allows users to easily subscribe to the Alloy
E-Zine.
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MARKETING AND PROMOTION
We market and promote our unified Alloy brand through channels that we have
developed as well as through traditional marketing channels. We believe we are
able to powerfully communicate our marketing messages through our Alloy catalog
and our Alloy E-Zine, a weekly broadcast e-mail to our registered users. Our
catalog and E-Zine continually remind customers about events, promotions and
other items of interest occurring online. We have complete control over how we
promote our Web site through our catalog and our E-Zine, thus allowing more
opportunities for our advertisers to reach Generation Y.
The marketing channels that we have developed are as follows:
- The Alloy Catalog. Our catalog serves as our primary offline marketing
tool to attract users to our Web site and to reinforce the Alloy brand.
With an expected 20 million catalogs to be circulated in 1999, our
catalog's circulation is comparable to major teen magazines, including
Seventeen, Teen and YM. Using an integrated marketing approach, we
heavily promote our Web site and prominently display special events and
online sales promotions throughout our catalog. We believe that our large
circulation, as well as the integrated relationship between our catalog
and our Web site, gives us an advantage over many of our competitors.
- Direct Marketing. Our databases of approximately 2.2 million Generation
Y boys and girls and approximately 480,000 registered users of our Web
site enable us to sell products and services using a variety of direct
marketing techniques. We believe these individuals represent a desirable
socioeconomic subset of the Generation Y demographic group who are
receptive to our direct marketing messages. We are able to leverage our
user database to deliver a weekly broadcast e-mail, Alloy E-Zine, that
contains information about fashion, music, contests, special Alloy
merchandise sales and links to our Web site. We intend to expand our use
of broadcast e-mail to include more targeted messages and promotions to
specific segments of our registered users. Additionally, we intend to use
our database to target specific groups of individuals via direct mail
with special online offers.
We also promote, advertise and increase the visibility of our brand and
attract new users and customers through the following methods:
- Traditional and Internet Advertising. Our advertising efforts to date
have been focused primarily offline. We believe that our strategy of
using traditional offline media to generate online sales enables us to
reach our target audience, build our brand name, control our promotional
budgets more effectively and tie advertising to revenue. To maximize our
visibility with our target audience, we advertise in the Generation Y
fashion, music and sports magazines such as Seventeen Magazine, YM, Teen,
Rolling Stone and Snowboarder. We have selectively placed online
advertising where we believed it to be most cost-effective. Following
this offering, we expect to significantly increase our investment in both
offline and online advertising and promotion, including a television
advertising campaign as well as testing online advertising programs.
- Strategic Alliances. We have entered into strategic relationships with
several Internet companies to increase the number of visitors to our Web
site. We have existing relationships providing us with prominent exposure
on such sites as Yahoo! Shopping, FashionMall.com, CatalogCity.com and
CatalogLink.com. We intend to enter into additional strategic alliances
with heavily trafficked Web sites.
- Special Co-Promotions. We have structured high profile, co-promotion
arrangements with a number of leading marketers including, among others,
MGM Entertainment, Sony Music, Burton Snowboards, MCI and
EarthLink/Sprint. Because of our large community, strong brand and
extensive distribution, these marketers have provided free products and
services that we use as special promotions for the Alloy community.
Promotions have included product give-aways, private movie screenings,
exclusive music give-aways and celebrity online chats. These promotions
help attract visitors to our Web site.
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SPONSORSHIP AND ADVERTISING SALES
We provide marketers with a large, demographically desirable Generation Y
audience. We believe that our Web site visitors represent an attractive
socioeconomic subset of active Generation Y consumers for companies focused on
the youth market.
For the year ended January 31, 1999, we derived less than 2.0% of our
revenues from sponsorships and advertising. However, we plan to generate an
increasing amount of revenue from sponsorship and advertising sales. Currently,
we use a third-party firm to sell advertising on our Web site. We intend to
build an in-house sales force during the coming year and offer the following
programs:
- Sponsorships. Sponsorships will allow advertisers to gain maximum
exposure by sponsoring areas of our Web site. We offer sponsorship
opportunities throughout our entire site. We also offer sponsorship
advertising in Alloy E-Zine, our weekly electronic magazine distributed
by e-mail to approximately 480,000 subscribers.
- Run-of-Site. Run-of-site rotations are banner advertisements that rotate
on a random basis throughout our Web site, appealing to advertisers
seeking to establish general brand recognition with our users. To date,
participating advertisers have included Princeton Review, Sony
Playstation and Partnership for a Drug Free America.
- Targeted Advertising. Targeted advertising allows companies to deliver
their advertisements to specific segments of our user base. This
segmentation can be done by specific area of our Web site, by the time of
day, user location or age.
- Combination Print/Web Site Advertising. Unlike many of our competitors,
we have the ability to offer selected combinations of print and Web site
advertisements. With an estimated circulation of 20 million catalogs in
1999, we believe we offer advertisers the option to gain significant
additional exposure to the Generation Y demographic group. To date,
advertisers that have chosen this type of program have included Seventeen
Magazine, Elektra Records and N2K.
MERCHANDISING
Our merchandise strategy is designed to minimize fashion risk and
facilitate speed to market and product assortment flexibility. Our objective is
to reflect, not to lead, Generation Y styles and tastes. We select merchandise
from the best existing designers and producers allowing us to stay current with
the tastes of the market rather than to predict future fashion trends. Our
buyers and merchandisers work closely with our many vendors to tailor products
to our specifications, rather than design and produce our own line. By doing
this, we are able to minimize design risk and make final product selections only
two to three months before the products are brought to market, not the typical
six to nine months for many apparel companies. We believe this strategy
significantly reduces our trend risk and is consistent with our role as an
"editor" of Generation Y lifestyle.
Our organization and operational processes support our merchandising
strategy. Our buyers have significant experience with retail and media companies
that market to Generation Y. We believe our staff has a proven ability to
identify desirable products and ensure that our vendors meet specific guidelines
regarding product quality and production time. At present, we use primarily
domestic vendors who must have the ability to produce and ship products within
two to eight weeks. This speed to market gives us the flexibility to incorporate
the latest trends into our product mix and to better serve the evolving tastes
of Generation Y.
Our merchandising strategy also enables us to closely control our inventory
levels. We typically purchase only approximately 50% of our initial sales
estimates and rely on quick re-order ability. Because we do not make aggressive
initial orders, we believe we are able to minimize our risk of excess inventory.
Additionally, we use our Web site to offer special product prices as part of our
"Bargain Basement" section and in the past have mailed various sales circulars
to our customers to sell slower moving inventory.
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Alloy has created a strong brand presence among our vendor group. We
believe that presence on our Web site and in our circulating catalog is a
valuable marketing tool for our vendors and, as a result, our vendors typically
grant us online and catalog exclusivity for each product we select. We believe
this exclusivity makes the merchandise in the Alloy catalog more attractive to
our target audience and protects us from direct price comparisons. At any one
time, our merchandise selection includes more than 70 vendors. No vendor
accounts for more than 10% percent of our sales. Brands currently offered
through Alloy include nationally recognized names such as Vans, O'Neill and
Diesel, as well as smaller, niche producers, including Dawls, Free People and
Kikwear.
A typical Alloy catalog is 60 to 68 pages, with approximately 220 unique
items. Apparel for girls ranges from basics, such as shorts, jeans and T-shirts,
to seasonal and fashion-oriented merchandise such as outerwear and swimwear,
dresses and accessories. Boys' apparel includes shorts, T-shirts, jeans,
outerwear and sports-related attire. Accessories include bags, watches,
cosmetics and costume jewelry. Our footwear selections include sandals,
platforms, sneakers, boots and flats.
ORDERING, FULFILLMENT AND CUSTOMER SERVICE
In order to attract and retain customers, we use a full-service, scalable,
and state-of-the-art call center and fulfillment center with trained personnel.
Our call center and fulfillment center for both the Alloy catalog and our Web
site are provided by Harrison Fulfillment Services. Contracting with Harrison
has allowed Alloy to grow rapidly without incurring major capital expenditures
or dedicating management resources to build and staff an in-house call and
fulfillment center. This has also allowed us to maintain a high level of
customer service during our period of rapid growth.
Harrison has sufficient capacity at its fulfillment center to accommodate
our expected growth until at least 2001. Our inventory is stored at Harrison's
2.1 million cubic foot warehouse in Chattanooga, Tennessee. We estimate that we
currently occupy only 100,000 cubic feet of this facility. As we continue to
grow, it may become cost-effective at some point in the future to bring the call
center and fulfillment center in-house, but we do not currently anticipate
undertaking such a project until at least the year 2001.
We also believe that high levels of customer service and support are
critical to the value of our services and to retaining and expanding our
customer base. Harrison maintains two call centers with approximately 200
stations and an interactive voice response system. Harrison personnel conduct
teleservice training sessions continuously, and Alloy personnel visit
approximately once a month to introduce and explain new Alloy products and
procedures. These customer service representatives are available 24 hours a day,
7 days a week through a toll-free telephone number. The representatives are able
to guide customers through the order process, monitor order progress and provide
general information about our products such as sizing advice and product
features.
INFRASTRUCTURE, OPERATIONS AND TECHNOLOGY
The technology infrastructure of our operations provides continuous
availability of our online service. All of the critical components of the system
are redundant, which allows continuous service in case of unexpected component
failure, maintenance and upgrades.
Currently, we license commercially available technology whenever possible
in lieu of dedicating our financial and human resources to developing solutions.
Our system hardware is hosted at OneSoft Corporation, a third-party facility in
Annandale, Virginia. A group of systems administrators and network managers at
OneSoft operate our Web site, network operations and transactions-processing
systems and monitor our systems 24 hours a day. Our infrastructure is scalable,
allowing us to quickly adjust to our rapidly expanding user base.
Our operations are dependent on our ability to maintain our computer and
telecommunications systems in effective working order and to protect our systems
against damage from fire, natural disaster, power loss, telecommunications
failure or similar events. Our servers are powered by an uninterruptible power
supply to provide back-up power supply at the operations facility within seconds
of a power outage.
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Our systems are copied to backup tapes each night and regularly stored at an
off-site storage facility. We have implemented these various redundancies and
backup systems in order to minimize the risk associated with damage from fire,
power loss, telecommunications failure, break-ins, computer viruses and other
events beyond our control.
OPPORTUNITIES IN INTERNATIONAL MARKETS
Based on preliminary test marketing, we believe that significant
opportunities exist to address the global adoption of the Internet and the
international demand for Generation Y-focused community, content and commerce.
The size of the Generation Y population internationally and the emergence of a
global youth culture that is heavily influenced by the U.S. present substantial
overseas opportunities. For example, the European Union currently has 72 million
people between the ages of 10 and 24, 16 million more than in the United States.
Japan's Generation Y population numbers approximately 25 million. We believe
that an early presence in these markets will enhance our long-term competitive
position. We intend to explore these opportunities to extend the reach of the
Alloy brand and to create strategic relationships in important international
markets.
COMPETITION
Electronic Commerce and Catalog Sales. The online commerce market is new,
rapidly evolving and intensely competitive. Current and new competitors can
launch new Web sites at relatively low cost. Our catalog competes with other
catalog retailers and direct marketers, some of which may specifically target
our customers. We currently or potentially compete with a variety of other
companies serving segments of the Generation Y market including:
- various mail-order retailers;
- various Web-based retailers;
- various Generation Y traditional retailers, either in their physical or
online stores; and
- various online service providers that offer products of interest to our
Generation Y consumers; including America Online and Microsoft Network.
We believe that the following are the principal competitive factors in our
market:
- brand recognition;
- quality of site content;
- merchandise selection;
- convenience;
- price;
- customer service; and
- reliability and speed of fulfillment.
Many of our current and potential store-based, catalog and online
competitors have longer operating histories, larger customer or user bases and
significantly greater financial, marketing and other resources than we do. In
addition, competitors could enter into exclusive distribution arrangements with
our vendors and deny us access to their products. If we face increased commerce
competition, our business, operating results and financial condition may be
materially and adversely affected.
Internet Community Services. We compete for users and advertisers with
many providers of community services, including companies that attempt, as we
do, to target Generation Y consumers. These include:
- Web sites primarily focused on the Generation Y demographic group;
- online service providers with teen-specific channels, such as America
Online; and
- community Web sites, such as GeoCities, that may create Generation
Y-specific communities.
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In addition, we could face competition in the future from traditional media
companies, a number of which, including Disney, CBS and NBC, have recently
acquired or invested in Internet companies. The Generation Y-focused magazines,
such as Seventeen, YM or Teen, might devote additional efforts to their existing
Web sites which would compete with us for users and advertising dollars.
We believe that the principal competitive factors for companies seeking to
create Generation Y-focused communities on the Internet are:
- brand recognition;
- critical mass of both boys and girls;
- relevant content and editorial expertise;
- functionality of the Web site; and
- user loyalty.
We believe that the strong Alloy brand combined with our ability to deliver
targeted audiences to advertisers and the overall cost-effectiveness of the
advertising medium we offer are principal competitive advantages. However, many
of our competitors, current and potential, may have greater financial or
technical resources and we could face additional competitive pressures that
would have a material and adverse effect on our business, results of operations
and financial condition.
INTELLECTUAL PROPERTY
We have applied for trademark or service mark protection for the names
"Alloy", "Alloyonline.com", "Alloymail.com", "Local 212", "Stationwagon" and
"Hello My Name Is". We also have rights to numerous Internet domain names
including alloy.com, alloyonline.com, alloymail.com, alloysports.com and
alloymusic.com. We regard our service marks, trademarks, trade secrets and
similar intellectual property as critical to our success. We rely on a
combination of trademark and copyright law, trade secret protection and
confidentiality, license and other agreements with employees, customers,
strategic partners and others to protect our intellectual property rights.
Effective trademark, service mark, copyright and trade secret protection may not
be available in every country in which we sell our products and services online.
Therefore, the steps we take to protect our intellectual property rights may be
inadequate. In addition, we regard our database as critical to our success. Our
database is maintained on a secure system by a third-party database service
bureau and is accessible only by us.
GOVERNMENT REGULATION
We are subject, both directly and indirectly, to various laws and
governmental regulations relating to our business. The Internet is rapidly
evolving and there are few laws or regulations directly applicable to online
commerce and community Web sites. Due to the increasing popularity and use of
the Internet, governmental authorities in the United States and abroad may adopt
laws and regulations to govern Internet activities. Laws with respect to online
commerce may cover issues such as pricing, distribution and characteristics and
quality of products and services. Laws with respect to community Web sites may
cover content, copyrights, libel, obscenity and personal privacy. Any new
legislation or regulation or the application of existing laws and regulations to
the Internet could have a material and adverse effect on our business, results
of operations and financial condition.
Although our online transmissions generally originate in New York and
Virginia, the governments of other states or foreign countries might attempt to
regulate our transmissions or levy sales or other taxes relating to our
activities. As our products and services are available over the Internet
anywhere in the world, multiple jurisdictions may claim that we are required to
qualify to do business as a foreign corporation in each of those jurisdictions.
Our failure to qualify as a foreign corporation in a jurisdiction where we are
required to do so could subject us to taxes and penalties for the failure to
qualify. It is possible that state and foreign governments might also attempt to
regulate our transmissions of content on our Web site or prosecute us for
violations of their laws. We cannot assure you that state or foreign
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governments will not charge us with violations of local laws or that we might
not unintentionally violate these laws in the future.
The U.S. Congress recently enacted the Children's Online Privacy Protection
Act of 1998. The principal provisions of the law are expected to become
effective between April 21, 2000 and April 21, 2001. Among other things, subject
to limited exceptions, this act:
- makes it unlawful for an operator of a Web site or online service
directed to children under age 13, and any operator that has actual
knowledge that it is collecting personal information from children under
age 13, to collect personal information from these children without
having obtained verifiable parental consent; and
- prohibits requiring that a child under age 13 disclose more information
than is reasonably necessary in order to participate in a game, the
offering of a prize, or another activity.
The Federal Trade Commission has not yet promulgated regulations
interpreting this act. We believe that the promulgation of regulations under
this act will make it more difficult for us to collect personal information from
our audience.
A number of government authorities are increasingly focusing on online
privacy issues and the use of personal information. The Federal Trade Commission
and several states have investigated the use by some Internet companies of
personal information. Our business could be adversely affected if new
regulations regarding the use of personal information are introduced or if
government authorities choose to investigate our privacy practices. In addition,
the European Union recently adopted a directive addressing data privacy that may
limit the collection and use of some information regarding Internet users. This
directive may limit our ability to target advertising or collect and use
information in some European countries.
EMPLOYEES
As of March 9, 1999, we had 25 full-time employees, of which:
- five work in merchandising;
- four work in editorial and content development;
- three work in customer service;
- three work in sales and marketing;
- three work in technology development;
- four work in operations; and
- three work in administration.
None of our employees is represented by a labor union or is the subject of a
collective bargaining agreement. We consider relations with our employees to be
good.
LEGAL
There are no material legal proceedings pending, or to our knowledge,
threatened against our company.
FACILITIES
Our principal offices are located between New York City's Silicon Alley and
the Garment District at 115 West 30th Street, New York, New York 10001, where we
lease approximately 7,000 square feet of space. This lease expires in February
2002. We believe that our current facilities will be adequate to meet our needs
for the near future. Sufficient space is available on the current premises for
expansion. We do not own any real estate.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
Directors, executive officers and other key employees of Alloy, and their
ages, as of May 7, 1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Matthew C. Diamond................... 30 Chairman, Chief Executive Officer, Treasurer
and Director
James K. Johnson, Jr................. 32 Chief Operating Officer, President and Director
Samuel A. Gradess.................... 33 Chief Financial Officer, Secretary and Director
Neil I. Vogel........................ 29 Chief Corporate Development Officer
Andrew A. Roberts.................... 32 Vice President Business Development
Susan K. Kaplow...................... 31 Director of Internet Development
Joan D. Rosenstock................... 33 Marketing Director
Karen K. Ngo......................... 27 Creative Director
J. Scott Caldwell.................... 35 Director of Catalog Operations
Peter M. Graham...................... 44 Director
David Yarnell........................ 43 Director
</TABLE>
Matthew C. Diamond founded Alloy together with Mr. Johnson in January 1996,
and served as the Director of Marketing and Planning until January 1999. He has
served as a director of Alloy since July 1996, was appointed as Chief Executive
Officer in January 1999 and was elected Chairman of the Board in April 1999.
From 1991 to 1994, Mr. Diamond held a variety of financial and operations posts
at the GE Company, including a two-year business development assignment in Asia.
Mr. Diamond received his MBA from the Harvard Graduate School of Business in
1996 and his BA in Economics from the University of North Carolina at Chapel
Hill in 1991.
James K. Johnson, Jr. founded Alloy together with Mr. Diamond in January
1996 and has been a director since that time. He was appointed President of
Alloy in January 1997 and Chief Operating Officer in January 1999. From 1989 to
1996, Mr. Johnson held a variety of financial, operations and business
development positions with the GE Company. Mr. Johnson received his BA in
History from Hamilton College in 1989.
Samuel A. Gradess joined Alloy in July 1996 and has been a director since
that time. He was appointed as Secretary and Director of Finance and
Administration of Alloy in January 1997 and Chief Financial Officer in January
1999. From 1987 to 1997, Mr. Gradess was a Vice President at Goldman, Sachs &
Co., an investment bank. Mr. Gradess received his BA in Economics from the
University of Virginia in 1987.
Neil I. Vogel joined Alloy in February 1999 and has been Chief Corporate
Development Officer since that time. From 1993 to 1999, Mr. Vogel held various
positions in the Investment Banking department of Ladenburg Thalmann & Co. Inc.,
an investment bank, most recently Vice President in the Consumer and Internet
Group. Mr. Vogel received a BS in Economics from the Wharton School of Business
at the University of Pennsylvania in 1992.
Andrew A. Roberts joined Alloy in January 1999 and has been Vice President
Business Development since that time. From 1996 to 1999, Mr. Roberts was a
management consultant at PricewaterhouseCoopers LLP, focusing on developing
growth strategies for a variety of clients. Mr. Roberts received his MBA from
the Harvard Graduate School of Business in 1996, his MMHS from Brandeis
University 1992 and his BA from Brandeis University in 1991.
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<PAGE> 41
Susan K. Kaplow joined Alloy in March 1998 and has been Director of
Internet Development since that time. From 1994 to 1998, Ms. Kaplow held a
variety of positions at Seventeen Magazine including Senior Editor and Music
Editor. From 1992 to 1994, Ms. Kaplow served as a Staff Writer for Allure
magazine. Ms. Kaplow received her BA in English from the University of Maryland
in 1988.
Joan D. Rosenstock joined Alloy in August 1998 and has served as Director
of Marketing since that time. From 1995 to 1998, Ms. Rosenstock held a variety
of positions at NBA Properties, the marketing arm of the National Basketball
Association, most recently Director of Marketing. Ms. Rosenstock received her
MBA from the Harvard Graduate School of Business in 1995 and her BA in Liberal
Arts from the University of Michigan in 1987.
Karen K. Ngo joined Alloy in March 1997 and has been Creative Director
since that time. From 1996 to 1997, Ms. Ngo held a variety of positions at
Seventeen Magazine including Feature Editor and Fashion Stylist. From 1995 to
1996, Ms. Ngo served as a Production Coordinator for 2X4 Design Studios, a
photography studio. Ms. Ngo received her BA in Art from Yale University in 1993.
J. Scott Caldwell joined Alloy in January 1999 and has been Director of
Catalog Operations since that time. From 1998 to 1999, Mr. Caldwell was a Brand
Manager at Genesis Direct, a direct marketer. From 1996 to 1997, Mr. Caldwell
was a Principal of Authentic Sports Marketing, a direct marketer. From 1994 to
1996, Mr. Caldwell was a Marketing Manager with the Direct Marketing Division of
Killir Enterprises. Mr. Caldwell attended the University of Kansas.
Peter M. Graham has served as a director of Alloy since November 1998. He
has been the President and Chief Operating Officer of Ladenburg Thalmann Group
Inc. and Vice Chairman of its principal subsidiary, Ladenburg Thalmann & Co.
Inc., since 1994. Mr. Graham joined Ladenburg Thalmann & Co. Inc. in 1976 after
having attended the Wharton School of Business at the University of
Pennsylvania. Mr. Graham is a director of Regency Equities Corp. and Seventh
Generation, both of which are publicly traded companies. Mr. Graham was elected
to the board pursuant to a stockholders agreement that will terminate upon the
completion of this offering.
David Yarnell has served as a director of Alloy since November 1998. He has
been a Managing Member of Brand Equity Partners I, LLC since March 1997 and a
Vice President of Consumer Venture Partners since June 1993. From June 1991 to
June 1993, Mr. Yarnell served as President of Mexx USA, Inc., a contemporary
apparel company. Mr. Yarnell is a director of Cyberian Outpost, Inc., a publicly
traded online commerce company, and Buca di Beppo, a restaurant chain. He
received his MBA from the Harvard Graduate School of Business in 1982. Mr.
Yarnell was elected to the board pursuant to a stockholders agreement that will
terminate upon the completion of this offering.
EMPLOYMENT AGREEMENTS
All of our executive officers and key employees have entered into
agreements that contain non-competition, non-disclosure and non-solicitation
restrictions and covenants, including a provision prohibiting these officers
from competing with Alloy during their employment with us and for a period of
one year after termination of their employment with us. In addition, we have
entered into employment agreements with Matthew C. Diamond, James K. Johnson and
Samuel A. Gradess that will take effect upon the completion of this offering.
They will each receive initial annual base salaries of $150,000 and be eligible
for annual bonuses of up to 25% of base salary to be determined by a mutually
agreed-upon formula. The agreements further provide that, if we terminate any of
Messrs. Diamond, Johnson or Gradess without "cause", as defined in the
agreements, they will be entitled to severance pay equal to their annual base
salaries, payable in installments, for a period of 12 months from the date of
termination. If termination is voluntary, by Alloy for cause or as a result of
death or disability, we have no obligation to pay severance beyond the
individual's accrued base salary and bonus up to the date of termination. As of
February 22, 1999, we entered into an employment letter with Neil Vogel, our
Chief Corporate Development Officer. Mr. Vogel receives an annual salary of
$85,000. We also granted Mr. Vogel options to purchase 304,560 shares of our
common stock under our 1997 Restated Employee, Director and
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<PAGE> 42
Consultant Stock Option Plan. Except in some circumstances, his options have the
following vesting schedules and exercise prices:
- 28,200 options are currently exercisable at an exercise price equal to
the price paid by the public in this offering;
- 28,200 options will be exercisable on February 22, 2000 at an exercise
price equal to the price paid by the public in this offering;
- 56,400 options will be exercisable on February 22, 2001 at an exercise
price equal to 120% of the price paid by the public in this offering;
- 84,600 options will be exercisable on February 22, 2002 at an exercise
price equal to 150% of the price paid by the public in this offering; and
- 107,160 options will be exercisable on February 22, 2003 at an exercise
price equal to 175% of the price paid by the public in this offering.
Mr. Vogel is eligible for any bonus and benefits we offer to our executive
officers.
BOARD OF DIRECTORS
Upon the completion of this offering, our board of directors will be
divided into three classes as nearly equal in number as possible. Each year the
stockholders will elect the members of one of the three classes to a three-year
term of office. Mr. Graham and Mr. Yarnell will serve in the class whose term
expires in the year 2000, Mr. Gradess will serve in the class whose term expires
in the year 2001 and Mr. Diamond and Mr. Johnson will serve in the class whose
term expires in the year 2002.
BOARD COMMITTEES
The compensation committee of the board of directors determines the
salaries and incentive compensation of our officers and provides recommendations
for the salaries and incentive compensation of our other employees. The
compensation committee also administers our 1997 Restated Employee, Director and
Consultant Stock Option Plan. The members of the compensation committee are
Messrs. Graham and Yarnell.
The audit committee of the board of directors reviews, acts on and reports
to the board of directors with respect to various auditing and accounting
matters, including the selection of our independent auditors, the scope of the
annual audits, fees to be paid to the auditors, the performance of our
independent auditors and our accounting practices. The members of the audit
committee are Messrs. Graham and Yarnell.
DIRECTORS COMPENSATION
Directors are reimbursed for reasonable out-of-pocket expenses incurred in
attending board meetings. Non-employee directors receive no directors' fees, but
directors are eligible to receive grants of non-qualified stock options under
our 1997 Restated Employee, Director and Consultant Stock Option Plan. Messrs.
Graham and Yarnell, as non-employee directors, will each receive an option to
purchase 40,000 shares of common stock, at an exercise price equal to the
initial public offering price, effective on the closing of this offering. These
options will vest in equal annual installments of 10,000 shares over four years.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee of the board of directors consists of Messrs.
Graham and Yarnell, neither of whom has been an officer or employee of Alloy at
any time since our inception. No executive officer of Alloy serves as a member
of the board of directors or compensation committee of any entity that has one
or more executive officers serving as a member of our board of directors or
compensation
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<PAGE> 43
committee. Prior to the formation of the compensation committee, the board of
directors as a whole made decisions relating to the compensation of our
executive officers.
KEY PERSON LIFE INSURANCE
Alloy has purchased and presently maintains key person life insurance
policies in the amount of $2.0 million on the lives of each of Messrs. Diamond,
Johnson and Gradess.
EXECUTIVE COMPENSATION
Summary Compensation. The table below sets forth the compensation earned
during the fiscal year ended January 31, 1999 by our chief executive officer. No
other executive officer or employee of Alloy received compensation in excess of
$100,000 in the fiscal year ended January 31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION(1)
NAME AND PRINCIPAL POSITION SALARY
--------------------------- ---------------
<S> <C>
Matthew C. Diamond $70,000
Chief Executive Officer, Treasurer and Director
</TABLE>
- ------------
(1) The columns for "Bonus" and "Other Annual Compensation" have been omitted
because there is no compensation required to be reported.
OPTION GRANTS IN LAST FISCAL YEAR
Alloy did not grant any options to Mr. Diamond during the fiscal year ended
January 31, 1999.
OPTION EXERCISES AND YEAR-END OPTION
Mr. Diamond did not exercise any options to purchase securities of Alloy
during the fiscal year ended January 31, 1999 and did not hold any options as of
January 31, 1999.
EMPLOYEE BENEFIT PLANS
Restated 1997 Employee, Director and Consultant Stock Option Plan. The
following description of Alloy's Restated 1997 Employee, Director and Consultant
Stock Option Plan is a summary and qualified in its entirety by the text of the
plan, which is filed as an exhibit to the registration statement of which this
prospectus is a part.
The purpose of the plan is to enhance the profitability and value of Alloy
for the benefit of its stockholders by enabling Alloy to offer to employees,
directors and consultants stock based incentives. This is a means to both
increase the ownership of Alloy held by those individuals in order to attract,
retain and reward them and strengthen the mutual interests between those
individuals and the stockholders of Alloy. The plan authorizes the grant of
options to purchase shares of common stock to employees, directors and
consultants of Alloy and its affiliates. Under the plan, Alloy may grant
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986 and non-qualified stock options. Incentive stock options
may only be granted to employees of Alloy.
The plan was approved by Alloy's board of directors and its stockholders in
June 1997 and subsequently amended by the board of directors and stockholders in
April 1999. A total of 4,000,000 shares are reserved for issuance under the
plan. As of the date of this prospectus, 362,481 shares had been issued as the
result of the exercise of options, 807,232 shares were subject to outstanding
options and 2,830,287 shares were available for future grants. The plan is
administered by the compensation committee of the board. Subject to the
provisions of the plan, the committee has authority to determine the
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<PAGE> 44
employees, directors and consultants of Alloy who are to be awarded options and
the terms of these awards, including:
- the number of shares subject to an option;
- when the option becomes exercisable;
- the option exercise price per share; and
- the duration of the option.
Incentive stock options must have an exercise price equal to at least 100%
(110% if the grant is to a stockholder holding more than 10% of Alloy's voting
stock) of the fair market value of a share on the date of the award and
generally cannot have a duration of more than ten years (five years if the grant
is to a stockholder holding more than 5% of Alloy's voting stock). Terms and
conditions of awards are in written agreements between Alloy and the holders of
the options. Awards under the plan may not be made after the tenth anniversary
of the date of its adoption but awards granted before that date may extend
beyond that date.
If the employment with Alloy of the holder of an incentive stock option is
terminated for any reason other than as a result of the holder's death or
disability or for "cause" as defined in the plan, the holder may exercise the
option, to the extent exercisable on the date of termination of employment,
until the earlier of the option's specified expiration date and 90 days after
the date of termination. If an option holder dies or becomes disabled, both
incentive and non-qualified stock options may generally be exercised, to the
extent exercisable on the date of death or disability, by the option holder or
the option holder's survivors until the earlier of the option's specified
termination date and one year after the date of death or disability. If an
option holder's employment with Alloy is terminated for cause, all outstanding
and unexercised options are forfeited.
Under the Restated 1997 Employee, Director and Consultant Stock Option
Plan, any non-employee or non-affiliate director first elected or appointed to
the board following the consummation of this offering will be granted a
non-qualified stock option to purchase 40,000 shares of our common stock as of
the date of election or appointment to the board. If the director has been in
continuous and uninterrupted service to the board on the fourth anniversary of
election or appointment, the director will be granted another non-qualified
stock option to purchase 40,000 shares of our common stock. Similarly, Messrs.
Graham and Yarnell, our current non-employee directors, have received options on
the same terms. Each of these options will vest in equal annual installments of
10,000 shares over four years and each has a term of ten years.
Employee Stock Purchase Plan. On April 16, 1999, the board of directors
adopted the 1999 Employee Stock Purchase Plan. This plan will be submitted for
approval by our stockholders prior to the closing of this offering. The 1999
Employee Stock Purchase Plan authorizes the issuance of a maximum of 500,000
shares of common stock to participating employees through the grant of
nontransferable options.
The 1999 Employee Stock Purchase Plan is administered by the board's
compensation committee. All employees working 20 hours or more per week for more
than five months of the year and who have been with Alloy for at least three
consecutive months are eligible to participate. Employees who own more than 5%
of Alloy's stock may not participate in the 1999 Employee Stock Purchase Plan.
To participate in the 1999 Employee Stock Purchase Plan, an employee authorizes
a deduction from his or her pay, not to exceed $21,250 per year, beginning on
the first day of a designated six month offering period. On the first day of
each of these offering periods, twice per year, each participating employee
receives an option to purchase Alloy shares at an exercise price which is the
lesser of 85% of the fair market value of Alloy's common stock on the first or
last business day of the particular offering period. On the last day of each
offering period, each outstanding option granted under the 1999 Employee Stock
Purchase Plan is automatically exercised using funds withheld from each
employee's compensation as of that date. A participating employee may withdraw
from the 1999 Employee Stock Purchase Plan at any time.
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<PAGE> 45
401(k) Plan. Effective January 1, 1999, we instituted the Alloy Online,
Inc. 401(k) Savings Plan (the "401(k) Plan"). Eligible employees of the Company
who are at least 21 years of age may begin making deferrals under the 401(k)
Plan as of the first month following their date of hire, or the date they become
otherwise eligible. The 401(k) Plan is intended to be a qualified plan under
Internal Revenue Code Section 401(a), with a cash or deferred option governed by
Section 401(k) of the Internal Revenue Code. Employees may elect to defer their
eligible current compensation up to the statutorily and 401(k) Plan prescribed
limits and have the amount of such deferral contributed to the 401(k) Plan.
Contributions to the 401(k) Plan are invested in the investment funds described
in the 401(k) Plan.
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<PAGE> 46
CERTAIN TRANSACTIONS
DIRECTORS AND EXECUTIVE OFFICERS
On January 22, 1996, Mr. Diamond, our chairman and chief executive officer,
and Mr. Johnson, our chief operating officer, each purchased 1,353,600 shares of
our common stock for a purchase price of $0.03695 per share which they paid in
cash (60%) and by contribution of services (40%). Mr. Gradess, our chief
financial officer, purchased 1,353,600 shares of common stock in September 1996
for a purchase price of $.11081 per share in cash.
COMMON STOCK OFFERINGS
June 1997 Offering. In June 1997, Alloy raised gross proceeds of
approximately $2.36 million from the issue and sale of a total of 2,732,219
shares of common stock in a private placement to 36 investors at a price of
$0.87 per share. Each purchaser of shares in the offering also received a
warrant to purchase additional shares of our common stock for nominal
consideration which provided these purchasers with dilution protection in the
event of specified future sales of equity securities by Alloy prior to June 30,
1998. These warrants were exercised in July 1998 and resulted in the issuance of
an additional 711,560 shares of common stock to the purchasers. Purchasers
included the following individuals who are members of the immediate families of
directors and executive officers of Alloy:
<TABLE>
<CAPTION>
ADDITIONAL SHARES
NUMBER OF SHARES ACQUIRED UPON EXERCISE OF
NAME RELATIONSHIP PURCHASED WARRANTS IN JULY 1998
- ---- -------------------------- ----------------- --------------------------
<S> <C> <C> <C>
Robert D. Diamond........ Father of Matthew Diamond 69,316 18,053
Stuart Gradess........... Father of Samuel Gradess 28,882 7,521
Anita R. Johnson......... Mother of James Johnson 34,657 9,026
</TABLE>
Mr. Robert E. Kerson, uncle of Matthew Diamond and a beneficial owner of
more than five percent of our common stock, purchased 138,633 shares of common
stock in the offering at a price of $0.87 per share and upon exercise of the
warrant associated with these shares acquired an additional 36,104 shares in
July 1998. These shares are held by Mr. Kerson and his wife, Miriam K. Kerson,
as Joint Tenants with Right of Survivorship.
January 1998 Offering. In January 1998, Alloy raised gross proceeds of
approximately $1.69 million from the issue and sale of a total of 975,148 shares
of common stock in a private placement to 19 investors at a price of $1.73 per
share. Purchasers included the following individuals who are members of the
immediate families of directors and executive officers of Alloy:
<TABLE>
<CAPTION>
NAME RELATIONSHIP NUMBER OF SHARES PURCHASED
- ---- --------------------------- ---------------------------
<S> <C> <C>
Robert D. Diamond....................... Father of Matthew Diamond 57,821
David M. Diamond........................ Brother of Matthew Diamond 11,564
Joseph Diamond.......................... Brother of Matthew Diamond 5,782
Amy K. Diamond.......................... Sister of Matthew Diamond 5,782
Michael K. Diamond...................... Brother of Matthew Diamond 5,782
Jeffrey Speer and Joy Diamond, JTWROS... Brother-in-law and Sister
of Matthew Diamond 30,355
</TABLE>
Mr. Kerson purchased 173,463 shares of common stock in the offering at a
price of $1.73 per share. These shares are held by Mr. Kerson and his wife as
Joint Tenants with Right of Survivorship.
OFFERING OF NOTES AND WARRANTS
In May 1998, Alloy raised gross proceeds of approximately $3.81 million
from the issue and sale of promissory notes together with warrants to purchase a
total of 480,682 shares of common stock in a private
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<PAGE> 47
placement to 31 investors. The notes bear an interest rate of 10% per annum
compounded quarterly, payable at maturity and are repayable on the first to
occur of:
- May 13, 2001;
- the closing of this offering; and
- other transactions constituting a change in control of Alloy.
Accordingly, Alloy will be obligated to repay the notes from the proceeds
of this offering. The warrants are exercisable until May 12, 2001 and had an
initial exercise price of $5.465 per share. The exercise price was reduced to
$5.035 per share as a result of the sale of shares of convertible preferred
stock at a price of $3.391 per share in November 1998 and February 1999.
Purchasers of the notes and the warrants included the following individuals who
are members of the immediate families of directors and executive officers of
Alloy:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT SHARES REPRESENTED
NAME RELATIONSHIP OF NOTE BY WARRANT
- ---- ------------ ---------------- ------------------
<S> <C> <C> <C>
Robert D. Diamond...... Father of Matthew Diamond $ 5,000 630
David M. Diamond....... Brother of Matthew Diamond $35,000 4,416
Joseph Diamond......... Brother of Matthew Diamond $10,000 1,262
Amy K. Diamond......... Sister of Matthew Diamond $ 5,000 630
Michael K. Diamond..... Brother of Matthew Diamond $ 5,000 630
Joy Diamond............ Sister of Matthew Diamond $ 5,000 630
</TABLE>
Mr. Peter Graham, who became a director of Alloy in November 1998 and is
President and Chief Operating Officer of Ladenburg Thalmann Group Inc. and Vice
Chairman of its principal subsidiary, Ladenburg Thalmann & Co. Inc., an
underwriter in connection with this offering, purchased notes in the principal
amount of $500,000 together with warrants to purchase a total of 63,084 shares
of common stock.
CONVERTIBLE PREFERRED STOCK OFFERING
In November 1998 and February 1999, Alloy raised gross proceeds of
approximately $5.05 million from the issue and sale of a total of 1,487,843
shares of convertible preferred stock in a private placement to two investors at
a price of $3.391 per share. Brand Equity Ventures I, L.P., a five percent
beneficial stockholder of Alloy, purchased a total of 1,474,573 shares of
convertible preferred stock at a price of $3.391 per share. David Yarnell, a
director of Alloy, is a Managing Member of Brand Equity Partners I, LLC, the
General Partner of Brand Equity Ventures I, L.P., and was elected to our board
of directors pursuant to a stockholders agreement that terminates upon the
closing of this offering.
Upon the closing of this offering, each outstanding share of convertible
preferred stock will be converted into 1.128 shares of common stock.
TRANSACTIONS WITH LADENBURG THALMANN & CO. INC.
In April 1998, Alloy entered into a letter agreement with Ladenburg
Thalmann & Co. Inc., an underwriter of this offering. In accordance with the
terms of this agreement, Ladenburg acted as placement agent for Alloy's offering
of promissory notes and warrants in May 1998, for which Alloy paid Ladenburg a
fee consisting of $122,903 in cash and a warrant to purchase 25,299 shares of
common stock with an initial exercise price of $5.465 per share. The terms of
this warrant are substantially the same as those of the warrants issued to the
purchasers of notes and warrants in May 1998 and the exercise price was also
reduced to $5.035 per share following the subsequent sale of shares of our
convertible preferred stock.
In October 1998, Alloy entered into a second letter agreement with
Ladenburg that provided for Alloy to pay Ladenburg placement fees for sales of
securities by Alloy equal to three percent of the value of any securities sold
by Alloy to Brand Equity Ventures. In December 1998 and February 1999 and in
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<PAGE> 48
accordance with the terms of this letter agreement, Alloy paid Ladenburg fees
totaling $150,000 in connection with the sale of shares of convertible preferred
stock.
OTHER TRANSACTIONS
Alloy has had an oral agreement since June 1997 with Mr. Kerson, uncle of
Matthew Diamond, regarding consulting services. In August 1998, as consideration
for these consulting services, and in replacement of an earlier arrangement,
Alloy granted Mr. Kerson a non-qualified option at an exercise price of $0.709
per share to purchase 282,000 shares of common stock under Alloy's 1997 Restated
Employee, Director and Consultant Stock Option Plan. Alloy recorded compensation
expense of $668,000 in connection with this option grant. In connection with the
grant of this option to Mr. Kerson, Alloy also entered into a letter agreement
with Mr. Kerson in which Alloy agreed to pay Mr. Kerson a bonus equal to the
exercise price of the option upon its exercise. On March 5, 1999, Mr. Kerson
exercised this option.
Joseph Diamond, brother of Matthew Diamond, is employed by Alloy as a
business analyst. In the fiscal year ended January 31, 1999, Alloy paid Joseph
Diamond total compensation of $34,000 in cash. In September 1997, Alloy granted
him options to purchase 13,863 shares of common stock at an exercise price of
$0.361 per share. In March 1998, Alloy granted him options to purchase 8,673
shares of common stock at an exercise price of $0.433 per share and in February
1999, Alloy granted him options to purchase 6,768 shares of common stock at an
exercise price of $0.60 per share. In connection with the September 1997 and
March 1998 grants, Alloy entered into letter agreements with Joseph Diamond in
which Alloy agreed to pay him bonuses equal to the exercise price of the options
upon their exercise. On March 5, 1999, Joseph Diamond exercised the options
granted to him in 1997 and 1998. Through January 31, 1999, Alloy recognized a
total of $35,000 in compensation expense related to the 1997 and 1998 option
grants.
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<PAGE> 49
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of Alloy's common stock as of March 5, 1999, and as adjusted to
reflect the sale of the shares of common stock offered by this prospectus, by:
- each person, or group of affiliated persons, who Alloy knows beneficially
owns 5% or more of the common stock;
- each director and named executive officer of Alloy; and
- all directors and executive officers of Alloy as a group.
In accordance with the SEC's rules, the following table gives effect to the
shares of common stock that could be issued upon the exercise of outstanding
options and warrants within 60 days of March 5, 1999. Unless otherwise indicated
in the footnotes to the table,
- the following individuals have sole vesting and sole investment control
with respect to the shares they beneficially own; and
- the address of each beneficial owner listed below is c/o Alloy Online,
Inc. 115 West 30th Street, Suite 201, New York, NY 10001.
<TABLE>
<CAPTION>
PERCENT
BENEFICIALLY OWNED
-----------------------
NUMBER BEFORE AFTER
NAME OF BENEFICIAL OWNER OF SHARES OFFERING OFFERING(1)
- ------------------------ --------- -------- -----------
<S> <C> <C> <C>
Executive Officers and Directors:
Matthew C. Diamond(1)....................................... 1,353,600 12.9% 9.5%
James K. Johnson, Jr(1)..................................... 1,353,600 12.9 9.5
Samuel A. Gradess(1)........................................ 1,353,600 12.9 9.5
Neil I. Vogel(2)............................................ 32,616 * *
Peter M. Graham(3).......................................... 151,466 1.4 1.0
David Yarnell(4)............................................ 1,663,318 15.8 11.7
All directors and executive officers as a group (6
persons)(5)............................................... 5,908,200 55.2 41.0
Other 5% Stockholders:
Brand Equity Ventures I, L.P.(6)............................ 1,663,318 15.8 11.7
Robert E. Kerson(7)......................................... 630,200 6.0 4.4
</TABLE>
- ------------
* Less than one percent
(1) Consists of shares held of record by each of Messrs. Diamond, Johnson and
Gradess. Does not include a total of 4,781,408 shares of common stock over
which each of them has voting control pursuant to an irrevocable proxy
granted under a Stockholders and Voting Agreement dated August 19, 1997.
Counting these shares, each of Messrs. Diamond, Johnson and Gradess may be
deemed to beneficially own a total of 6,135,008 shares, or 58.3% of the
outstanding stock prior to this offering. The Stockholders and Voting
Agreement and the proxy granted thereunder terminate upon the completion of
this offering.
(2) Includes 28,200 shares subject to currently exercisable options and 4,416
shares subject to a currently exercisable warrant.
(3) Consists of (1) 63,084 shares subject to currently exercisable warrants held
by Mr. Graham, (2) 63,083 shares subject to a currently exercisable warrant
held by The LLZ 1997 Trust and (3) 25,299 shares subject to a currently
exercisable warrant held by Ladenburg Thalmann & Co. Inc. Mr. Graham is a
trustee of The LLZ 1997 Trust and shares voting and investment power over
its shares. However, Mr. Graham has no pecuniary interest in the trust's
shares and therefore expressly disclaims beneficial ownership of these
shares. Mr. Graham is President and Chief Operating Officer
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<PAGE> 50
of Ladenburg Thalmann Group Inc. and Vice Chairman of its principal
subsidiary, Ladenburg Thalmann & Co. Inc. Mr. Graham expressly disclaims
beneficial ownership of the shares held by Ladenburg Thalmann & Co. Inc.,
except to the extent of his pecuniary interest therein. The address for
Ladenburg Thalmann & Co. Inc. is 590 Madison Avenue, New York, NY 10022.
(4) Consists of 1,663,318 shares owned by Brand Equity Ventures I, L.P. Mr.
Yarnell is a Managing Member of Brand Equity Partners I, LLC, the General
Partner of Brand Equity Ventures I, LP. Brand Equity Partners I, LLC has
sole voting and investment power with respect to these shares. Mr. Yarnell
expressly disclaims beneficial ownership of these shares, except to the
extent of his pecuniary interest therein. The address for Brand Equity
Partners I, LLC and Brand Equity Ventures I, LP is Three Pickwick Plaza,
Greenwich, Connecticut 06830.
(5) See footnotes 1 through 4 above.
(6) Brand Equity Partners I, LLC, the General Partner of Brand Equity Ventures
I, L.P., has sole voting and investment power with respect to these shares.
(7) All of these shares are held by Mr. Kerson and his wife, Miriam K. Kerson,
as Joint Tenants with Right of Survivorship.
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<PAGE> 51
DESCRIPTION OF CAPITAL STOCK
We are authorized to issue 50,000,000 shares of common stock, par value
$.01 per share, and 5,000,000 shares of preferred stock, par value $.01 per
share. Upon completion of this offering, there will be 14,231,774 shares of
common stock and no shares of preferred stock outstanding. As of April 21, 1999,
we had 8,842,208 shares of common stock outstanding held of record by 59
stockholders.
COMMON STOCK
Holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders and do not have
cumulative voting rights. Subject to preferences that may be applicable to any
outstanding shares of preferred stock, holders of common stock are entitled to
receive ratably such dividends, if any, as may be declared by our board of
directors out of funds legally available therefor. All outstanding shares of
common stock are fully paid and nonassessable, and the holders of common stock
have no preferences or rights of conversion, exchange or preemption. In the
event of any liquidation, dissolution or winding-up of our affairs, holders of
common stock will be entitled to share ratably in our assets that are remaining
after payment or provision for payment of all of our debts and obligations and
after liquidation payments to holders of outstanding shares of preferred stock,
if any.
PREFERRED STOCK
Upon the closing of this offering, all of our outstanding shares or
convertible preferred stock will convert into 1,678,286 shares of common stock
after giving effect to the stock split. These shares of convertible preferred
stock will no longer be authorized, issued or outstanding after completion of
this offering.
The preferred stock, if issued, would have priority over the common stock
with respect to dividends and other distributions, including the distribution of
assets upon liquidation. Our board of directors has the authority, without
further stockholder authorization, to issue from time to time shares of
preferred stock in one or more series and to fix the terms, limitations,
relative rights and preferences and variations of each series. We have no
present plans to issue any shares of preferred stock. See "-- Anti-Takeover
Effects of Various Provisions of Delaware Law and Alloy's Restated Certificate
of Incorporation and Bylaws."
WARRANTS
As of the date of this prospectus, warrants to purchase a total of 505,981
shares of common stock are held by Ladenburg Thalmann & Co. Inc. and 31 other
holders. The warrants were issued in connection with the sale of our promissory
notes in May 1998. These warrants are currently exercisable at an exercise price
of $5.035 per share and expire on May 12, 2001. The number of shares for which
each of the warrants described above is exercisable is subject to adjustment
upon changes in our capital structure, including stock splits, combinations or
dividends and reclassifications, exchanges or substitutions.
REGISTRATION RIGHTS
Convertible Preferred Stock. The 1,487,843 shares of convertible preferred
stock outstanding will be automatically converted into shares of common stock in
connection with this offering. Pursuant to a stockholders agreement, the
convertible preferred stockholders are entitled to specified registration rights
with respect to the registration of their shares of common stock under the
Securities Act of 1933. Subject to various exceptions and after this public
offering, if we propose to register shares of the common stock under the
Securities Act, these holders are entitled to notice of the registration and are
entitled to include their shares of common stock in the registration at our
expense. If the registration is underwritten, the managing underwriters have the
right to limit the number of shares included in the registration. Subject to
various conditions and limitations, these holders may require us, at our expense
but on not more than two occasions, to file a registration statement under the
Securities Act with respect to their shares of common stock. These rights to
require registration may not be exercised until November 24, 2001. Subject to
50
<PAGE> 52
various conditions and limitations, these holders may also require us, at our
expense, to register their shares of common stock on Form S-3 when we become
eligible to use such form.
Warrant Holders. Pursuant to the terms of their warrants, holders of
warrants to purchase a total of 505,981 shares of common stock are also entitled
to specified rights with respect to the registration of their shares of common
stock under the Securities Act. Subject to various and customary exceptions, if
we propose to register shares of the common stock under the Securities Act,
other than this offering, holders are entitled to notice of the registration and
are entitled to include their shares of common stock in the registration at our
expense. If the registration is underwritten, the managing underwriters have the
right to limit the number of shares included in the registration. Subject to
conditions and limitations and our reasonable commercial judgment, we are
obligated to file a registration statement, but not on more than one occasion,
covering the shares of common stock underlying such warrants within one year
after the closing of this offering.
ANTI-TAKEOVER EFFECTS OF VARIOUS PROVISIONS OF DELAWARE LAW AND ALLOY'S
CERTIFICATE OF INCORPORATION AND BYLAWS
After the closing of this offering, we will be subject to the anti-takeover
provisions of Section 203 of the Delaware General Corporation Law. In general,
Section 203 prohibits a publicly-held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the interested stockholders attained that status with the
approval of the board of directors or unless the business combination is
approved in a prescribed manner. "Business combinations" include mergers, asset
sales and other transactions resulting in a financial benefit to the interested
stockholder. Generally, an "interested stockholder" is a person who, together
with his affiliates and associates, owns, or within the prior three years did
own, 15% or more of the corporation's voting stock. This statute could prohibit
or delay the accomplishment of mergers or other takeover or change of control
attempts with respect to Alloy and, accordingly, may discourage attempts to
acquire us.
In addition, our certificate of incorporation and bylaws that will be in
effect upon the closing of this offering and are summarized below may delay,
defer or prevent a tender offer or takeover attempt that a stockholder might
consider in its best interest, including those attempts that might result in a
premium over the market price for the shares held by stockholders.
Classified Board of Directors. Following the completion of this offering,
our board of directors will be divided into three classes serving staggered
three-year terms. As a result, approximately one-third of the board of directors
will be elected each year. These provisions are likely to increase the time
required for stockholders to change the composition of our board of directors.
For example, in general, at least two annual meetings will be necessary for
stockholders to effect a change in the majority of our board of directors.
Advance Notice Requirements for Stockholder Proposals and Director
Nominees. Our bylaws provide that, for nominations to the board of directors or
for other business to be properly brought by a stockholder before a meeting of
stockholders, the stockholder must first have given timely notice of the
proposal in writing to our Secretary. For an annual meeting, a stockholder's
notice generally must be delivered not less than 45 days nor more than 75 days
prior to the anniversary of the preceding year's mailing date. For a special
meeting, the notice must generally be delivered not later than the later of 90
days prior to the special meeting or ten days following the day on which public
announcement of the meeting is first made. Detailed requirements as to the form
of the notice and information required in the notice are specified in our
bylaws. If it is determined that business was not properly brought before a
meeting in accordance with our bylaw provisions, such business will not be
conducted at the meeting.
Stockholder Action; Special Meeting of Stockholders. Our restated
certificate of incorporation does not permit our stockholders to act by written
consent. As a result, any action to be effected by our stockholders must be
effected at a duly called annual or special meeting of the stockholders. Special
meetings of the stockholders may be called only by our board of directors.
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<PAGE> 53
Amendment of Certificate of Incorporation or Bylaws. The Delaware General
Corporation Law generally provides that the affirmative vote of a majority of
the shares entitled to vote on any matter is required to amend a corporation's
certificate of incorporation or bylaws, unless the corporation's certificate of
incorporation or bylaws, as the case may be, requires a greater percentage. Our
restated certificate of incorporation requires the affirmative vote of the
holders of at least 70% of our outstanding voting stock to amend or repeal any
of the provisions discussed in this section or to reduce the number of
authorized shares of common stock or preferred stock. This 70% stockholder vote
would be in addition to any separate class vote that might in the future be
required pursuant to the terms of any preferred stock that might then be
outstanding. A 70% vote is also required for any amendment to, or repeal of, our
bylaws by the stockholders. Our bylaws may also be amended or repealed by a
simple majority vote of the board of directors.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
As permitted by the Delaware General Corporation Law, our restated
certificate of incorporation includes a provision that eliminates the personal
liability of our directors for monetary damages for breaches of fiduciary duty
as a director, except for liability:
- for any breach of the director's duty of loyalty to Alloy or its
stockholders;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the Delaware General Corporation Law regarding
unlawful dividends and stock purchases; or
- for any transaction from which the director derived an improper personal
benefit.
Our bylaws generally provide that we must indemnify our directors and
officers to the fullest extent permitted by Delaware law and advance expenses to
such directors or officers to defend any action for which rights of
indemnification are provided. In addition, our restated certificate of
incorporation and bylaws also permit us to grant such rights to indemnification
to our employees and agents. Our bylaws also provide that we may enter into
indemnification agreements with our directors and officers and purchase
insurance on behalf of any person whom we are required or permitted to
indemnify. We have obtained liability insurance for our officers and directors.
We are not aware of any threatened litigation or proceeding that may result in a
claim for indemnification.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is American Stock
Transfer & Trust Company, New York, New York.
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<PAGE> 54
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has not been any public market for our common
stock, and no prediction can be made as to the effect, if any, that sales of
shares of common stock or the availability of shares of common stock for sale
will have on the market price of the common stock prevailing from time to time.
Nevertheless, sales of substantial amounts of common stock in the public market,
or the perception that these sales could occur, could adversely affect the
market price of our common stock and could impair our future ability to raise
capital through the sale of our equity securities.
Upon the completion of this offering, we will have a total of 14,231,774
shares of common stock outstanding, assuming no exercise of the underwriters'
over-allotment option and no exercise of options or warrants outstanding. Of the
outstanding shares, the 3,700,000 shares sold in this offering will be freely
tradeable, except that any shares purchased by our "affiliates" (as that term is
defined in Rule 144 promulgated under the Securities Act) may be sold only in
compliance with the limitations described below. The remaining shares of common
stock will be deemed "restricted securities" as defined under Rule 144 and may
not be sold publicly unless they are registered under the Securities Act or are
sold pursuant to Rule 144 or another exemption from registration. Substantially
all of our other stockholders, holding a total of 10,531,774 shares, have agreed
that they will not sell, directly or indirectly, any shares of common stock
without the prior written consent of BancBoston Robertson Stephens Inc. for a
period of 180 days from the date of this prospectus. Subject to these lock-up
agreements, the shares of common stock outstanding upon the completion of this
offering will be available for sale in the public market as follows:
<TABLE>
<CAPTION>
APPROXIMATE
NUMBER OF
SHARES DESCRIPTION
----------- -----------
<C> <S>
3,700,000 After the date of this prospectus, freely tradeable shares
sold in this offering and shares saleable under Rule 144(k)
that are not subject to the 180-day lock-up
0 After 90 days from the date of this prospectus, additional
shares saleable under Rule 144 that are not subject to the
180-day lock-up
10,158,013 After 180 days from the date of this prospectus, the 180-day
lock-up is released and these additional shares are saleable
under Rule 144 (subject, in some cases, to volume
limitations), or Rule 144(k)
373,761 Over 180 days from the date of this prospectus, restricted
shares that are held for less than one year and are not yet
saleable under Rule 144
</TABLE>
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are required to be aggregated), including an affiliate, who has
beneficially owned shares for at least one year is entitled to sell, within any
three-month period commencing 90 days after the date of this prospectus, a
number of shares that does not exceed the greater of (1) 1% of the then
outstanding shares of common stock which will equal approximately 142,317 shares
after the closing of this offering or (2) the average weekly trading volume in
the common stock during the four calendar weeks preceding the date on which
notice of the sale is filed, subject to various restrictions. In addition, a
person who is not deemed to have been an affiliate of ours at any time during
the 90 days preceding a sale and who has beneficially owned the shares proposed
to be sold for at least two years would be entitled to sell those shares under
Rule 144(k) without regard to the requirements described above. To the extent
that shares were acquired from an affiliate, this person's holding period for
the purpose of effecting a sale under Rule 144 begins on the date of transfer
from the affiliate.
Upon completion of this offering, options and warrants to purchase a total
of 1,313,213 shares of common stock were outstanding, of which 559,181 were
exercisable. Upon the completion of this offering, we intend to file a
registration statement to register for resale the 3,637,519 shares of common
stock reserved for issuance under our Restated 1997 Employee, Director and
Consultant Stock Option Plan. That registration statement will become effective
immediately upon filing. Accordingly, shares covered by that registration
statement will become eligible for sale in the public market subject to vesting
restrictions
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<PAGE> 55
or the lock-up agreements with BancBoston Robertson Stephens Inc. Holders of
options to purchase 807,232 shares of common stock and holders of warrants to
purchase 502,828 shares of common stock have entered into lock-up agreements.
We have agreed not to sell or otherwise dispose of any shares of common
stock during the 180-day period following the date of the prospectus, except we
may issue, and grant options to purchase, shares of common stock under the 1997
Restated Employee, Director and Consultant Stock Option Plan.
Following this offering, under specified conditions and subject to
customary exceptions, holders of 1,678,286 shares of common stock will have
demand registration rights with respect to their shares of common stock (subject
to the 180-day lock-up arrangement described above) to require us to register
their shares of common stock under the Securities Act, and they will have rights
to participate in any future registration of securities by us. We are not
required to effect more than a total of two demand registrations on behalf of
these holders. In addition, under specified conditions and subject to customary
exceptions, holders of warrants to purchase a total of 505,981 shares of common
stock are entitled to demand registration rights with respect to their shares of
common stock (subject to the 180-day lock-up arrangement described above). They
also have rights to participate in any future registration of securities by us.
Under the terms of the warrants, we are obligated to file a registration
statement covering the shares of common stock underlying the warrants within a
year after the completion of this offering.
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<PAGE> 56
UNDERWRITING
The underwriters named below, acting through their representatives,
BancBoston Robertson Stephens Inc., Volpe Brown Whelan & Company, LLC, Dain
Rauscher Wessels, a division of Dain Rauscher Incorporated, and Ladenburg
Thalmann & Co. Inc. (the "Representatives") have severally agreed with us,
subject to the terms and conditions of the underwriting agreement, to purchase
from us the number of shares of common stock set forth opposite their names
below. The underwriters are committed to purchase and pay for all these shares
if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ----------
<S> <C>
BancBoston Robertson Stephens Inc. .........................
Volpe Brown Whelan & Company, LLC...........................
Dain Rauscher Wessels.......................................
Ladenburg Thalmann & Co. Inc. ..............................
----------
Total............................................. 3,700,000
==========
</TABLE>
The Representatives have advised us that the underwriters propose to offer
the shares of common stock to the public at the public offering price on the
cover page of this prospectus and to some dealers at such price less a
concession of not in excess of $ per share, of which $ may be
reallowed to other dealers. After this offering, the public offering price,
concession, and reallowance to dealers may be reduced by the Representatives.
This reduction shall not change the amount of proceeds to be received by us as
stated on the cover page of this prospectus. The common stock is offered by the
underwriters as stated herein, subject to receipt and acceptance by them and
subject to their right to reject any order in whole or in part.
Over-Allotment Option. We have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to 555,000 additional shares of common stock at the same price per
share as we will receive for the 3,700,000 shares that the underwriters have
agreed to purchase. To the extent that the underwriters exercise this option,
each of the underwriters will have a firm commitment to purchase approximately
the same percentage of the additional shares that the number of shares of common
stock to be purchased by it shown in the above table represents as a percentage
of the 3,700,000 shares offered hereby. If purchased, these additional shares
will be sold by the underwriters on the same terms as those on which the
3,700,000 shares are being sold. We will be obligated, pursuant to the option,
to sell shares to the extent the option is exercised. The underwriters may
exercise this option only to cover over-allotments made in connection with the
sale of the shares of common stock offered hereby. If this option is exercised
in full, the total price to public, underwriting discounts and commissions and
proceeds to company will be $55.3 million, $3.9 million and $51.4 million,
respectively.
Directed Share Program. At our request, the underwriters have reserved up
to 125,000 shares of common stock to be issued by us and offered hereby for
sale, at the initial public offering price, to our directors, officers,
employees, business associates and persons otherwise related to Alloy. The
number of shares of common stock available for sale to the general public will
be reduced to the extent these individuals purchase these reserved shares. The
underwriters will offer any reserved shares that are not so purchased to the
general public on the same basis as the other shares offered hereby.
Indemnity. The underwriting agreement contains covenants of indemnity
among the underwriters and us against various civil liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.
Lock-Up Agreements. Each executive officer and director of Alloy and
substantially all of our other stockholders have agreed, during the period
ending 180 days after the date of this prospectus ("the lock-up period"),
subject to various exceptions, not to offer to sell, contract to sell, or
otherwise sell, dispose of, loan, pledge or grant any rights with respect to any
shares of common stock or any options or warrants to purchase any shares of
common stock, or any securities convertible into or exchangeable for shares of
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<PAGE> 57
common stock owned as of the date of this prospectus or thereafter acquired
directly by these holders or with respect to which they have the power of
disposition, without the prior written consent of BancBoston Robertson Stephens
Inc. BancBoston Robertson Stephens Inc. may, in its sole discretion and at any
time or from time to time without notice, release all or any portion of the
securities subject to the lock-up agreements. There are no existing agreements
between the Representatives and any of our stockholders who have executed a
lock-up agreement providing consent to the sale of shares prior to the
expiration of the lock-up period.
In addition, we have agreed that during the lock-up period we will not,
without the prior written consent of BancBoston Robertson Stephens Inc., subject
to various exceptions,
- consent to the disposition of any shares held by stockholders subject to
lock-up agreements prior to the expiration of the lock-up period; or
- issue, sell, contract to sell, or otherwise dispose of, any shares of
common stock, any options to purchase any shares of common stock or any
securities convertible into, exercisable for or exchangeable for shares
of common stock other than our sale of shares in this offering, the
issuance of common stock upon the exercise of outstanding options, and
the issuance of options under existing stock option and incentive plans
provided the options do not vest prior to the expiration of the lock-up
period. See "Shares Eligible for Future Sale."
The underwriters have advised us that they do not intend to confirm sales
of more than 5% of the common stock offered in this offering to accounts over
which they exercise discretionary authority.
Pursuant to letter agreements entered into by Alloy, Ladenburg Thalmann &
Co. Inc. acted as the placement agent for Alloy's sale of $3.81 million of notes
and warrants in May 1998 and for the sale of $5.05 million of convertible
preferred stock in November 1998 and February 1999. In connection with these
services, Ladenburg Thalmann & Co. Inc. received fees totaling $272,903 and a
warrant to purchase 25,299 shares of common stock with a current exercise price
of $5.035 per share. In addition, Mr. Peter Graham, a director of Alloy and the
President and Chief Operating Officer of Ladenburg Thalmann Group Inc. and Vice
Chairman of its principal subsidiary, Ladenburg Thalmann & Co. Inc., purchased
notes in the principal amount of $500,000 and warrants to purchase 63,084 shares
of common stock in Alloy's May 1998 financing. Nine other Ladenburg Thalmann &
Co. Inc. employees also purchased notes in the principal amount of $315,000 and
warrants to purchase a total of 39,743 shares of common stock. The notes issued
in Alloy's May 1998 financing by their terms are required to be paid in full
upon the completion of this offering.
Prior to this offering, there has been no public market for the common
stock. Consequently, the public offering price for the common stock offered by
this prospectus will be determined through negotiations among the
Representatives and us. Among the factors to be considered in such negotiations
are prevailing market conditions, some of our financial information, market
valuations of other companies that the Representatives and we believe to be
comparable to us, estimates of our business potential, the present state of our
development and other factors deemed relevant.
Listing. The shares of common stock will be listed 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
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<PAGE> 58
accruing to an underwriter or syndicate member in connection with this offering
if the common stock originally sold by such underwriter or syndicate member is
purchased by the Representatives in a syndicate covering transaction and has
therefore not been effectively placed by such underwriter or syndicate member.
The Representatives have advised us that these transactions may be effected on
the Nasdaq National Market or otherwise and, if commenced, may be discontinued
at any time.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
Alloy by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., Boston,
Massachusetts, and for the underwriters by Brobeck, Phleger & Harrison LLP, New
York, New York.
EXPERTS
The audited financial statements and schedules included in this prospectus
and elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
to those financial statements, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-l. This prospectus, which is a part of the registration
statement, does not contain all of the information included in the registration
statement and its exhibits and schedules. Particular items are omitted in
accordance with the rules and regulations of the Securities and Exchange
Commission. For further information with respect to Alloy and the common stock
offered by this prospectus, reference is made to the registration statement and
its exhibits and schedules. You may review a copy of the registration statement,
including exhibits, at the Securities and Exchange Commission's public reference
room at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 or Seven
World Trade Center, 13th Floor, New York, New York 10048 or Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Please call the
Securities and Exchange Commission at 1-800-SEC-0330 for further information on
the operation of the public reference rooms.
We will also file annual, quarterly and current reports, proxy statements
and other information with the Securities and Exchange Commission. You may read
and copy any reports, statements or other information on file at the public
reference rooms. You can also request copies of these documents, for a copying
fee, by writing to the Securities and Exchange Commission.
Our Securities and Exchange Commission filings and the registration
statement can also be reviewed by accessing the Securities and Exchange
Commission's Internet site at http://www.sec.gov, which contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the Securities and Exchange Commission.
57
<PAGE> 59
ALLOY ONLINE, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants.................... F-2
Financial Statements:
Balance Sheets as of January 31, 1998 and 1999.............. F-3
Statements of Operations for the years ended January 31,
1997, 1998 and 1999....................................... F-4
Statements of Changes in Stockholders' Equity (Deficit) for
the years ended January 31, 1997, 1998 and 1999........... F-5
Statements of Cash Flows for the years ended January 31,
1997, 1998 and 1999....................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 60
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Alloy Online, Inc.:
We have audited the accompanying balance sheets of Alloy Online, Inc. (a
Delaware corporation) as of January 31, 1998 and 1999, and the related
statements of operations, stockholders' equity (deficit) and cash flows for each
of the three years in the period ended January 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Alloy Online, Inc. as of
January 31, 1998 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended January 31, 1999 in conformity
with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
New York, New York
March 5, 1999 (except with respect
to the matter discussed in Note 13,
as to which the date is May 13, 1999).
F-2
<PAGE> 61
ALLOY ONLINE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31,
-----------------------------------------------
PRO FORMA
1998 1999 JANUARY 31, 1999
---- ---- ----------------
(UNAUDITED)
(NOTE 14)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (includes
restricted cash of $51,000 and $182,000 at
January 31, 1998 and 1999, respectively)... $ 2,320,548 $ 2,983,283 $ 2,983,283
Accounts receivable.......................... -- 145,476 145,476
Stock subscription receivable (Note 7)....... -- 2,500,000 2,500,000
Inventories, net............................. 512,006 810,354 810,354
Other current assets......................... 305,387 458,687 458,687
----------- ----------- -----------
Total current assets......................... 3,137,941 6,897,800 6,897,800
Property and equipment, net....................... 22,874 178,017 178,017
Deferred financing costs, net..................... -- 125,851 125,851
Other assets...................................... 5,661 205,387 205,387
----------- ----------- -----------
Total assets................................. $ 3,166,476 $ 7,407,055 $ 7,407,055
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................. $ 379,378 $ 936,291 $ 936,291
Accrued expenses............................. 308,033 622,186 622,186
Current portion of capital lease
obligation................................. -- 73,178 73,178
----------- ----------- -----------
Total current liabilities.................... 687,411 1,631,655 1,631,655
Promissory notes, net of unamortized discount..... -- 3,945,122 3,945,122
Capital lease obligation, less current portion.... -- 40,218 40,218
----------- ----------- -----------
Series A convertible redeemable preferred stock:
$.01 par value; 1,678,286 shares authorized; 0
and 1,487,843 shares issued and outstanding as
of January 31, 1998 and February 1, 1999,
respectively (liquidation preference $5,045,276)
(Note 7)........................................ -- 4,836,387 --
----------- ----------- -----------
Commitments and contingencies (Note 11)
Stockholders' equity (deficit):
Common stock; $.01 par value; 11,500,000
shares authorized; 7,768,167 and 8,479,727
shares issued and outstanding and
10,158,013 pro forma shares issued and
outstanding, respectively.................. 77,682 84,797 101,580
Additional paid-in capital................... 4,384,301 5,441,012 10,260,616
Accumulated deficit.......................... (1,982,918) (8,347,241) (8,347,241)
Deferred compensation........................ -- (224,895) (224,895)
----------- ----------- -----------
Total stockholders' equity (deficit).... 2,479,065 (3,046,327) 1,790,060
----------- ----------- -----------
Total liabilities and stockholders'
equity (deficit)...................... $ 3,166,476 $ 7,407,055 $ 7,407,055
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE> 62
ALLOY ONLINE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
---------------------------------------
1997 1998 1999
--------- ----------- -----------
<S> <C> <C> <C>
Net merchandise revenues............................. $ 25,020 $ 1,799,992 $10,085,832
Sponsorship and other revenues....................... -- -- 124,565
--------- ----------- -----------
Total revenues....................................... 25,020 1,799,992 10,210,397
Cost of goods sold................................... 16,885 1,050,136 5,486,018
--------- ----------- -----------
Gross profit......................................... 8,135 749,856 4,724,379
--------- ----------- -----------
Operating expenses:
Selling and marketing........................... 98,495 1,966,744 9,166,490
General and administrative...................... 27,948 682,090 1,682,839
--------- ----------- -----------
Total operating expenses............................. 126,443 2,648,834 10,849,329
--------- ----------- -----------
Loss from operations................................. (118,308) (1,898,978) (6,124,950)
Interest income (expense), net....................... -- 34,368 (239,373)
--------- ----------- -----------
Net loss............................................. $(118,308) $(1,864,610) $(6,364,323)
========= =========== ===========
Net loss per common share:
Basic.............................................. $ (.03) $ (.33) $ (.75)
========= =========== ===========
Diluted............................................ $ (.03) $ (.31) $ (.72)
========= =========== ===========
Weighted average common shares outstanding:
Basic.............................................. 4,060,800 5,617,577 8,479,727
========= =========== ===========
Diluted............................................ 4,450,353 6,007,130 8,869,280
========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 63
ALLOY ONLINE, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK
------------------- ADDITIONAL ACCUMULATED DEFERRED
SHARES AMOUNT PAID-IN CAPITAL DEFICIT COMPENSATION TOTAL
--------- ------- --------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 31, 1996........ -- $ -- $ -- $ -- $ -- $ --
Issuance of stock to
Founders..................... 4,060,800 40,608 209,392 -- -- 250,000
Net loss....................... -- -- -- (118,308) -- (118,308)
--------- ------- ---------- ----------- --------- -----------
Balance, January 31, 1997........ 4,060,800 40,608 209,392 (118,308) -- 131,692
Proceeds from issuance of
common stock in connection
with private placements, net
of issuance costs............ 3,707,367 37,074 3,984,909 -- -- 4,021,983
Issuance of options to
consultant for services
rendered..................... -- -- 120,000 -- -- 120,000
Issuance of options to
employees for services
rendered..................... -- -- 70,000 -- -- 70,000
Net loss....................... -- -- -- (1,864,610) -- (1,864,610)
--------- ------- ---------- ----------- --------- -----------
Balance, January 31, 1998........ 7,768,167 77,682 4,384,301 (1,982,918) -- 2,479,065
Issuance of shares in
connection with anti-dilution
protection included in
private placement............ 711,560 7,115 (7,115) -- -- --
Issuance of warrants to holders
of promissory notes.......... -- -- 183,762 -- -- 183,762
Issuance of warrants to
placement agent.............. -- -- 8,545 -- -- 8,545
Issuance of warrants in
connection with capital
lease........................ -- -- 20,691 -- -- 20,691
Issuance of options to
consultant for services
rendered..................... -- -- 547,750 -- -- 547,750
Issuance of options to
employees for services
rendered..................... -- -- 310,271 -- (229,680) 80,591
Amortization of deferred
compensation................. -- -- -- -- 4,785 4,785
Accretion of preferred stock
issuance costs............... -- -- (7,193) -- -- (7,193)
Net loss....................... -- -- -- (6,364,323) -- (6,364,323)
--------- ------- ---------- ----------- --------- -----------
Balance, January 31, 1999........ 8,479,727 $84,797 $5,441,012 $(8,347,241) $(224,895) $(3,046,327)
========= ======= ========== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 64
ALLOY ONLINE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
---------------------------------------
1997 1998 1999
--------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss............................................. $(118,308) $(1,864,610) $(6,364,323)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation.................................... -- 2,084 21,382
Amortization of financing costs................. -- -- 86,047
Compensation charge for issuance of options and
common stock.................................. -- 422,000 441,126
Accrued interest on promissory notes............ -- -- 278,068
Changes in Operating Assets and Liabilities:
Accounts receivable........................ (2,665) -- (145,476)
Inventories, net........................... (21,951) (490,054) (298,348)
Prepaid catalog costs...................... -- (223,562) (202,450)
Other current assets....................... -- (81,825) 49,150
Other assets............................... (175) (5,486) (199,726)
Accounts payable........................... 5,486 380,202 556,913
Accrued expenses........................... -- 112,387 506,152
--------- ----------- -----------
Net cash used in operating activities................ (137,613) (1,748,864) (5,271,485)
--------- ----------- -----------
INVESTING ACTIVITIES:
Capital expenditures................................. (3,345) (21,613) (14,043)
--------- ----------- -----------
Net cash used in investing activities................ (3,345) (21,613) (14,043)
--------- ----------- -----------
FINANCING ACTIVITIES:
Net proceeds from issuances of common stock.......... 160,000 4,071,983 --
Net proceeds from issuance of promissory notes....... -- -- 3,656,737
Net proceeds from issuance of preferred stock........ -- -- 2,329,194
Payments of capital lease obligation................. -- -- (37,668)
--------- ----------- -----------
Net cash provided by financing activities............ 160,000 4,071,983 5,948,263
--------- ----------- -----------
Net increase in cash and cash equivalents............ 19,042 2,301,506 662,735
Cash and cash equivalents, beginning of year......... -- 19,042 2,320,548
--------- ----------- -----------
Cash and cash equivalents, end of year............... $ 19,042 $ 2,320,548 $ 2,983,283
========= =========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITY:
Purchase of computer equipment under capital lease... $ -- $ -- $ 162,482
========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 65
ALLOY ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS
Alloy Online, Inc. ("Alloy") (Note 12) was incorporated in the State of
Delaware on January 22, 1996 and is a direct marketer of casual apparel and
accessories targeting the high growth Generation Y marketplace (10 to 24 year
olds). Alloy's revenues are primarily derived from merchandise sales from its
print catalog and merchandise and advertising sales from its Internet Website,
www.alloy.com. (Note 12). Alloy.com was launched in August 1996 as a community
which addresses the diverse concerns, interests, tastes and needs of Generation
Y.
Activities from the date of inception to January 31, 1999 have been
directed primarily to developing the Alloy brand through direct marketing
efforts to the Generation Y demographic group, growing merchandise sales and
advertising revenues, performing administrative functions and raising capital.
Since inception, Alloy has incurred recurring losses and negative operating
cash flow, and has relied primarily on equity and debt financing to fund its
operations. As of January 31, 1999, Alloy had cash and cash equivalents of
$2,983,283. Subsequent to January 31, 1999, Alloy received an additional
$2,500,000 which represents the final installment of the proceeds from the
issuance of the Series A Convertible Redeemable Preferred Stock (Note 7). In the
opinion of Alloy's management, Alloy has liquidity and sufficient working
capital resources to fund its operations through the quarter ended April 30,
2000.
The success of future operations will be dependent primarily upon Alloy's
ability to consistently offer merchandise appealing to its target audience;
manage the anticipated growth of its operations; attract, build and retain
significant traffic levels on its website; deliver adequate customer service and
compete effectively with other companies targeting the Generation Y market.
Reference is made to the risk factors discussed in this prospectus.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
For the purposes of the notes to financial statements, the fiscal year
ended January 31, 1997 is referred to as fiscal 1996; the fiscal year ended
January 31, 1998 is referred to as fiscal 1997; and the fiscal year ended
January 31, 1999 is referred to as fiscal 1998.
REVENUE RECOGNITION
Merchandise revenues are recognized at the time the products are shipped to
customers. Alloy provides an allowance for sales returns in accordance with its
return policy and based on historical experience. At January 31, 1998 and 1999,
the allowance for sales returns was approximately $15,000 and $57,000,
respectively.
Revenues from sponsorships, advertising and other arrangements are
recognized during the period in which the sponsorship or advertisement is
displayed, provided that no significant performance obligations remain and
collection of the related receivable is probable.
Alloy is subject to seasonal fluctuations in its merchandise sales and
results of operations. Alloy expects its net sales and operating results
generally to be lower in the first half of each fiscal year.
F-7
<PAGE> 66
ALLOY ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, Alloy considers all highly
liquid investments with an original maturity of three months or less to be cash
equivalents. Alloy maintains cash balances in excess of federally insured
amounts with commercial banks.
Alloy's credit card processing services agreement requires the maintenance
of a reserve balance, against which chargebacks are assessed. At January 31,
1998 and 1999, cash and cash equivalents includes approximately $51,000 and
$182,000, respectively, of cash restricted for such purposes.
No supplemental disclosure of cash flow information is required as it is
not applicable for the periods presented.
CREDIT RISK
Alloy's fulfillment services provider performs credit card authorizations
and check verifications of its customers. Credit risk is limited due to the
collection of payments in advance or at time of shipment and Alloy's large
number of diversified customers.
INVENTORIES
Inventories, which consist of finished goods, are stated at the lower of
cost (first-in, first-out) or market value. At January 31, 1998 and 1999, Alloy
has recorded an inventory valuation allowance of approximately $158,000 and
$271,000, respectively.
ADVERTISING COSTS
The cost of advertising is expensed the first time the advertising takes
place, except for direct-mail advertising which is capitalized and expensed over
its expected period of benefit in accordance with the American Institute of
Certified Public Accountants' Statement of Position (SOP) 93-7. Direct-mail
advertising consists of catalog production and mailing costs. Catalog costs are
capitalized and expensed over the three to four month period from the date the
catalogs are mailed. Deferred catalog costs as of January 31, 1998 and 1999 were
approximately $224,000 and $426,000, respectively. Catalog costs expensed for
the years ended January 31, 1997, 1998 and 1999 were approximately $53,000,
$845,000 and $4,836,000, respectively, and are included within selling and
marketing expenses in the accompanying statements of operations.
INTERNALLY CAPITALIZED SOFTWARE COSTS
Alloy has adopted the provisions of SOP 98-1, "Accounting for Costs of
Computer Software Developed or Obtained for Internal Use", which requires the
capitalization of internal and external costs incurred to develop or obtain
internal-use computer software under certain circumstances. During fiscal 1998,
Alloy capitalized approximately $382,000 of software development costs
associated with its Internet activities. In the second quarter of fiscal 1998,
Alloy determined that such software would not achieve its intended objectives
and, accordingly charged the entire amount that was capitalized to selling and
F-8
<PAGE> 67
ALLOY ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
marketing expenses during the second quarter of fiscal 1998. The Company now
utilizes the services of a third-party service provider on a revenue sharing
basis.
DEFERRED FINANCING COSTS
Legal and financing costs incurred in connection with Alloy's issuance of
promissory notes in fiscal 1998 (Note 6) have been deferred and are being
amortized over the expected term of the notes.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Computer equipment under capital lease...................... Life of the lease
Computer equipment.......................................... 5 Years
Office furniture and equipment.............................. 10 Years
</TABLE>
LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to Be Disposed Of," Alloy periodically reviews long-lived assets and certain
identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to the fair value of the asset as
measured by the future net cash flows (on an undiscounted basis) expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized would be measured by the amount by which the
carrying amount of the assets exceeds the underlying fair value of the assets.
Alloy has performed a review of its long-lived assets and has determined that no
impairment of the respective carrying values has occurred as of January 31,
1999.
STOCK BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation," allows companies
to account for stock-based compensation either under the provisions of SFAS No.
123 or under the provisions of Accounting Principles Bulletin No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), but requires pro forma
disclosure in the footnotes to the financial statements as if the measurement
provisions of SFAS No. 123 had been adopted. Alloy has elected to account for
its stock-based compensation in accordance with the provisions of APB 25 and has
provided the disclosures required under SFAS No. 123 in Note 8.
INCOME TAXES
Alloy accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under the asset and liability method of SFAS No.
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement and tax
bases of assets and liabilities. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. Under SFAS No. 109, the effect of a change in tax rates on deferred tax
assets and liabilities is recognized in income in the period that includes the
enactment date. Differences between assets and liabilities for financial
statement and tax return purposes are principally related to inventories,
accruals and deferred compensation.
F-9
<PAGE> 68
ALLOY ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NET LOSS PER SHARE
Alloy has adopted SFAS No. 128, "Earnings Per Share," which established new
standards for computing and presenting net income per share information. Basic
and diluted loss per share is also computed pursuant to the Securities and
Exchange Commission Staff Accounting Bulletin No. 98 ("SAB 98"). SAB 98 requires
that all equity instruments issued at nominal prices prior to the effective date
of an initial public offering be included in the calculation of basic and
diluted loss per share as if they were outstanding for all periods presented
whether or not the impact is dilutive. Basic net loss per share was determined
by dividing net loss by the weighted average number of common shares outstanding
during each period. Diluted net loss per share includes stock options issued at
nominal prices and excludes the impact of the conversion of convertible
preferred stock and the exercise of outstanding warrants as the inclusion of
these instruments would be anti-dilutive. A reconciliation of the net loss
available for common stockholders and the number of shares used in computing
basic and diluted net loss per share is provided in Note 10.
RECENT ACCOUNTING PRONOUNCEMENTS
In the quarter ended April 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income". SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of financial statements. The adoption of SFAS No. 130 did not have an effect on
Alloy's financial position or results of operations.
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosure About Segments of an Enterprise and Related Information,"
which is effective for fiscal years beginning after December 15, 1997. SFAS No.
131 requires that public companies report certain information about operating
segments in their annual financial statements and in subsequent condensed
financial statements of interim periods issued to shareholders. This statement
also requires that public companies report certain information about their
products and services, the geographic areas in which they operate and their
major customers. Reportable operating segments are determined based on the
management approach, as defined by SFAS No. 131. The management approach is
based on the way that the chief operating decision maker organizes the segments
within an enterprise for making operating decisions and assessing performance.
Alloy currently operates under two segments, merchandise revenues and
sponsorship and other revenues. No segment disclosure has been provided for the
periods presented due to the fact the Company was primarily operating under one
segment (e.g. sponsorship and other revenues only accounted for approximately 1%
of total revenues in fiscal 1998).
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. Alloy currently does not use derivatives and
therefore this new pronouncement is not applicable.
The FASB is currently addressing significant current practices relating to
accounting for stock-based compensation awards under APB 25. The FASB is also
addressing the accounting for the repricing of stock options. Tentatively, the
FASB has decided that awards to non-employee directors would be charged to
operations based upon the fair value of the award.
F-10
<PAGE> 69
ALLOY ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. OTHER CURRENT ASSETS
At January 31, 1998 and 1999, other current assets consists of the
following:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Prepaid catalog costs....................................... $223,562 $426,012
Other....................................................... 81,825 32,675
-------- --------
$305,387 $458,687
======== ========
</TABLE>
4. PROPERTY AND EQUIPMENT
At January 31, 1998 and 1999, property and equipment consists of the
following:
<TABLE>
<CAPTION>
1998 1999
------- --------
<S> <C> <C>
Computer equipment under capital lease...................... $ -- $162,482
Computer equipment.......................................... 16,711 21,999
Office furniture and equipment.............................. 8,247 17,001
------- --------
24,958 201,482
Less: accumulated depreciation.............................. 2,084 23,465
------- --------
$22,874 $178,017
======= ========
</TABLE>
5. ACCRUED EXPENSES
At January 31, 1998 and 1999, accrued expenses consists of the following:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Professional fees........................................... $ 15,000 $200,000
Accrued consulting fees..................................... 192,000 --
Accrued salaries -- officers................................ 25,000 140,000
Other....................................................... 76,033 282,186
-------- --------
$308,033 $622,186
======== ========
</TABLE>
6. PROMISSORY NOTES
In May 1998, Alloy issued $3,810,000 of promissory notes together with
warrants to purchase an aggregate of 480,682 shares of common stock. In
connection with the issuance of the notes, Alloy paid legal and financing costs
of approximately $153,000 and issued warrants to the placement agent to purchase
25,299 shares of common stock. The notes bear interest at 10% per annum
compounded quarterly and are payable in full on the earlier of (i) May 31, 2001,
(ii) the closing of an initial public offering or (iii) the occurrence of
certain other significant events, as defined. Interest is payable upon maturity
of the notes. As of January 31, 1999, Alloy has recorded accrued interest
payable of $278,000. The warrants issued in connection with the notes carry
certain anti-dilution provisions. The warrants are exercisable until May 12,
2001 and had an initial exercise price of $5.47 per share. In accordance with
the anti-dilution provision in the agreement, the exercise price of the warrants
was reduced to $5.04 per share as a result of the issuance of the Series A
Convertible Redeemable Preferred Stock (Note 7) in November 1998. The impact of
such revaluation was an increase to the debt discount in the amount of
approximately $40,000.
Alloy evaluated the fair value of the warrants issued based upon the
Black-Scholes option-pricing model with the following assumptions: dividend
yield of 0%, volatility of 50%, risk-free interest rate of
F-11
<PAGE> 70
ALLOY ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5.25% and expected lives of 3 years. The fair value of the warrants issued to
the holders of the notes of approximately $184,000 has been recorded as notes
discount. The fair value of the warrants issued to the placement agent, valued
at approximately $9,000, has been recorded as deferred financing costs. The
notes discount of $184,000 and total deferred financing costs of $162,000 are
being amortized as a component of interest expense over the term of the notes.
Amortization of notes discount and deferred financing costs recorded in fiscal
1998 was approximately $41,000 and $36,000, respectively.
7. SERIES A CONVERTIBLE REDEEMABLE PREFERRED STOCK
In November 1998, Alloy entered into an agreement to issue 1,678,286 shares
of its Series A Convertible Redeemable Preferred Stock (the "Preferred Stock")
to investors for approximately $5,045,000. Alloy paid issuance costs of
approximately $216,000, which has been recorded as a reduction of the carrying
value of the Preferred Stock and is being accreted over the expected period to
redemption of five years. Accretion of the issuance costs of approximately
$7,000 was recorded in fiscal 1998. The issuance of the Preferred Stock occurred
in two installments in November 1998 and February 1999. Alloy received payment
of the second installment of $2,500,000 on February 1, 1999 and therefore has
classified this amount as a stock subscription receivable within current assets
in the accompanying balance sheets.
Each holder of Preferred Stock is entitled to vote on all matters as if
their shares were converted to voting common stock on a one-for-one basis. All
holders of the Preferred Stock have the right to convert into common stock. All
outstanding shares of Preferred Stock have an automatic conversion feature into
common stock upon the consummation of a firm commitment underwritten public
offering of at least $15 million with a valuation of Alloy greater than $75
million. The conversion ratio is initially on a one-for-one basis, however, the
conversion price is subject to adjustment based on the issuance price of equity
securities subsequently issued by Alloy and certain other diluting issues as
discussed in Alloy's Restated Certificate of Incorporation.
The Preferred Stock is redeemable at the election of at least 75% of the
Preferred Stock holders in two equal installments, if notice is provided to
Alloy on or after December 24, 2003. The redemption price per share is an amount
equal to the fair market value of the Preferred Stock, as defined, or $3.01 per
share plus a further amount per share equal to any declared but unpaid
dividends. If Alloy's funds legally available for redemption of the Preferred
Stock are insufficient to redeem the total number of outstanding shares of
Preferred Stock on the redemption date, the holders of the Preferred Stock shall
share ratably in any funds legally available for redemption of such shares.
Interest shall accrue at the rate of 10% per annum on any unpaid amounts.
In the event of either a voluntary or involuntary liquidation, dissolution
or winding up of Alloy, the holders of the Preferred Stock will be entitled to
receive, prior and in preference to any distribution of any of Alloy's assets to
holders of Alloy's common stock, $3.01 per share (or as adjusted based upon the
provisions in the agreement) plus declared and unpaid dividends.
8. STOCKHOLDERS' EQUITY
COMMON STOCK
Change in Par Value and Authorized Number of Shares
In June 1997, Alloy amended its Certificate of Incorporation to authorize
15,000,000 shares of common stock from 1,500 and to change the par value from no
par value per share to $.01 par value per share. In November 1998, Alloy amended
its Certificate of Incorporation to reduce the number of the authorized shares
of common stock from 15,000,000 to 11,500,000.
F-12
<PAGE> 71
ALLOY ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Stock Split
Effective June 1997, Alloy authorized a 4,000-for-1 stock split of common
shares. All share and per share information included in these financial
statements has been adjusted to retroactively reflect the stock split.
Reference is made to Note 13, wherein an additional stock split is
discussed and for which all share and per share information included in the
financial statements has also been adjusted to retroactively reflect that stock
split.
Private Placements
In June 1997, Alloy issued 2,732,219 shares of its common stock in a
private placement receiving net proceeds of $2,347,880 (after issuance expenses
of approximately $17,000). These stockholders each received one warrant with the
shares of stock they purchased which entitled the holders to dilution protection
in the event of a future sale of the Company's equity securities.
In January 1998, Alloy issued 975,148 additional shares of its common stock
in a second private placement receiving net proceeds of $1,674,103 (after
issuance expenses of approximately $12,000). The second private placement,
together with the issuance of employee and consultant options and lessor
warrants, resulted in Alloy issuing 711,560 additional shares to the
stockholders who participated in the June 1997 private placement in accordance
with the dilution protection warrants which expired on June 30, 1998.
STOCK OPTIONS
In 1997, Alloy's Board of Directors adopted a Stock Option Plan (the
"Plan"). The Plan, as amended, authorizes the granting of options, the exercise
of which would allow up to an aggregate of 982,885 shares of Alloy's common
stock to be acquired by the holders of the options. The options can take the
form of Incentive Stock Options ("ISOs") or Non-qualified Stock Options
("NQSOs"). Options may be granted to employees, directors and consultants. ISOs
and NQSOs are granted in terms not to exceed ten years and become exercisable as
specified when the option is granted. Options may be exercised in whole or in
part. Vesting terms of the options range from immediately vesting to a ratable
vesting period of four years.
The exercise price of the ISOs must be at least equal to 100% of the fair
market price of Alloy's common stock on the date of grant. In the case of a plan
participant who owns directly or by reason of the applicable attribution rules
in Section 424(d) of the United States Internal Revenue Code of 1986, as
amended, more than 10% of the total combined voting power of all classes of
stock of Alloy, the exercise price shall not be less than 110% of the fair
market value on the date of grant. ISOs must be exercised within five to ten
years from the date of grant depending on the participant's ownership in Alloy.
The exercise price of all NQSO's granted under the Plan shall be determined by
Alloy's Board of Directors at the time of grant.
F-13
<PAGE> 72
ALLOY ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Following is a summary of Alloy's stock option activity:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
------------------------------------------------------------------
1997 1998 1999
------------------- ------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year.......... -- $ -- -- $ -- 183,705 $.26
Options granted......................... -- -- 183,705 .26 392,148 .67
Options exercised....................... -- -- -- -- -- --
Options canceled or expired............. -- -- -- -- (186,300) (.27)
------- ---- ------- ---- -------- ----
Outstanding, end of year................ -- $ -- 183,705 $.26 389,553 $.67
======= ==== ======= ==== ======== ====
Exercisable, end of year................ -- $ -- 183,705 $.26 362,481 $.67
======= ==== ======= ==== ======== ====
</TABLE>
The options outstanding at January 31, 1999 range in price from $.36 per
share to $1.37 per share and have a weighted average remaining contractual life
of 9.47 years.
Alloy entered into option agreements with certain of its employees that
require Alloy to pay the full exercise price of their options. Alloy has valued
the options granted under these agreements using the fair value of the common
stock at the date of grant. Alloy recorded compensation expense of approximately
$0, $70,000 and $105,000 for the years ended January 31, 1997, 1998 and 1999,
respectively, in connection with the granting of these options.
Alloy applies APB 25 in accounting for options issued under the Plan and,
accordingly, recognizes compensation expense for the difference between the fair
value of the underlying common stock and the grant price of the option at the
date of grant. Pro forma disclosure of the impact of applying the provisions of
SFAS No. 123 is not required due to the fact that Alloy charged compensation
expense equal to the fair value of the common stock at the date of grant for
primarily all of the stock options issued. Therefore, net loss and per share
information is the same under APB 25 and SFAS No. 123.
The weighted average fair value of the options granted during 1998 and 1999
was estimated at $1.04 and $2.77, respectively, as of the date of grant using
the Black-Scholes option-pricing model with the following assumptions: dividend
yield of 0%, volatility of 50%, risk-free interest rate of 5.25% and expected
lives of 5 years.
Consultant Option Agreement
In fiscal 1997, Alloy entered into an agreement granting 138,633 options to
a consultant for services rendered. Under the terms of the agreement, Alloy was
obligated to pay the full exercise price of the options and reimburse the
individual for certain taxes resulting from the exercise of such options. This
agreement resulted in Alloy charging approximately $312,000 of compensation
expense equal to the fair market value of the options at the date of grant and
related taxes.
In fiscal 1998, Alloy entered into a new agreement with the consultant that
voided and nullified the original agreement and canceled the then outstanding
options. The new agreement provided that Alloy grant to the consultant an option
to purchase 282,000 shares of common stock at an exercise price of $.71 per
share and pay to the consultant the full exercise price of his option. This
option is fully exercisable from the date of grant and expires ten years after
the date of grant. Alloy has valued the option granted to the consultant using
the fair value of the common stock at the date of grant. This agreement and the
nullification of the original agreement resulted in Alloy charging additional
compensation expense of approximately $356,000 for the year ended January 31,
1999.
F-14
<PAGE> 73
ALLOY ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The consultant provided the Company with services in connection with the
development of strategic plans for human resources and market development. This
non-employee was the only shareholder who rendered services to the Company and
received compensation in the form of equity rights. Although there is no formal
agreement between the parties, these services have been provided from
time-to-time. There is no formal or informal commitment for the consultant to
provide additional services to the Company in the future.
WARRANTS
The following table summarizes all common stock and preferred stock warrant
activity:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
--------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Outstanding, beginning of year........................ -- -- --
Warrants issued..................................... -- -- 517,261
Warrants exercised.................................. -- -- --
------- ------- -------
Outstanding, end of year.............................. -- -- 517,261
======= ======= =======
</TABLE>
The weighted average fair value of the warrants granted during fiscal 1998
was estimated at $0.38, using the Black-Scholes option-pricing model with the
following assumptions: dividend yield of 0%, volatility of 50%, risk-free
interest rate of 5.25% and expected lives of 3 years. The warrants have a
weighted average exercise price of $4.99 per share and weighted average
remaining contractual term of 2.35 years.
In connection with the execution of a capital lease for computer equipment,
Alloy issued a warrant to purchase 11,280 shares of common stock at an exercise
price of $2.66 per share. The warrants are exercisable at the earlier of June
30, 2003 or the closing of an initial public offering. Alloy recorded prepaid
interest, in the amount of $21,000, based on the fair value of the warrant and
is amortizing such amount over the life of the capital lease obligation.
Shares Reserved for Future Issuance:
At January 31, 1999, shares reserved for future issuance are as follows:
<TABLE>
<S> <C>
Series A Convertible Redeemable Preferred Stock............. 1,678,286
Stock Option Plan........................................... 982,885
Warrants.................................................... 517,261
----------
3,178,432
==========
</TABLE>
Subsequent Activity
Subsequent to January 31, 1999, the following transactions relating to
stock options and warrants occurred (1) the Company granted 780,160 options to
employees having a weighted average exercise price of $11.66, including options
with an assumed exercise price equal to the pending initial public offering
price, currently projected to be $11.00, and (2) 362,481 options were exercised
having a weighted average exercise price of $.68. In addition, it is expected
that 11,280 of previously issued warrants will be exercised at $2.66 upon
consummation of the Company's initial public offering.
F-15
<PAGE> 74
ALLOY ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES
At January 31, 1998 and 1999, net deferred tax assets consist of the
following:
<TABLE>
<CAPTION>
1998 1999
--------- -----------
<S> <C> <C>
Deferred Tax Assets:
Net operating loss carryforwards......................... $ 360,991 $ 2,802,398
Deferred compensation.................................... 168,080 362,175
Accruals................................................. -- 113,783
Inventories.............................................. 69,250 119,240
--------- -----------
598,321 3,397,596
Less: valuation allowance.................................. (598,321) (3,397,596)
--------- -----------
Net deferred tax assets.................................. $ -- $ --
========= ===========
</TABLE>
Alloy has recorded a valuation allowance to fully reserve for the deferred
tax benefit attributable to its temporary differences and its net operating loss
carryforwards due to the uncertainty as to their ultimate realizability.
The provision for income taxes differed from the amount computed by
applying the U.S. federal statutory rate to the loss before income taxes due to
the effects of the following:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Expected tax benefit at federal statutory rate.............. (34%) (34%) (34%)
Future state benefit, net of federal benefit................ (10%) (10%) (10%)
Non-deductible expenses and other........................... -- -- --
Increase in valuation allowance............................. 44% 44% 44%
---- ---- ----
0% 0% 0%
==== ==== ====
</TABLE>
Alloy was an S Corporation for income tax purposes through October 31,
1997. On November 1, 1997, Alloy elected to be taxed as a C Corporation. The
income tax benefit represents the estimated benefit that would have been
reported had Alloy filed its tax return as a taxable C corporation for all
periods presented.
At January 31, 1999, Alloy had net operating loss carryforwards aggregating
approximately $6,369,000, which may be applied against future years' income with
expiration dates through 2019.
F-16
<PAGE> 75
ALLOY ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net
loss per share:
<TABLE>
<CAPTION>
JANUARY 31,
---------------------------------------
1997 1998 1999
--------- ----------- -----------
<S> <C> <C> <C>
Numerator:
Net loss........................................ $(118,308) $(1,864,610) $(6,364,323)
Accretion of preferred stock.................... -- -- (7,193)
--------- ----------- -----------
Net loss available to common stockholders....... $(118,308) $(1,864,610) $(6,371,516)
========= =========== ===========
Denominator:
Basic weighted average shares outstanding....... 4,060,800 5,617,577 8,479,727
Nominal issuances of stock options.............. 389,553 389,553 389,553
--------- ----------- -----------
Diluted weighted average shares outstanding..... 4,450,353 6,007,130 8,869,280
========= =========== ===========
Basic net loss per share............................. $ (.03) $ (.33) $ (.75)
========= =========== ===========
Diluted net loss per share........................... $ (.03) $ (.31) $ (.72)
========= =========== ===========
</TABLE>
The following equity instruments were not included in the diluted net loss
per share calculation as their effect would be anti-dilutive:
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- ---------
<S> <C> <C> <C>
Series A Convertible Redeemable Preferred stock...... -- -- 1,678,286
Warrants............................................. -- -- 517,261
</TABLE>
11. COMMITMENTS AND CONTINGENCIES
LEASES
Alloy leases office space and certain computer equipment under
noncancellable leases expiring through fiscal 2001. As of January 31, 1999,
future net minimum lease payments were as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
FISCAL YEAR LEASE LEASE
- ----------- -------- ---------
<S> <C> <C>
1999........................................................ $ 73,178 $ 82,500
2000........................................................ 50,341 90,200
2001........................................................ 1,295 93,800
-------- --------
Total minimum lease payments................................ 124,814 $266,500
========
Less: amounts representing interest......................... (11,418)
--------
Present value of net minimum lease payments................. 113,396
Current portion............................................. 73,178
--------
Long-term................................................... $ 40,218
========
</TABLE>
Rent expense was approximately $0, $8,000, and $33,000 for the years ended
January 31, 1997, 1998 and 1999, respectively, under noncancellable operating
leases.
F-17
<PAGE> 76
ALLOY ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ORDERING, FULFILLMENT AND CUSTOMER SERVICE
In July 1997, Alloy entered into an agreement with Harrison Fulfillment
Services ("HFS"), a third party service organization, whereby HFS provides Alloy
with a comprehensive call center and order fulfillment services in support of
Alloy's direct marketing operations. All aspects relating to fulfillment of
customer orders are handled by HFS including receipt and processing of customer
orders, shipment of merchandise to customers and customer service.
In consideration for performance of the services provided by HFS during the
contract term, Alloy paid HFS an initial start-up fee and is charged on a fee
for service basis. On October 9, 1998, the original agreement was amended to
permit a reduction in the fee for service charges. The agreement provides that
if Alloy exits the agreement prior to the termination date (July 31, 2003),
Alloy will be required to make a termination payment to HFS equal to the
unamortized amount of the contract savings as defined in the amendment. Alloy's
management currently has no intention of exiting the agreement prior to its
termination date.
SALES TAX
Alloy does not collect sales or other similar taxes in respect of shipments
of goods into most states. However, various states or foreign countries may seek
to impose sales tax obligations on Alloy. A number of proposals have been made
at the state and local levels that would impose additional taxes on the sale of
goods and services through the Internet. The United States Congress has passed
legislation limiting for three years the ability of the states to impose taxes
on Internet-based transactions. Failure to renew this legislation could result
in the imposition by various states of taxes on e-commerce. A successful
assertion by one or more states that Alloy should have collected or be
collecting sales taxes on the sale of products could have a material and adverse
effect on Alloy's operations.
12. SUBSEQUENT EVENTS
PURCHASE OF DOMAIN NAME
In February 1999, Alloy acquired the rights to the domain name alloy.com,
including the registration of the domain name with Network Solutions, Inc. and
the rights to register and use the domain name in jurisdictions other than the
United States of America, from the previous holder of these rights in exchange
for $125,000.
PURCHASE OF CUSTOMER LIST
In February 1999, Alloy purchased on a non-exclusive basis a mailing list
of names and addresses of potential customers for $125,000.
CHANGE OF COMPANY NAME
On March 4, 1999 the Board of Directors elected to change the name of the
Company from Alloy Designs, Inc. to Alloy Online, Inc.
13. PROPOSED INITIAL PUBLIC OFFERING
During March 1999, the Board of Directors authorized Alloy to file a
registration statement with the Securities and Exchange Commission for an
initial public offering of shares of its common stock. In anticipation of the
closing of the offering, Alloy has effected a 1.128 for 1 common stock split.
Additionally, Alloy's stock option plan was amended to provide for the issuance
of up to 4,000,000 options.
F-18
<PAGE> 77
ALLOY ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the above, Alloy has amended and restated its
Certificate of Incorporation such that it will have the authority to issue an
aggregate of 55,000,000 shares of capital stock, consisting of 50,000,000 shares
of common stock, par value $.01 per share, and 5,000,000 shares of preferred
stock, par value $.01 per share. All references to common shares and per common
share, except for references to authorized common shares, in the financial
statements have been restated to give effect to the common split discussed
herein.
14. PRO FORMA BALANCE SHEET (UNAUDITED)
The pro forma balance sheet as of January 31, 1999 reflects the conversion
of Alloy's Series A Convertible Redeemable Preferred Stock into 1,678,286 shares
of common stock, which conversion will occur upon the consummation of the
Initial Public Offering.
F-19
<PAGE> 78
[Alloy Online]
[Graphic depiction of Alloy Web Pages]
Alloy Homepage
Alloy Shop
Today in Alloy
Alloy Connect
Win Prizes at Alloy
Alloy Catalog
<PAGE> 79
[ALLOY ONLINE CORPORATE LOGO]
<PAGE> 80
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemization of all estimated expenses,
all of which we will pay, in connection with the issuance and distribution of
the securities being registered:
<TABLE>
<CAPTION>
UNDERWRITER AMOUNT
- ----------- ------
<S> <C>
SEC Registration Fee........................................ $ 14,456
Nasdaq National Market Listing Fee.......................... 90,500
NASD Fee.................................................... 5,100
Printing and engraving fees................................. 250,000
Registrant's counsel fees and expenses...................... 700,000
Accounting fees and expenses................................ 300,000
Blue Sky expenses and counsel fees.......................... 5,000
Transfer agent and registrar fees........................... 2,000
Miscellaneous............................................... 2,944
----------
$1,370,000
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our restated certificate of incorporation (the "Charter") provides that we
shall indemnify and advance expenses to the fullest extent permitted by Section
145 of the Delaware General Corporation Law ("DGCL"), as amended from time to
time, to each person who is or was one of our directors or officers and the
heirs, executors and administrators of that person. Any expenses, including
attorneys' fees, incurred by a person who is or was one of our directors or
officers, and the heirs, executors and administrators of such a person in
connection with defending any such proceeding in advance of its final
disposition shall be paid by us; provided, however, that if the DGCL requires an
advancement of expenses incurred by an indemnitee in his capacity as a director
or officer, and not in any other capacity in which service was or is rendered by
the indemnitee, including, without limitation, service to an employee benefit
plan, shall be made only upon delivery to us of an undertaking by or on behalf
of the indemnitee, to repay all amounts so advanced, if it shall ultimately be
determined that the indemnitee is not entitled to be indemnified for his or her
expenses. Notwithstanding the aforementioned indemnification provisions, we may,
at the discretion of our chief executive officer, enter into indemnification
agreements with directors or officers.
Section 145 of the DGCL provides that a corporation has the power to
indemnify any director or officer, or former director or officer, who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, other than an action by or in the right of the corporation, by
reason of the fact that director or officer or former director or officer is or
was a director, officer, employee or agent of the corporation, against expenses,
including attorneys' fees, judgments, fines and amounts paid in settlement
actually and reasonably incurred by them in connection with the action, suit or
proceeding, if the person shall have acted in good faith and in a manner
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, provided
that the person had no reasonable cause to believe his or her conduct was
unlawful, except that, if the action shall be in the right of the corporation,
this indemnification shall not be provided as to any claim, issue or matter as
to which the person shall have been judged to have been liable to the
corporation unless and to the extent that the Court of Chancery of the State of
Delaware, or any court in which the suit or action was brought, shall determine
upon application that, in view of all of the circumstances of the case, the
person is fairly and reasonably entitled to indemnity for these expenses that
the court shall deem proper.
II-1
<PAGE> 81
The Charter, which will be filed prior to the completion of our initial
public offering of securities, contains a provision to limit the personal
liability of our directors to the fullest extent permitted by Section 102(b)(7)
of the DGCL, as amended. In addition, the Restated bylaws, which will become
effective prior to the completion of the offering of securities, provide that we
shall indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, other than an action
by us or in our right, by reason of the fact that he is or was one of our
directors, officers, employees or agents, or is or was serving at our request as
a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses, including attorneys'
fees, judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with the action, suit or proceeding if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to our
best interests, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. See Exhibit 3.1, "Restated
Certificate of Incorporation of Alloy."
As permitted by the DGCL, the Charter, which will be filed prior to the
completion of the offering, provides that, subject to limited exceptions, none
of our directors shall be liable to us or our stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability (1) for any
breach of the director's duty of loyalty to us or our stockholders, (2) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (3) for the unlawful payment of dividends on or
redemption or repurchase of our capital stock or (4) for any transaction from
which the director derived an improper personal benefit. The effect of this
provision is to limit our ability and our stockholders' ability through
stockholder derivative suits on our behalf to recover monetary damages against a
director for the breach of certain fiduciary duties as a director, including
breaches resulting from grossly negligent conduct. In addition, the Charter and
Restated bylaws provide that we shall, to the fullest extent permitted by the
DGCL, indemnify all of our directors and officers and that we may, to the extent
permitted by the DGCL, indemnify our employees and agents.
We have agreed to indemnify the underwriters against various liabilities,
including civil liabilities under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Set forth in chronological order is information regarding shares of common
stock issued and options and warrants granted by the registrant since March
1996. Also included is the consideration, if any, received by the registrant for
such shares and options and information relating to the section of the
Securities Act of 1933, as amended (the "Securities Act"), or rule of the
Securities and Exchange Commission under which exemption from registration was
claimed.
In September 1996, the registrant issued 1,353,600 shares of common stock
at a purchase price of $0.125 per share to Samuel A. Gradess, Chief Financial
Officer and a Director of the registrant, for total consideration of $150,000.
In June 1997, the registrant issued and sold a total of 2,732,219 shares of
common stock in a private placement to 36 investors at a price of $0.87 per
share for gross consideration of $2,365,000. Purchasers in this offering also
received warrants to purchase additional shares of common stock for nominal
consideration that provided the purchasers with dilution protection in the event
of specified future sales of equity securities by the registrant. These warrants
were exercised in July 1998 and, in accordance with their terms, a total of
711,560 additional shares of common stock were issued to the purchasers upon
such exercise.
In June 1997, the registrant's 1997 Employee, Director and Consultant Stock
Option Plan was approved and adopted by the Board of Directors and the
stockholders of the registrant. In November 1998, and again in April 1999, the
Board of Directors and the stockholders of the registrant approved and adopted
amendments to the plan that increased the total number of shares of common stock
for which options may be granted under it. Since June 1997, options to purchase
a total of 1,169,713 shares of common stock have been granted. As of March 5,
1999, 362,481 of these options had been exercised.
II-2
<PAGE> 82
In January 1998, the registrant issued and sold a total of 975,148 shares
of common stock in a private placement to 19 investors at a price of $1.73 per
share for gross consideration of $1,688,500.
In March 1998, the registrant issued a warrant to purchase 11,280 shares of
common stock with an exercise price of $2.66 per share to Mr. Ronald Demer. The
warrant was issued in connection with a lease financing agreement. As of March
5, 1999 the warrant had not been exercised. Mr. Demer has indicated that he will
exercise these warrants upon completion of the offering.
In May 1998, the registrant issued warrants to purchase a total of 480,682
shares of common stock in connection with a private placement of promissory
notes to 31 investors. The warrants had an initial exercise price of $5.465 per
share. The exercise price was reduced to $5.035 per share following the issue
and sale of shares of Series A convertible preferred stock in November 1998 and
February 1999. The registrant issued an additional warrant to purchase 25,299
shares of common stock to Ladenburg Thalmann & Co. Inc., as a portion of the
consideration for its services as placement agent for this offering of notes and
warrants. This warrant contained substantially the same terms as the warrants
issued to the purchasers. All of the warrants described in this paragraph are
outstanding and none have been exercised.
In November 1998 and February 1999 the registrant issued and sold a total
of 1,487,843 shares of Series A convertible preferred stock in a private
placement to two investors at a price of $3.391 per share for gross
consideration of $5,045,275.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in the names required by the underwriters to permit
prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described under Item 14 above, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission this indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by the director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of the issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part
of this Registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this Registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
II-3
<PAGE> 83
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------- ----------------------
<C> <S>
*1.1 Form of Underwriting Agreement
3.1 Restated Certificate of Incorporation of the Registrant
*3.2 Restated Bylaws of the Registrant
*4.1 Form of Common Stock Certificate
*4.2 See Exhibits 3.1 and 3.2 for provisions of the Restated
Certificate of Incorporation and Restated Bylaws of the
Registrant defining the rights of holders of common stock of
the Registrant
*5.1 Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo,
P.C. with respect to the legality of securities being
registered
*10.1 Agreement of Lease, dated March 1999, between One Fifteen
West Assoc., L.P. and the Registrant
*10.2 Restated 1997 Employee, Director and Consultant Stock Option
Plan
+*10.3 Fulfillment Services Agreement, dated July 23, 1997, by and
between Harrison Fulfillment Services, Inc. and the
Registrant
+*10.4 Amendment to Fulfillment Services Agreement, dated September
1, 1997, by and between Harrison Fulfillment Services, Inc.
and the Registrant
+*10.5 Second Amendment to Fulfillment Services Agreement, dated
October 9, 1998, by and between Harrison Fulfillment
Services, Inc. and the Registrant
+*10.6 Agreement, dated June 19, 1998, between iName, a Division of
GlobeComm, Inc., and the Registrant
+*10.7 Services Agreement, dated February 9, 1999, between OneSoft
Corporation and the Registrant
+*10.8 Mailing List Purchase Agreement, dated February 22, 1999,
between Just Nikki, Inc. and the Registrant
+*10.9 Standard Merchant Terms and Insertion Order, dated November
18, 1998 between Yahoo! Shopping and the Registrant
+*10.10 Top Tier E-Sales Agreement Form, dated December 9, 1998,
between Catalog City and the Registrant
+*10.11 Agreement, dated March 8, 1999, between Internet Fashion
Mall, LLC and the Registrant
+*10.12 Memorandum of Understanding, dated January 28, 1999, between
Primedia Consumer Marketing and the Registrant
10.13 [Intentionally Blank]
10.14 [Intentionally Blank]
*10.15 Stockholders and Voting Agreement, dated as of June 30,
1997, among the stockholders named on Schedule I thereto and
Samuel A. Gradess, James K. Johnson, Jr. and Matthew Diamond
*10.16 Amendment No. 1, dated August 25, 1997, to Stockholders and
Voting Agreement, dated June 30, 1997
*10.17 Stockholders Agreement, dated November 24, 1998, among the
stockholders named on Schedule I thereto and Samuel A.
Gradess, James K. Johnson, Jr. and Matthew Diamond
*10.18 Employment Agreement, dated April 19, 1999, between Matthew
C. Diamond and the Registrant
*10.19 Employment Agreement, dated April 19, 1999, between James K.
Johnson, Jr. and the Registrant
*10.20 Employment Agreement, dated April 19, 1999, between Samuel
A. Gradess and the Registrant
*10.21 Employment letter, dated February 22, 1999, between Neil
Vogel and the Registrant
*10.22 Non-Competition and Confidentiality Agreement, dated
November 24, 1998, between Matthew C. Diamond and the
Registrant
</TABLE>
II-4
<PAGE> 84
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------- ----------------------
<C> <S>
*10.23 Non-Competition and Confidentiality Agreement, dated
November 24, 1998, between James K. Johnson, Jr. and the
Registrant
*10.24 Non-Competition and Confidentiality Agreement, dated
November 24, 1998, between Samuel A. Gradess and the
Registrant
*10.25 Non-Competition and Confidentiality Agreement, dated
February 22, 1999, between Neil Vogel and the Registrant
*10.26 Master Equipment Lease Agreement, dated March 11, 1998,
between Ronald Demer and the Registrant
+*10.27 Agreement, dated April 6, 1998, between Ladenburg Thalmann &
Co. Inc. and the Registrant
+*10.28 Agreement, dated October 12, 1998, between Ladenburg
Thalmann & Co. Inc. and the Registrant
10.29 [Intentionally Blank]
10.30 [Intentionally Blank]
*10.31 Letter Agreement, dated August 14, 1998, between Robert E.
Kerson and the Registrant
*10.32 Form of Non-Qualified Stock Option Agreement
*10.33 Form of Incentive Stock Option Agreement
*10.34 Form of 1997 Stock and Warrant Subscription Agreement
*10.35 Form of May 1998 Subscription Agreement between the
Registrant and each of Peter Graham, Peter M. Graham
Purchase Money Plan, Neil Vogel and Ladenburg Thalmann & Co.
Inc.
*10.36 Form of May 1998 Promissory Note issued by the Registrant to
Peter Graham, Peter M. Graham Purchase Money Plan, and Neil
Vogel
*10.37 Form of Warrant, dated May 13, 1998, issued to Ladenburg
Thalmann & Co. Inc., Peter Graham, Peter M. Graham Purchase
Money Plan and Neil Vogel
*10.38 Series A Convertible Preferred Stock Purchase Agreement,
dated November 24, 1998, between Brand Equity Ventures I,
L.P. and the Registrant
*10.39 Registration Rights Agreement, dated November 24, 1998, by
and among Brand Equity Ventures I, L.P., J. Edward Diamond
and the Registrant
*10.40 Flexible Standardized 401(k) Profit Sharing Plan Adoption
Agreement
*10.41 1999 Employee Stock Purchase Plan
*10.42 Form of Incentive Stock Option Agreement between the
Registrant and Neil Vogel
*10.43 Form of Non-Qualified Stock Option Agreement between the
Registrant and Neil Vogel
23.1 Consent of Arthur Andersen LLP
*23.2 Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo,
P.C. (see Exhibit 5.1)
*24.1 Powers of Attorney (see signature Page of original S-1)
*27.1 Financial Data Schedule
</TABLE>
- ------------
* Previously filed with the SEC.
+ Confidential treatment requested as to certain portions, which portions have
been omitted and filed separately with the SEC.
(b) FINANCIAL STATEMENT SCHEDULES
Financial Statements Schedules are omitted because the information is
included in the Financial Statements or notes thereto.
II-5
<PAGE> 85
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has duly caused this Amendment No. 4 to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, State of New York, on May 12, 1999.
ALLOY ONLINE, INC.
By: /s/ JAMES K. JOHNSON, JR.
------------------------------------
James K. Johnson, Jr.
Chief Operating Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 4 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Chief Executive Officer, Treasurer May 12, 1999
- ------------------------------------------------ and Director (principal executive
Matthew C. Diamond officer)
/s/ JAMES K. JOHNSON, JR. Chief Operating Officer, President May 12, 1999
- ------------------------------------------------ and Director
James K. Johnson, Jr.
* Chief Financial Officer, Secretary May 12, 1999
- ------------------------------------------------ and Director (principal financial
Samuel A. Gradess and accounting officer)
* Director May 12, 1999
- ------------------------------------------------
Peter M. Graham
* Director May 12, 1999
- ------------------------------------------------
David Yarnell
</TABLE>
* By executing his name hereto, James K. Johnson, Jr. is signing this document
on behalf of the persons indicated above pursuant to powers of attorney duly
executed by such persons and filed with the Securities and Exchange
Commission.
By: /s/ JAMES K. JOHNSON, JR.
----------------------------------
James K. Johnson, Jr.
(Attorney-in-Fact)
II-6
<PAGE> 86
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SCHEDULE
To Alloy Online, Inc.:
We have audited, in accordance with generally accepted auditing standards,
the financial statements of Alloy Online, Inc. (the "Company") included in this
registration statement and have issued our report thereon dated March 5, 1999.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying schedule is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ ARTHUR ANDERSEN LLP
NEW YORK, NEW YORK
MARCH 5, 1999
II-7
<PAGE> 87
SCHEDULE II
ALLOY ONLINE, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED BALANCE AT
BEGINNING OF TO THE END OF
DESCRIPTION PERIOD EXPENSE DEDUCTIONS PERIOD
----------- ------------ ---------- ---------- -----------
<S> <C> <C> <C> <C>
Reserve for sales returns and
allowances:
January 31, 1997................... $ -- -- -- --
======= ========== ========== =======
January 31, 1998................... $ -- $ 193,898 $ 178,898 $15,000
======= ========== ========== =======
January 31, 1999................... $15,000 $1,096,341 $1,054,535 $56,806
======= ========== ========== =======
</TABLE>
II-8
<PAGE> 88
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
- -------- ---------------------- ------------
<C> <S> <C>
*1.1 Form of Underwriting Agreement
3.1 Restated Certificate of Incorporation of the Registrant
*3.2 Restated Bylaws of the Registrant
*4.1 Form of Common Stock Certificate
*4.2 See Exhibits 3.1 and 3.2 for provisions of the Restated
Certificate of Incorporation and Restated Bylaws of the
Registrant defining the rights of holders of common stock of
the Registrant
*5.1 Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo,
P.C. with respect to the legality of securities being
registered
*10.1 Agreement of Lease, dated March 1999, between One Fifteen
West Assoc., L.P. and the Registrant
*10.2 Restated 1997 Employee, Director and Consultant Stock Option
Plan
+*10.3 Fulfillment Services Agreement, dated July 23, 1997, by and
between Harrison Fulfillment Services, Inc. and the
Registrant
+*10.4 Amendment to Fulfillment Services Agreement, dated September
1, 1997, by and between Harrison Fulfillment Services, Inc.
and the Registrant
+*10.5 Second Amendment to Fulfillment Services Agreement, dated
October 9, 1998, by and between Harrison Fulfillment
Services, Inc. and the Registrant
+*10.6 Agreement, dated June 19, 1998, between iName, a Division of
GlobeComm, Inc., and the Registrant
+*10.7 Services Agreement, dated February 9, 1999, between OneSoft
Corporation and the Registrant
+*10.8 Mailing List Purchase Agreement, dated February 22, 1999,
between Just Nikki, Inc. and the Registrant
+*10.9 Standard Merchant Terms and Insertion Order, dated November
18, 1998 between Yahoo! Shopping and the Registrant
+*10.10 Top Tier E-Sales Agreement Form, dated December 9, 1998,
between Catalog City and the Registrant
+*10.11 Agreement, dated March 8, 1999, between Fashion Mall, LLC
and the Registrant
*10.12 Memorandum of Understanding, dated January 28, 1999, between
Primedia Consumer Marketing and the Registrant
10.13 [Intentionally Blank]
10.14 [Intentionally Blank]
*10.15 Stockholders and Voting Agreement, dated as of June 30,
1997, among the stockholders named on Schedule I thereto and
Samuel A. Gradess, James K. Johnson, Jr. and Matthew Diamond
*10.16 Amendment No. 1, dated August 25, 1997, to Stockholders and
Voting Agreement, dated June 30, 1997
*10.17 Stockholders Agreement, dated November 24, 1998, among the
stockholders named on Schedule I thereto and Samuel A.
Gradess, James K. Johnson, Jr. and Matthew Diamond
*10.18 Employment Agreement, dated April 19, 1999, between Matthew
C. Diamond and the Registrant
*10.19 Employment Agreement, dated April 19, 1999, between James K.
Johnson, Jr. and the Registrant
</TABLE>
<PAGE> 89
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
- -------- ---------------------- ------------
<C> <S> <C>
*10.20 Employment Agreement, dated April 19, 1999, between Samuel
A. Gradess and the Registrant
*10.21 Employment letter, dated February 22, 1999, between Neil
Vogel and the Registrant
*10.22 Non-Competition and Confidentiality Agreement, dated
November 24, 1998, between Matthew C. Diamond and the
Registrant
*10.23 Non-Competition and Confidentiality Agreement, dated
November 24, 1998, between James K. Johnson, Jr. and the
Registrant
*10.24 Non-Competition and Confidentiality Agreement, dated
November 24, 1998, between Samuel A. Gradess and the
Registrant
*10.25 Non-Competition and Confidentiality Agreement, dated
February 22, 1999, between Neil Vogel and the Registrant
*10.26 Master Equipment Lease Agreement, dated March 11, 1998,
between Ronald Demer and the Registrant
+*10.27 Agreement, dated April 6, 1998, between Ladenburg Thalmann &
Co. Inc. and the Registrant
+*10.28 Agreement, dated October 12, 1998, between Ladenburg
Thalmann & Co. Inc. and the Registrant
10.29 [Intentionally Blank]
10.30 [Intentionally Blank]
*10.31 Letter Agreement, dated August 14, 1998, between Robert E.
Kerson and the Registrant
*10.32 Form of Non-Qualified Stock Option Agreement
*10.33 Form of Incentive Stock Option Agreement
*10.34 Form of 1997 Stock and Warrant Subscription Agreement
*10.35 Form of May 1998 Subscription Agreement between the
Registrant and each of Peter Graham, Peter M. Graham
Purchase Money Plan, Neil Vogel and Ladenburg Thalmann & Co.
Inc.
*10.36 Form of May 1998 Promissory Note issued by the Registrant to
Ladenburg Thalmann & Co. Inc., Peter Graham, Peter M. Graham
Money Purchase Plan and Neil Vogel
*10.37 Form of Warrant, dated May 13, 1998, issued to Ladenburg
Thalmann & Co. Inc., Peter Graham and Neil Vogel
*10.38 Series A Convertible Preferred Stock Purchase Agreement,
dated November 24, 1998, between Brand Equity Ventures I,
L.P. and the Registrant
*10.39 Registration Rights Agreement, dated November 24, 1998, by
and among Brand Equity Ventures I, L.P., J. Edward Diamond
and the Registrant
*10.40 Flexible Standardized 401(k) Profit Sharing Plan Adoption
Agreement
*10.41 1999 Employee Stock Purchase Plan
*10.42 Form of Incentive Stock Option Agreement between the
Registrant and Neil Vogel
*10.43 Form of Non-Qualified Stock Option Agreement between the
Registrant and Neil Vogel
23.1 Consent of Arthur Andersen LLP
</TABLE>
<PAGE> 90
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
- -------- ---------------------- ------------
<C> <S> <C>
*23.2 Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo,
P.C. (see Exhibit 5.1)
*24.1 Powers of Attorney (see signature page of original S-1)
*27.1 Financial Data Schedule
</TABLE>
- ------------
* Previously filed with the SEC.
+ Confidential treatment requested as to certain portions, which portions have
been omitted and filed separately with the SEC.
<PAGE> 1
EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
ALLOY ONLINE, INC.
Alloy Online, Inc. (the "Corporation"), a Delaware corporation, hereby
certifies as follows:
1. The name of the corporation is Alloy Online, Inc. The original name of
the Corporation was Nippon Direct, Inc. and the date of the filing of its
original Certificate of Incorporation with the Secretary of State of Delaware
was January 22, 1996.
2. This Restated Certificate of Incorporation amends, restates and
integrates the provisions of the Certificate of Incorporation, as heretofore
amended or restated, of said Corporation and has been duly adopted in accordance
with the provisions of Sections 242 and 245 of the General Corporation Law of
the State of Delaware pursuant to a resolution adopted by the Board of Directors
of the Corporation and by written consent of stockholders of the Corporation in
accordance with Section 228 of the General Corporation Laws of the State of
Delaware.
3. The text of the Certificate of Incorporation is hereby amended and
restated to read in its entirety as follows:
FIRST: The name of the corporation is:
ALLOY ONLINE, INC.
SECOND: The address, including street, number, city and county of the
registered office of the Corporation in the State of Delaware is 1013 Centre
Road, City of Wilmington, County of New Castle and the name of the registered
agent of the Corporation in the State of Delaware is The Prentice-Hall
Corporation System, Inc.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity or carry on any business for which corporations may be organized under
the Delaware General Corporation Law of the State of Delaware.
FOURTH: The total number of shares of all classes of stock which the
Corporation shall have the authority to issue is 55,000,000 shares, consisting
of 50,000,000 shares of common stock, par value $.01 per share (the "Common
Stock"), and 5,000,000 shares of preferred stock, par value $.01 per share (the
"Preferred Stock").
Each share of Common Stock of the Corporation, par value $.01 per share,
issued and outstanding or held in the treasury of the Corporation is hereby
reclassified and changed into 1.128 fully paid and nonassessable shares of
Common Stock of the Corporation, par value $.01 per share, and each stock
certificate for one or more shares of Common Stock of the Corporation as of the
close of business on the date this amendment becomes effective (the "Effective
Time") shall represent the whole number of shares of Common Stock obtained by
multiplying by 1.128 the number of shares of Common Stock represented by such
certificate.
The following is a statement of the relative powers, designations, special
rights, privileges, qualifications, limitations, restrictions and other matters
pertaining to the common stock and the preferred stock.
<PAGE> 2
A. Common Stock.
------------
1. DIVIDENDS. Subject to the preferential rights, if any, of the
Preferred Stock, the holders of shares of Common Stock shall be entitled to
receive, when and if declared by the Board of Directors, out of the assets of
the Corporation which are by law available therefor, dividends payable either in
cash, in property, or in shares of Common Stock.
2. LIQUIDATION. In the event of any liquidation, dissolution or winding
up of the Corporation, whether voluntary or involuntary, after payment or
provision for payment of the debts and other liabilities of the Corporation and
the amounts to which the holders of any Preferred Stock shall be entitled, the
holders of Common Stock shall be entitled to share ratably in the remaining
assets of the Corporation.
3. VOTING. The holders of the Common Stock are entitled to one vote for
each share held. There shall be no cumulative voting.
B. Preferred Stock
---------------
1. Shares of Preferred Stock may be issued in one or more series at such
time or times and for such consideration as the Board of Directors may
determine.
2. Authority is hereby expressly granted to the Board of Directors to fix
from time to time, by resolution or resolutions providing for the establishment
and/or issuance of any series of Preferred Stock, the designation of such series
and the powers, preferences and rights of the shares of such series, and the
qualifications, limitations or restrictions thereof, to the fullest extent such
authority may be conferred upon the Board of Directors under the General
Corporation Law of the State of Delaware, including, without limitation, the
authority to fix the following:
(a) The distinctive designation and number of shares comprising such
series, which number may (except where otherwise provided by the Board of
Directors in creating such series) be increased or decreased (but not below
the number of shares then outstanding) from time to time by action of the
Board of Directors;
(b) The rate of dividends, if any, on the shares of that series,
whether dividends shall be (i) non-cumulative, (ii) cumulative to the
extent earned or (iii) cumulative (and, if cumulative, from which date or
dates), whether dividends shall be payable in cash, property or rights, or
in shares of the Corporation's capital stock, and the relative rights of
priority, if any, of payment of dividends on shares of that series over
shares of any other series or class;
(c) Whether the shares of that series shall be redeemable and, if so,
the terms and conditions of such redemption, including the date or dates
upon or after which they shall be redeemable, and the amount per share
payable in case of redemption (which amount may vary under different
conditions and at different redemption dates) or the property or rights,
including securities of any other corporation, payable in case of
redemption;
(d) Whether the series shall have a sinking fund for the redemption
or purchase of shares of that series and, if so, the terms and amounts
payable into such sinking fund;
(e) The rights to which the holders of the shares of that series
shall be entitled in the event of the voluntary or involuntary liquidation,
dissolution or winding-up of the
2
<PAGE> 3
Corporation, and the relative rights of priority, if any, of payment of
shares of that series in any such event;
(f) Whether the shares of that series shall be convertible into or
exchangeable for shares of stock of any other class or any other series
and, if so, the terms and conditions of such conversion or exchange,
including the rate or rates of conversion or exchange, the date or dates
upon or after which they shall be convertible or exchangeable, the period
or periods during which they shall be convertible or exchangeable, the
event or events upon or after which they shall be convertible or
exchangeable or at whose option they shall be convertible or exchangeable,
and the method (if any) of adjusting the rates of conversion or exchange in
the event of a stock split, stock dividend, combination of shares or
similar event;
(g) Whether the issuance of any additional shares of such series, or
of any shares of any other series, shall be subject to restrictions as to
issuance, or as to the powers, preferences or rights of any such additional
shares of such series or shares of such other series;
(h) Whether or not the shares of that series shall have voting
rights, the extent of such voting rights on specified matters or on all
matters, the number of votes to which the holder of a share of such series
shall be entitled in respect of such share, whether such series shall vote
generally with the Common Stock on all matters or (either generally or upon
the occurrence of specified circumstances) shall vote separately as a class
or with other series of Preferred Stock; and
(i) Any other preferences, privileges and powers and relative,
participating, optional or other special rights and qualifications,
limitations or restrictions of such series, as the Board of Directors may
deem advisable and as shall not be inconsistent with the provisions of this
Restated Certificate of Incorporation and to the full extent now or
hereafter permitted by the General Corporation Law of the State of
Delaware.
FIFTH: The Corporation is to have perpetual existence.
SIXTH: The following provisions are inserted for the management of the
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its directors and stockholders:
A. The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors. In addition to the powers and
authority expressly conferred upon them by statute or by this Restated
Certificate of Incorporation or the By-Laws of the Corporation as in effect from
time to time, the directors are hereby empowered to exercise all such powers and
do all such acts and things as may be exercised or done by the Corporation.
B. The directors of the Corporation need not be elected by written ballot
unless the By-Laws of the Corporation so provide.
C. Any action required or permitted to be taken by the stockholders of
the Corporation may be effected only at a duly called annual or special meeting
of stockholders of the Corporation and not by written consent.
D. Special meetings of the stockholders may only be called by the Board
of Directors.
3
<PAGE> 4
SEVENTH:
A. Subject to the rights of the holders of shares of any series of
Preferred Stock then outstanding to elect additional directors under specified
circumstances, the number of directors shall be fixed from time to time
exclusively by the Board of Directors pursuant to a resolution adopted by a
majority of the Board of Directors.
B. The Board of Directors of the Corporation shall be divided into three
classes, as nearly equal in number as reasonably possible, with the term of
office of the first class to expire at the 2000 annual meeting of stockholders
or any special meeting in lieu thereof, the term of office of the second class
to expire at the 2001 annual meeting of stockholders or any special meeting in
lieu thereof, and the term of office of the third class to expire at the 2002
annual meeting of stockholders or any special meeting in lieu thereof. At each
annual meeting of stockholders or special meeting in lieu thereof following such
initial classification, directors elected to succeed those directors whose terms
expire shall be elected for a term of office to expire at the third succeeding
annual meeting of stockholders or special meeting in lieu thereof after their
election and until their successors are duly elected and qualified.
C. Subject to the rights of the holders of any series of Preferred Stock
then outstanding, newly created directorships resulting from any increase in the
authorized number of directors or any vacancies in the Board of Directors
resulting from death, resignation, retirement, disqualification, removal from
office or other cause may be filled only by a majority vote of the directors
then in office even though less than a quorum, or by a sole remaining director.
In the event of any increase or decrease in the authorized number of directors,
(i) each director then serving as such shall nevertheless continue as a director
of the class of which he is a member until the expiration of his current term or
his prior death, retirement, removal or resignation and (ii) the newly created
or eliminated directorships resulting from such increase or decrease shall if
reasonably possible be apportioned by the Board of Directors among the three
classes of directors so as to ensure that no one class has more than one
director more than any other class. To the extent reasonably possible,
consistent with the foregoing rule, any newly created directorships shall be
added to those classes whose terms of office are to expire at the latest dates
following such allocation and newly eliminated directorships shall be subtracted
from those classes whose terms of office are to expire at the earliest dates
following such allocation, unless otherwise provided for from time to time by
resolution adopted by a majority of the directors then in office, although less
than a quorum.
D. Advance notice of stockholder nominations for the election of
directors and of business to be brought by stockholders before any meeting of
the stockholders of the Corporation shall be given in the manner provided in the
By-Laws of the Corporation.
EIGHTH: The Board of Directors is expressly empowered to adopt, amend or
repeal By-Laws of the Corporation. Any adoption, amendment or repeal of the
By-Laws of the Corporation by the Board of Directors shall require the approval
of a majority of the Board of Directors. The stockholders shall also have power
to adopt, amend or repeal the By-Laws of the Corporation, provided, that in
addition to any vote of the holders of any class or series of stock of the
Corporation required by law or by this Restated Certificate of Incorporation,
the affirmative vote of the holders of at least seventy percent (70%) of the
voting power of all of the then outstanding shares of the capital stock of the
Corporation entitled to vote generally in the election of directors, voting
together as a single class, shall be required for the stockholders to adopt,
amend or repeal any provision of the By-Laws of the Corporation.
4
<PAGE> 5
NINTH:
A. To the fullest extent permitted by the General Corporation Law of the
State of Delaware as the same now exists or may hereafter be amended, the
Corporation shall indemnify, and advance expenses to, its directors and officers
and to any person who is or was serving at the request of the Corporation as a
director, officer, trustee, employee or agent of another corporation, or of a
partnership, joint venture, trust or other enterprise, if such person was or is
made a party to or is threatened to be made a party to or is otherwise involved
(including, without limitation, as a witness) in any action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that such person is or was a director or officer of the Corporation or is or was
serving at the request of the Corporation as a director, officer, trustee,
employee or agent of another corporation, or of a partnership, joint venture,
trust or other enterprise, including service with respect to an employee benefit
plan, provided, that except with respect to proceedings to enforce rights to
indemnification or as is otherwise required by law, the By-Laws of the
Corporation may provide that the Corporation shall not be required to indemnify,
and advance expenses to, any director, officer or other person in connection
with a proceeding (or part thereof) initiated by such director, officer or other
person, unless such proceeding (or part thereof) was authorized by the Board of
Directors and shall be made only upon delivery to the Corporation of an
undertaking, by or on behalf of such person, to repay all amounts so advanced if
it shall ultimately be determined by final judicial decision from which there is
no further right to appeal that such person is not entitled to be indemnified
for such expenses under this Article NINTH or otherwise. The Corporation, by
action of its Board of Directors, may provide indemnification or advance
expenses to employees and agents of the Corporation or other persons only on
such terms and conditions and to the extent determined by the Board of Directors
in its sole and absolute discretion.
B. The indemnification and advancement of expenses provided by, or
granted pursuant to, this Article NINTH shall not be deemed exclusive of any
other rights to which a person seeking indemnification or advancement of
expenses may be entitled under any By-Law, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in such person's
official capacity and as to action in another capacity while holding such
office.
C. The Corporation shall have the power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, trustee, employee or agent of another corporation, or of
a partnership, joint venture, trust or other enterprise, against any liability
asserted against such person and incurred by such person in any such capacity,
or arising out of such person's status as such, whether or not the Corporation
would have the power to indemnify such person against such liability under this
Article NINTH.
D. The indemnification and advancement of expenses provided by, or
granted pursuant to, this Article NINTH shall, unless otherwise specified when
authorized or ratified, continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such person. The indemnification and rights to
advancement of expenses that may have been provided to an employee or agent of
the Corporation by action of the Board of Directors, pursuant to the last
sentence of paragraph 1 of this Article NINTH, shall, unless otherwise specified
when authorized or ratified, continue as to a person who has ceased to be an
employee or agent of the Corporation and shall inure to the benefit of the
heirs, executors and administrators of such person, after the time such person
has ceased to be an employee or agent of the Corporation, only on such terms and
conditions and to the extent determined by the Board of Directors in its sole
and absolute discretion. No repeal or amendment of this Article NINTH shall
adversely affect any rights of any person pursuant to this Article NINTH which
existed at the time of such repeal or amendment with respect to acts or
omissions occurring prior to such repeal or amendment.
5
<PAGE> 6
TENTH: No director shall be personally liable to the Corporation or its
stockholders for any monetary damages for breaches of fiduciary duty as a
director, notwithstanding any provision of law imposing such liability; provided
that this provision shall not eliminate or limit the liability of a director, to
the extent that such liability is imposed by applicable law, (i) for any breach
of the director's duty of loyalty to the Corporation or its stockholders, (ii)
for acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) under Section 174 or successor provisions
of the General Corporation Law of the State of Delaware, or (iv) for any
transaction from which the director derived an improper personal benefit. This
provision shall not eliminate or limit the liability of a director for any act
or omission if such elimination or limitation is prohibited by the General
Corporation Law of the State of Delaware. No amendment to or repeal of this
provision shall apply to or have any effect on the liability or alleged
liability of any director for or with respect to any acts or omissions of such
director occurring prior to such amendment or repeal. If the General Corporation
Law of the State of Delaware is amended to authorize corporate action further
eliminating or limiting the personal liability of directors, then the liability
of a director of the Corporation shall be eliminated or limited to the fullest
extent permitted by the General Corporation Law of the State of Delaware, as so
amended.
ELEVENTH: The Corporation reserves the right to amend or repeal any
provision contained in this Restated Certificate of Incorporation in the manner
prescribed by the General Corporation Law of the State of Delaware and all
rights conferred upon stockholders are granted subject to this reservation,
provided that in addition to the vote of the holders of any class or series of
stock of the Corporation required by law or by this Restated Certificate of
Incorporation, the affirmative vote of the holders of shares of voting stock of
the Corporation representing at least seventy percent (70%) of the voting power
of all of the then outstanding shares of the capital stock of the Corporation
entitled to vote generally in the election of directors, voting together as a
single class, shall be required to (i) reduce the number of authorized shares of
Common Stock or the number of authorized shares of Preferred Stock set forth in
Article FOURTH, or (ii) amend, alter or repeal, or adopt any provision
inconsistent with, Articles SIXTH, SEVENTH, EIGHTH, NINTH, TENTH, and this
Article ELEVENTH of this Restated Certificate of Incorporation.
TWELFTH: Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of the General Corporation Law of the State of
Delaware or on the application of trustees in dissolution or of any receiver or
receivers appointed for this Corporation under the provisions of Section 279 of
the General Corporation Law of the State of Delaware, order a meeting of the
creditors or class of creditors, and/or of the stockholders or class of
stockholders of this Corporation, as the case may be, to be summoned in such
manner as the said court directs. If a majority in number representing
three-fourths (3/4) in value of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this Corporation, as the case may
be, agree to any compromise or arrangement and to any reorganization of this
Corporation as consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of this Corporation, as the case may be, and also on this
Corporation.
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IN WITNESS WHEREOF, the Corporation has caused this Restated Certificate of
Incorporation to be signed by its duly authorized officer this 7th day of
May, 1999.
ALLOY ONLINE, INC.
By: /s/ Samuel A. Gradess
-------------------------------
Name: Samuel A. Gradess
Title: Chief Financial Officer
7
<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
New York, New York
May 13, 1999
