<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2000
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to __________
Commission file number: 0-26023
ALLOY ONLINE, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3310676
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
151 West 26th Street, 11th floor, New York, NY 10001
(Address of Principal Executive Offices)
(Zip Code)
Registrant's telephone number, including area code: (212) 244-4307
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of June 5, 2000, the registrant had 17,628,154 shares of common
stock, $.01 par value per share, outstanding. All share numbers referenced in
this quarterly report reflect a 1.128-for-1 stock split of all outstanding
shares of Common Stock effected by Alloy Online, Inc. on May 13, 1999.
<PAGE>
ALLOY ONLINE, INC.
CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE NO.
--------
<S> <C>
Item 1. Financial Statements
Consolidated Condensed Balance Sheets, April 30, 2000 (unaudited)
and January 31, 2000............................................................ 3
Consolidated Condensed Statements of Operations, Three Months Ended
April 30, 2000 (unaudited) and April 30, 1999 (unaudited)....................... 4
Consolidated Condensed Statements of Comprehensive (Loss) Income,
Three Months Ended April 30, 2000 (unaudited) and April 30, 1999 (unaudited).... 5
Consolidated Condensed Statements of Cash Flows, Three Months Ended
April 30, 2000 (unaudited) and April 30, 1999 (unaudited)....................... 6
Consolidated Condensed Statement of Changes in Stockholders' Equity, Three
Months Ended April 30, 2000 (unaudited)......................................... 7
Notes to Consolidated Condensed Financial Statements (unaudited).................. 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................ 14
PART II - OTHER INFORMATION
Item 1 Legal Proceedings................................................................ 15
Item 2 Changes in Securities and Use of Proceeds........................................ 15
Item 3 Defaults Upon Senior Securities.................................................. 15
Item 4 Submission of Matters to a Vote of Security Holders.............................. 15
Item 5 Other Information................................................................ 15
Item 6 Exhibits and Reports on Form 8-K................................................. 16
SIGNATURES.......................................................................................... 17
EXHIBIT INDEX....................................................................................... 18
EXHIBIT 27 - Financial Data Schedule................................................................ 19
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ALLOY ONLINE, INC.
Consolidated Condensed Balance Sheets
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
ASSETS
------
January 31, April 30,
2000 2000
------------ -------------
(audited) (unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 12,702 $ 18,024
Available-for-sale marketable securities 20,971 41,275
Accounts receivable, net 2,693 2,629
Inventories, net 3,981 4,457
Prepaid catalog costs 1,011 1,009
Other current assets 1,281 1,373
--------- ---------
TOTAL CURRENT ASSETS 42,639 68,767
Property and equipment, net 2,187 2,540
Goodwill, net of amortization 12,349 11,539
Other assets 493 1,492
--------- ---------
TOTAL ASSETS $ 57,668 $ 84,338
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 12,401 $ 9,311
Other current liabilities 59 32
--------- ---------
TOTAL CURRENT LIABILITIES 12,460 9,343
STOCKHOLDERS' EQUITY:
Common Stock; $.01 par value; 50,000,000 shares authorized;
14,686,437 and 17,628,154 shares issued and outstanding, respectively 147 176
Additional paid-in capital 68,948 97,764
Accumulated deficit (23,216) (29,521)
Deferred compensation (593) (623)
Accumulated other comprehensive (loss) income (78) 7,199
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 45,208 74,995
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 57,668 $ 84,338
========= =========
</TABLE>
The accompanying footnotes are an integral part of these consolidated condensed
financial statements.
<PAGE>
ALLOY ONLINE, INC.
Consolidated Condensed Statements of Operations
(Amounts in thousands, except share and per share data)
(unaudited)
<TABLE>
<CAPTION>
For the three months
ended April 30,
1999 2000
------------ -------------
<S> <C> <C>
NET MERCHANDISE REVENUES $ 2,391 $ 5,451
SPONSORSHIP AND OTHER REVENUES 163 2,209
------------ -------------
TOTAL REVENUES 2,554 7,660
COST OF GOODS SOLD 1,249 3,001
------------ -------------
GROSS PROFIT 1,305 4,659
------------ -------------
OPERATING EXPENSES:
Selling and marketing 2,610 8,497
General and administrative 919 2,089
Goodwill amortization -- 811
------------ -------------
TOTAL OPERATING EXPENSES 3,529 11,397
------------ -------------
LOSS FROM OPERATIONS (2,224) (6,738)
INTEREST (EXPENSE) INCOME, NET (78) 433
------------ -------------
NET LOSS $ (2,302) $ (6,305)
============ =============
BASIC LOSS PER SHARE OF COMMON STOCK (Note 3) $ (0.27) $ (0.41)
============ =============
DILUTED LOSS PER SHARE OF COMMON STOCK (Note 3) $ (0.26) $ (0.41)
============ =============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic 8,711,878 15,245,159
============ =============
Diluted 8,953,880 15,245,159
============ =============
</TABLE>
The accompanying footnotes are an integral part of these consolidated condensed
financial statements.
<PAGE>
ALLOY ONLINE, INC.
Consolidated Condensed Statements of Comprehensive (Loss) Income
(Amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the three months
ended April 30,
1999 2000
---------- ----------
<S> <C> <C>
Net Loss $ (2,302) $ (6,305)
Other comprehensive income, net of tax:
Net unrealized gain on available-for-sale securities -- 7,277
--------- ---------
Comprehensive (Loss) Income $ (2,302) $ 972
========= =========
</TABLE>
<PAGE>
ALLOY ONLINE, INC.
Consolidated Condensed Statements of Cash Flows (Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the three months
ended April 30,
1999 2000
-------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (2,302) $ (6,305)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 59 1,008
Compensation charge for issuance of stock options 284 87
Accrued interest on promissory notes 102 -
Changes in operating assets and liabilities - net of effect of business acquisitions -
(Increase) decrease in:
Accounts receivable 4 64
Inventories 196 (475)
Other current assets (329) (90)
Other assets (6) (16)
Increase (decrease) in:
Accounts payable and accrued expenses 1,285 (3,091)
------------------------
Net cash used in operating activities (707) (8,818)
------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net maturities of marketable securities - 6,502
Capital expenditures (135) (533)
Purchase of non-marketable securities - (1,000)
Purchase of domain name and mailing list (250) -
------------------------
Net cash (used in) provided by investing activities (385) 4,969
------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred registration costs (377) -
Proceeds from stock subscription receivable 2,497 -
Exercise of stock options and warrants - 9
Net proceeds from issuance of common stock - 9,189
Payments of capital lease obligation (16) (27)
------------------------
Net cash provided by financing activities 2,104 9,171
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,012 5,322
CASH AND CASH EQUIVALENTS, beginning of period 2,983 12,702
------------------------
CASH AND CASH EQUIVALENTS, end of period $ 3,995 $ 18,024
========================
Supplemental disclosure of non-cash investing and financing
activity:
Purchase of computer equipment under capital lease $ 6 $ -
Exercise of stock options $ 4 $ -
Deferred compensation $ 767 $ 117
Fair value of Liberty Digital, Inc. common stock received in connection with exchange transaction
(Note 4) $ - $ 19,530
Other comprehensive income $ - $ 7,277
</TABLE>
<PAGE>
ALLOY ONLINE, INC.
Consolidated Statement of Changes in Stockholders' Equity
(Amounts in thousands, except share data)
For the Three Months Ended April 30, 2000
<TABLE>
<CAPTION>
Common Stock
----------------------------- Additional
Shares Amount Paid-in Capital
----------- ---------- ---------------
<S> <C> <C> <C>
Balance, February 1, 2000 14,686,437 $ 147 $ 68,948
Proceeds from issuance of common stock in connection with the Liberty
Digital, Inc. transaction, net of issuance costs (Note 4) 2,922,694 29 28,690
Issuance of stock options to consultants -- -- 117
Amortization of deferred compensation -- -- --
Issuance of common stock pursuant to the exercise of options and
warrants and the employee stock purchase plan 19,023 -- 9
Net loss -- -- --
Net unrealized gain on available-for-sale marketable securities -- -- --
---------- ---------- ----------
Balance, April 30, 2000 17,628,154 $ 176 $ 97,764
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Accumulated Other
Accumulated Deferred Comprehensive
Deficit Compensation (Loss) Income Total
----------- ------------- ------------- -----
<S> <C> <C> <C> <C>
Balance, February 1, 2000 ($ 23,216) ($ 593) ($ 78) $ 45,208
Proceeds from issuance of common stock in connection with the Liberty
Digital, Inc. transaction, net of issuance costs (Note 4) -- -- -- 28,719
Issuance of stock options to consultants -- (117) -- --
Amortization of deferred compensation -- 87 -- 87
Issuance of common stock pursuant to the exercise of options and
warrants and the employee stock purchase plan -- -- -- 9
Net loss (6,305) -- -- (6,305)
Net unrealized gain on available-for-sale marketable securities -- -- 7,277 7,277
---------- ---------- ---------- ----------
Balance, April 30, 2000 ($ 29,521) ($ 623) $ 7,199 $ 74,995
========== ========== ========== ==========
</TABLE>
<PAGE>
ALLOY ONLINE, INC.
------------------
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------------------------------------------------
1. FINANCIAL STATEMENT PRESENTATION
The accompanying consolidated condensed financial statements have been
prepared by Alloy Online, Inc. ("Alloy"), without audit. In the opinion of
management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position, results of
operations, comprehensive income and losses, and cash flows at April 30,
2000 and for all periods presented have been made. The results of
operations for the periods ended April 30, 2000 and 1999 are not
necessarily indicative of the operating results for a full year.
Certain information and footnote disclosures prepared in accordance with
generally accepted accounting principles and normally included in the
financial statements have been condensed or omitted. We suggest that you
read the financial statements and these footnotes in conjunction with our
audited financial statements and footnotes included in our Annual Report on
Form 10-K for the fiscal year ended January 31, 2000 filed with the
Securities and Exchange Commission on May 1, 2000.
2. BUSINESS
Alloy was incorporated in the State of Delaware on January 22, 1996 and is
a leading Web site serving the unique interests and tastes of the high
growth Generation Y (10 to 24 year old) marketplace. Through our Web
site, www.alloy.com, Generation Y boys and girls can interact, share
information, explore compelling and relevant content and shop. Through our
Web site and our Alloy direct mail catalog, we offer Generation Y boys and
girls a variety of merchandise, including boys and girls apparel,
accessories, footwear, cosmetics and room furnishings.
3. NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net
loss per share. Amounts in thousands, except share and per share data:
<TABLE>
<CAPTION>
Three Months Ended April 30,
----------------------------
1999 2000
---------- -----------
<S> <C> <C>
Numerator:
Net loss $ (2,302) $ (6,305)
Accretion of preferred stock (11) -
---------- -----------
Net loss after accretion of preferred
stock $ (2,313) $ (6,305)
========== ===========
Denominator:
Basic weighted average shares outstanding 8,711,878 15,245,159
Nominal issuances of stock options 242,002 -
---------- -----------
Diluted weighted average shares outstanding 8,953,880 15,245,159
========== ===========
Basic net loss per share $ (0.27) $ (0.41)
Diluted net loss per share $ (0.26) $ (0.41)
</TABLE>
<PAGE>
ALLOY ONLINE, INC.
------------------
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------------------------------------------------
Alloy has applied the provisions of SFAS No. 128, "Earnings Per Share" in
the above calculations. Basic and diluted loss per share in the periods
prior to the Offering are 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. In accordance
with SFAS No. 128 and SAB 98, after Alloy's initial public offering of
shares of common stock (the "Offering"), the nominal issuances are included
in the total option pool and assessed for dilution as is normally done
under SFAS No. 128.
4. EXCHANGE TRANSACTION
On April 14, 2000, Alloy entered into a financial and strategic arrangement
with Liberty Digital, Inc. ("LDIG"), a subsidiary of Liberty Media Group,
Inc., pursuant to which Alloy issued 2,922,694 shares of its common stock
having a fair value of $35,072,000, or $12 per share, to a subsidiary of
LDIG in exchange for $10 million in cash and 837,740 shares of LDIG common
stock having a fair value of $19,530,000, or $23.31 per share. The Alloy
common shares exchanged represented 19.9% of the issued and outstanding
common stock prior to the transaction. Subsequent to the transaction, LDIG
had a 16.6% ownership interest in Alloy's issued and outstanding common
stock. Both parties are required to register the securities exchanged in
the transaction with the Securities and Exchange Commission and have agreed
to limit the future disposition of the common stock exchanged for a period
of one year from the respective effective dates of the registration
statements. Specifically, Alloy and LDIG are prohibited from selling more
than 25% of the shares issued to each during any consecutive 90-day period
within one year of the effective date of the respective registration
statements.
5. RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2000, the Emerging Issues Task Force ("EITF") issued a final
consensus on EITF Issue No. 00-14, "Accounting for Coupons, Rebates, and
Discounts". This issue provides standards for recognition, classification
and disclosure of sales incentives. Pursuant to the final consensus, sales
incentives should be recorded at the later of (a) when a sale is made or
(b) when offered. Further, sales incentives should be classified as a
reduction of revenue, unless the incentive is an inventory item, such as
promotional inventory, which should be classified within cost of sales.
The standards under this consensus are effective for all periods beginning
after May 18, 2000, with the transition resulting in a combination of a
cumulative effect of an accounting change for recognition and measurement,
and a restatement of prior periods for the classification provisions.
Alloy does not expect any adjustments to previously reported information
pursuant to this standard.
In May 2000, the EITF reached a tentative consensus with respect to EITF
Issue No. 00-10, "Accounting for Shipping and Handling Revenues and Costs".
The purpose of this issue discussion was to clarify the classification of
shipping and handling revenues and costs. The tentative consensus was that
all shipping and handling billed to customers is revenue and all shipping
and handling costs are to be classified as cost of sales, and shipping and
handling revenues and costs cannot be netted. Shipping costs have been
defined as the costs to move product from sellers to buyers, including
internal and external costs. Handling costs are those costs incurred to
prepare product for shipment, including direct costs and allocations of
internal overhead. A final consensus on this issue is expected in July
2000. This standard would require a restatement of prior periods for
changes in classification. Alloy currently nets its shipping and handling
revenue with the related costs and further does not include these costs in
cost of sales, but rather as selling and marketing expenses. Upon issuance
of the final consensus, Alloy will apply the standards and make any
required reclassifications of prior year information.
<PAGE>
ITEM 2. 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 Report. 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.
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, cosmetics and room furnishings.
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 net of
an allowance for sales returns which is determined in accordance with our return
policy and is based on historical experience. 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. Revenues earned and related expenses incurred in connection with our
publishing activities are recognized upon property publication. Any amounts
received or paid prior to publication are treated as advances and classified as
a current liability or current asset.
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
has been generated through merchandise sales; however, sponsorship and other
revenues have been increasing and we expect these revenues to continue to
increase in future periods as a result of our plan to increase visitors to our
Web site and further develop our marketing and sales team to capitalize on our
sponsorship, advertising and other revenue opportunities. In May 1999, we issued
3,700,000 shares of common stock in our initial public offering (the "Offering")
and received approximately $50.1 million in net proceeds, after deduction of
underwriter's commissions and discounts and expenses related to the Offering. In
April 2000, we entered into a financial and strategic arrangement with Liberty
Digital, Inc. ("LDIG"), a subsidiary of Liberty Media Group, Inc., pursuant to
which we issued 2,922,694 shares of common stock to a subsidiary of LDIG in
exchange for $9.2 million in net cash proceeds and 837,740 shares of LDIG common
stock.
We incurred net losses of approximately $118,000 for the fiscal year ended
January 31, 1997, $1.9 million for the fiscal year ended January 31, 1998, $6.4
million for the fiscal year ended January 31, 1999, $14.9 million for the year
ended January 31, 2000, and $6.3 million for the three months ended April 30,
2000. These net losses resulted primarily from the costs associated with
developing our Web site and database of Generation Y boys and girls, attracting
users to our Web site and establishing the Alloy brand. Because of our plans to
invest heavily in marketing and promotion, to hire additional employees and to
develop our Web site and operating infrastructure, we expect to incur
significant net losses for the foreseeable future. Although we have experienced
revenue growth in recent periods, this growth may not be sustainable and,
therefore, these recent periods should not be considered indicative of future
performance. We may never achieve significant revenues or profitability, or if
we achieve significant revenues they may not be sustainable in future periods.
<PAGE>
Results of Operations
The following table sets forth the statement of operations data for the
periods indicated as a percentage of revenues. Any trends reflected by the
following table may not be indicative of future results.
Three Months
Ended April 30,
---------------
1999 2000
---- ----
Net merchandise revenues.................. 93.6% 71.2%
Sponsorship and other revenues............ 6.4 28.8
------- ------
Total revenues......................... 100.0 100.0
Cost of goods sold........................ 48.9 39.2
------- ------
Gross profit.............................. 51.1 60.8
Operating expenses:
Selling and marketing.................. 102.1 110.9
General and administrative............. 36.0 27.3
Amortization of goodwill............... - 10.6
------- ------
Total operating expenses............... 138.1 148.8
------- ------
Loss from operations...................... (87.0) (88.0)
Interest (expense) income, net............ (3.1) 5.7
------- ------
Net loss.................................. (90.1)% (82.3)%
Comparison of Three Months Ended April 30, 1999 and 2000
Revenues
Merchandise Revenues. Net merchandise revenues increased 128.0% from $2.4
million in the three months ended April 30, 1999 to $5.4 million in the three
months ended April 30, 2000. The increase in merchandise revenues in the three
months ended April 30, 2000 was due primarily to the significant increase in
orders driven by our expanded database of Generation Y buyers and prospective
buyers to whom we marketed in this quarter.
Sponsorship and Other Revenues. Sponsorship and other revenues amounted to
$2.2 million in the three months ended April 30, 2000 as compared to $163,000 in
the three months ended April 30, 1999. This 1,250% increase in sponsorship and
other revenues in the three months ended April 30, 2000 resulted from the
increased number of visitors to our Web site and the expanding commercial
relationships with advertisers that we are developing through our in-house
advertising sales group, together with the contribution of the book publishing
business we purchased in January 2000. We expect sponsorship and other revenues
to trend upwards as Web site traffic increases and our sponsorship and
advertising sales team develops expanded and new relationships with companies
seeking to access our Generation Y Community.
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 140.3% from $1.2 million in the three months ended April
30, 1999 to $3.0 million in the three months ended April 30, 2000. The increase
in cost of goods sold was due primarily to the increase in merchandise sales
volume. Alloy's gross profit as a percentage of total revenues increased from
51.1% in the three months ended April 30, 1999 to 60.8% in the three months
ended April 30, 2000 due to the substantially larger percentage of sponsorship
and other revenues in our total revenue mix.
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; advertising
and marketing costs; and expenses related to the development, maintenance and
marketing of our Web site. These expenses increased 225.6% from $2.6 million in
the three months ended April 30, 1999 to $8.5 million in the three months ended
April 30, 2000 due to the increased costs incurred in marketing to our expanded
database,
<PAGE>
increased Web site promotion and development, and the hiring of selling and
marketing staff. As a percentage of total revenues, our selling and marketing
expenses increased from 102.1% in the three months ended April 30, 1999 to
110.9% in the three months ended April 30, 2000. The increase was primarily
driven by our expanded Web site marketing efforts and the hiring of additional
sales and marketing personnel.
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; 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; and marketing our merchandise offerings to an
expanded database. There is no assurance that these increased expenditures will
result in increased visitors to our Web site or additional sales.
General and Administrative. General and administrative expenses consist
primarily of salaries and related costs for our executive, administrative,
finance and management personnel, as well as support services and professional
service fees. These expenses increased 127.3% from $919,000 in the three months
ended April 30, 1999 to $2.1 million in the three months ended April 30, 2000.
As a percentage of total revenues, our general and administrative expenses
decreased from 36.0% in the three months ended April 30, 1999 to 27.3% in the
three months ended April 30, 2000. The increase in general and administrative
expenses was driven by an increase in compensation expense for additional
personnel to handle our growing business, together with expenses incurred as a
result of becoming a public company, such as professional fees, insurance
premiums and public relations costs. 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.
Amortization of Goodwill. Amortization of goodwill was approximately
$811,000 in the three months ended April 30, 2000 as compared to zero in the
three months ended April 30, 1999. These costs were recorded in connection with
our acquisition of substantially all of the assets of Celebrity Sightings, LLC
in December 1999 and the merger of our acquisition subsidiary with and into 17th
Street Acquisition Corp., the sole stockholder of 17th Street Productions, Inc.
in January 2000. These acquisitions were accounted for under the purchase method
of accounting. We anticipate that the future amortization of goodwill in
connection with these acquisitions will continue to be amortized on a straight-
line basis over three years in the case of Celebrity Sightings, LLC and five
years in the case of 17th Street Productions, Inc., and will amount to
approximately $811,000 per quarter until the end of fiscal 2002 and
approximately $375,000 per quarter thereafter until the related goodwill is
fully amortized. Any additional acquisitions or impairment of goodwill could
result in additional merger and acquisition related costs.
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, increase
the number of our employees to support a growing operation and purchase
complementary businesses. For the foregoing reasons, our loss from operations
increased from $2.2 million in the three months ended April 30, 1999 to $6.7
million in the three months ended April 30, 2000.
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 incurred net interest expense of $78,000 in the three months
ended April 30, 1999 due to the interest expense resulting from our issuance of
promissory notes in May 1998, which exceeded our interest earned on cash
balances held. In the three months ended April 30, 2000, we generated net
interest income of $433,000 due to the investment of the proceeds raised in the
Offering.
<PAGE>
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. In May 1999, we raised approximately $50.1 million in net
proceeds upon the closing of the Offering. In April 2000, we raised $9.2 million
in net cash proceeds and acquired 837,740 shares of LDIG common stock in
connection with our sale of 2,922,694 shares of Alloy common stock to a
subsidiary of LDIG. At April 30, 2000, we had approximately $18.0 million of
cash and cash equivalents and a further $41.3 million of marketable securities.
Our principal commitments at April 30, 2000 consisted of accounts payable and
obligations under our capital and operating leases.
Net cash used in operating activities was $707,000 in the three months
ended April 30, 1999 and $8.8 million in the three months ended April 30, 2000.
The principal use of cash in both periods was to fund our losses from
operations, with a further $3.1 million in cash used to extinguish accounts
payable and accrued expenses in the three months ended April 30, 2000.
Cash provided by investing activities was $5.0 million in the three months
ended April 30, 2000 due to the reduced time to maturity of certain fixed income
investments in our securities portfolio, offset partially by our capital
expenditure and strategic investing activities. Cash used in investing
activities was $385,000 in the three months ended April 30, 1999 due to our
capital expenditures for computers, office furniture and equipment; and the
acquisition of certain intangible assets, consisting of a Web site domain name
and a customer mailing list in separate transactions.
Net cash provided by financing activities was approximately $2.1 million in
the three months ended April 30, 1999 due to the collection of the stock
subscription receivable associated with the second installment of our Series A
Preferred Stock sold in November 1998. In the three months ended April 30, 2000,
we received $9.2 million in net cash proceeds from our sale of 2,922,694 shares
of Alloy common stock to a subsidiary of LDIG.
We anticipate that we will continue to experience significant growth in our
operating expenses for the foreseeable future as we build the Alloy brand and
our customer database and that our operating expenses will be a material use of
our cash resources. We believe that in light of the Offering which raised net
proceeds of $50.1 million in May 1999, together with the $9.2 million in net
cash proceeds and 837,740 shares of LDIG common stock we received in April 2000
in exchange for LDIG's investment in Alloy, our existing working capital and
cash flows from operations will be sufficient to meet our anticipated cash needs
for working capital and capital expenditures for at least the next 24 months. We
will continue to consider attractive opportunities to raise additional capital
should these opportunities arise. If cash generated from operations is
insufficient to satisfy our cash needs, we may be required to raise additional
funds. If we raise additional funds through the issuance of equity securities,
our existing shareholders may experience significant dilution. Furthermore,
additional financing may not be available when needed or, if available,
financing may not be on terms favorable to us or our stockholders. If financing
is not available when required or is not available on acceptable terms, we may
be unable to develop or enhance our products or services. In addition, we may be
unable to take advantage of business opportunities or respond to competitive
pressures. Any of these events could have a material and adverse effect on our
business, results of operations and financial condition.
Impact of the Year 2000
The "Year 2000 Problem" arose because many existing computer programs use
only the last two digits to refer to a year. Therefore, these computer programs
may recognize a year ending in "00" as the Year 1900 rather than the Year 2000,
which could result in a significant disruption of operations and an inability to
process certain transactions. We have conducted an internal assessment of all
material information technology and non-information technology systems at our
headquarters and our Web site host, including our accounting software, our
servers and related software, our personal computers and related software, and
our telephone system. The assessment revealed that all mission critical software
and hardware systems in our corporate headquarters and at our Web site host was
100% Year 2000 Compliant. We developed a strategic plan to estimate the
potential risks related to the vendors upon whom we materially rely. We have
concluded that Year 2000 issues would not materially affect the continuation of
our normal daily operations. To date, our operations have suffered no
significant disruption from Year 2000 problems. We do not expect to experience
any material adverse effects on our business, financial
<PAGE>
condition or results of operations from any other vendor, distributor or
supplier who may experience Year 2000 problems, including our new fulfillment
services and call center provider. We incurred no material historical costs
relating to Year 2000 compliance, and we have not incurred any material costs in
resolving the Year 2000 problems of third parties with whom we interact. We
intend, however, to continue monitoring our internal computer systems and those
of third parties with whom we deal for Year 2000 problems. Year 2000 problems
that are as yet undiscovered may arise in the future and could have a
significant impact on our operations.
Recently Issued Accounting Standards
In May 2000, the Emerging Issues Task Force ("EITF") issued a final consensus on
EITF Issue No. 00-14, "Accounting for Coupons, Rebates, and Discounts". This
issue provides standards for recognition, classification and disclosure of sales
incentives. Pursuant to the final consensus, sales incentives should be
recorded at the later of (a) when a sale is made or (b) when offered. Further,
sales incentives should be classified as a reduction of revenue, unless the
incentive is an inventory item, such as promotional inventory, which should be
classified within cost of sales. The standards under this consensus are
effective for all periods beginning after May 18, 2000, with the transition
resulting in a combination of a cumulative effect of an accounting change for
recognition and measurement, and a restatement of prior periods for the
classification provisions. Alloy does not expect any adjustments to previously
reported information pursuant to this standard.
In May 2000, the EITF reached a tentative consensus with respect to EITF Issue
No. 00-10, "Accounting for Shipping and Handling Revenues and Costs". The
purpose of this issue discussion was to clarify the classification of shipping
and handling revenues and costs. The tentative consensus was that all shipping
and handling billed to customers is revenue and all shipping and handling costs
are to be classified as cost of sales, and shipping and handling revenues and
costs cannot be netted. Shipping costs have been defined as the costs to move
product from sellers to buyers, including internal and external costs. Handling
costs are those costs incurred to prepare product for shipment, including direct
costs and allocations of internal overhead. A final consensus on this issue is
expected in July 2000. This standard would require a restatement of prior
periods for changes in classification. Alloy currently nets its shipping and
handling revenue with the related costs and further does not include these costs
in cost of sales, but rather as selling and marketing expenses. Upon issuance of
the final consensus, Alloy will apply the standards and make any required
reclassifications of prior year information.
Forward-Looking Statements
This report may contain forward-looking statements that involve risks and
uncertainties, including statements regarding our ability to increase revenues
and generate multiple revenue streams and increase visitors to our Web site; our
ability to develop our sales and marketing teams; our ability to capitalize on
our sales and marketing efforts; our ability to capitalize on our sponsorship,
advertising and other revenue opportunities; our ability to build the Alloy
brand name and develop our online community; our ability to develop commercial
relationships with advertisers; our Web site's appeal to marketers; our ability
to meet anticipated cash needs for working capital and capital expenditures for
the next 24 months; and that we do not expect Year 2000 problems to have a
material adverse effect on our business, financial condition or results of
operations. Our actual results could differ materially from those projected in
the forward-looking statements and reported results should not be considered an
indication of our future performance. Factors that might cause or contribute to
such differences include, among others, our expected future losses; our planned
sales and marketing campaigns may not attract sufficient additional visitors to
our Web site; our planned sales and marketing campaigns may not increase our
revenues or generate additional revenue streams; we lack experienced management
and personnel; our internal sales and marketing organization may fail to attract
sponsorship, advertising and other revenues; we may not be able to adapt as
Internet technologies and customer demands continue to evolve; increased
competition in the online commerce market would reduce our revenues; and we
would lose revenues and incur significant costs if our systems or material
third-party systems are not Year 2000 compliant.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Alloy was not exposed to material market risks associated with activities
in derivative financial instruments, other financial instruments or commodity
instruments as of the end of its most recent fiscal quarter.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a) Not applicable.
(b) Not applicable.
(c)-(d) In connection with Alloy's initial public offering, Alloy sold
3,700,000 shares of its Common Stock and received net offering proceeds of
approximately $50.1 million. On May 13, 1999, the Securities and Exchange
Commission declared Alloy's Registration Statement on Form S-1 (file No. 333-
74159) effective.
The following table sets forth Alloy's cumulative use of net offering
proceeds as of April 30, 2000:
Construction of plant, building and facilities:................... --
Purchase and installation of machinery and equipment:............. 2,300,000
Purchase of real estate:.......................................... --
Acquisition of other business(es):................................ 3,900,000
Repayment of indebtedness:........................................ 4,200,000
Working capital................................................... 5,600,000
Temporary investments:............................................
Investment grade fixed income securities: 14,400,000
General corporate purposes........................................ 19,700,000
The foregoing use of net proceeds does not represent a material change in
the use of net proceeds described in the Registration Statement.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) Exhibits
--------
Exhibit No. 3.1 Restated Certificate of Incorporation (filed as Exhibit 3.1 to
Registration Statement on Form S-1, No. 333-74159, and
incorporated herein by reference).
Exhibit No. 3.2 Restated Bylaws (filed as Exhibit 3.2 to Registration
Statement on Form S-1, No. 333-74159, and incorporated herein
by reference).
Exhibit No. 4.1 Form of Common Stock Certificate (filed as Exhibit 4.1 to
Registration Statement on Form S-1, No. 333-74159, and
incorporated herein by reference).
*Exhibit 10.1 Services Agreement between Distribution Associates, Inc. and
Alloy Online, Inc. dated as of March 31, 2000.
*Exhibit 10.2 Termination of Fulfillment Services Agreement, Settlement
Agreement and Release of Claims between Online Direct, Inc.
and Alloy Online, Inc., dated as of April 14, 2000.
Exhibit no. 27 Financial Data Schedule
_____________
*Confidential Treatment requested as to certain portions, which portions have
been omitted and filed separately with the SEC.
(B) Reports on Form 8-K.
-------------------
The following reports on Form 8-K were filed during the quarter ended
April 30, 2000:
1. Current Report on Form 8-K/A filed on February 22, 2000, which
included the audited financial statements of Celebrity Sightings,
LLC.
2. Current Report on Form 8-K filed on March 24, 2000 for a press
release, dated March 13, 2000.
3. Current Report on Form 8-K/A filed on April 7, 2000, which included
the 17th Street Acquisition Corp. and Subsidiary and 17th Street
Productions, Inc. (formerly Daniel Weiss Associates, Inc.) Report
on Audits of Financial Statements for years ending December 31,
1999, 1998 and 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ALLOY ONLINE, INC.
Date: June 14, 2000 By: /s/ Samuel A. Gradess
---------------------
Samuel A. Gradess,
Chief Financial Officer
(Principal Accounting and
Financial Officer)
<PAGE>
ALLOY ONLINE, INC.
EXHIBIT INDEX
Exhibit No. 3.1 Restated Certificate of Incorporation (filed as Exhibit 3.1 to
Registration Statement on Form S-1, No. 333-74159, and
incorporated herein by reference).
Exhibit No. 3.2 Restated Bylaws (filed as Exhibit 3.2 to Registration Statement
on Form S-1, No. 333-74159, and incorporated herein by
reference).
Exhibit No. 4.1 Form of Common Stock Certificate (filed as Exhibit 4.1 to
Registration Statement on Form S-1, No. 333-74159, and
incorporated herein by reference).
*Exhibit 10.1 Services Agreement between Distribution Associates, Inc. and
Alloy Online, Inc. dated as of March 31, 2000.
*Exhibit 10.2 Termination of Fulfillment Services Agreement, Settlement
Agreement and Release of Claims between Online Direct, Inc.
and Alloy Online, Inc., dated as of April 14, 2000.
Exhibit No. 27 Financial Data Schedule
____________
*Confidential Treatment requested as to certain portions, which portions have
been omitted and filed separately with the SEC.
