UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended April 30, 2008
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¨
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
Commission file number: 0-26023
Alloy, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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04-3310676
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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151 West 26th Street, 11
th
Floor,
New York, NY
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10001
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(Address of Principal Executive Offices)
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(Zip Code)
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Registrant’s telephone number, including area code:
(212) 244-4307
Former name, former
address and fiscal year, if changed since last report:
None.
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.
x
Yes
¨
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
¨
Accelerated filer
x
Non-accelerated filer
¨
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
¨
Yes
x
No
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of May 31, 2008, the registrant had 14,199,156 shares of common
stock, $.01 par value per share, outstanding, excluding 1,365,125 shares of treasury stock.
ALLOY, INC.
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
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Item 1.
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Financial Statements
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ALLOY, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
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April 30,
2008
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January 31,
2008
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(Unaudited)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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11,955
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$
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12,270
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Marketable securities
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3,225
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9,030
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Accounts receivable, net of allowance for doubtful accounts of $2,174 and $1,971, respectively
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29,754
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32,530
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Unbilled accounts receivable
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9,988
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8,164
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Inventory
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7,088
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3,242
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Other current assets
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5,692
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4,987
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Total current assets
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67,702
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70,223
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Fixed assets, net
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23,465
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20,199
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Goodwill
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50,111
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50,111
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Intangible assets, net
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7,272
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7,389
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Other assets
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973
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494
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Total assets
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$
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149,523
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$
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148,416
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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Current liabilities:
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Accounts payable
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$
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13,103
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$
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10,717
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Deferred revenue
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11,537
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11,956
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Bank loan payable
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4,000
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4,000
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Accrued expenses and other current liabilities
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15,042
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14,615
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Total current liabilities
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43,682
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41,288
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Senior convertible debentures
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1,397
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1,397
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Other long-term liabilities
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2,500
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2,400
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Total liabilities
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47,579
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45,085
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Stockholders’ equity:
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Common stock; $.01 par value: authorized 200,000 shares; issued and outstanding, 15,564 and 15,377, respectively
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155
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152
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Additional paid-in capital
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446,437
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445,406
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Accumulated deficit
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(328,667
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)
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(327,098
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)
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117,925
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118,460
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Less treasury stock, at cost; 1,358 and 1,243 shares
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(15,981
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)
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(15,129
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)
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Total stockholders’ equity
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101,944
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103,331
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Total liabilities and stockholders’ equity
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$
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149,523
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$
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148,416
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See accompanying notes to consolidated financial statements
3
ALLOY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
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Three Months Ended
April 30,
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2008
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2007
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(Unaudited)
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Revenues:
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Services revenue
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$
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43,353
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$
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32,326
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Product revenue
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5,792
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5,461
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Total revenue
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$
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49,145
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$
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37,787
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Cost of Goods Sold:
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Costs of goods sold- services
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$
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21,186
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$
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17,361
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Costs of goods sold- product
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1,271
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1,198
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Total costs of goods sold
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$
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22,457
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$
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18,559
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Expenses:
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Operating
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22,318
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15,970
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General and administrative
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4,333
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4,129
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Depreciation and amortization (includes amortization of intangibles of $505, and $447, respectively)
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1,470
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1,017
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Total expenses
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28,121
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21,116
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Operating loss
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(1,433
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)
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(1,888
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)
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Interest expense
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(87
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)
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(19
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)
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Interest income
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139
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312
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Loss before income taxes
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(1,381
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)
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(1,595
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)
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Income taxes
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(188
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)
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(113
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)
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Net loss
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(1,569
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)
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(1,708
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)
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Basic and diluted net loss per share
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$
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(0.12
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)
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$
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(0.13
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)
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Weighted average shares outstanding:
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Basic
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13,537
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13,138
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Diluted
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13,537
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13,138
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See accompanying notes to consolidated financial statements
4
ALLOY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
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Three Months Ended
April 30,
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2008
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2007
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(Unaudited)
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Cash Flows from Operating Activities
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Net loss
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$
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(1,569
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)
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$
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(1,708
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)
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Adjustments to reconcile net loss to net cash used in operating activities:
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Depreciation and amortization of fixed assets
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965
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570
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Amortization of intangible assets
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505
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447
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Provision for losses on accounts receivable
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510
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(170
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)
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Compensation charge for restricted stock and issuance of options
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1,034
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763
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Changes in operating assets and liabilities:
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Accounts receivable
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442
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(461
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)
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Other assets
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(5,030
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)
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(3,504
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)
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Accounts payable, accrued expenses, and other
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2,494
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2,935
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Net cash used in operating activities
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|
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(649
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)
|
|
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(1,128
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)
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Cash Flows from Investing Activities
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Capital expenditures
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(4,231
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)
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(1,149
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)
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Acquisition of companies
|
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|
—
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1,312
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Purchases of marketable securities
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|
|
—
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|
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(8,345
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)
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Proceeds from the sales and maturity of marketable securities
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5,805
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|
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16,215
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Purchase of domain name / mailing list / marketing rights
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(388
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)
|
|
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(810
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)
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|
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|
|
|
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Net cash provided by investing activities
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|
|
1,186
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|
|
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7,223
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Cash Flows from Financing Activities
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Issuance of common stock
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—
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528
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Repurchase of common stock
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(852
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)
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(353
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)
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Net cash (used in) provided by financing activities
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|
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(852
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)
|
|
|
175
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|
|
|
|
|
|
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Net change in cash and cash equivalents
|
|
|
(315
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)
|
|
|
6,270
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|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
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Beginning of period
|
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12,270
|
|
|
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6,366
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End of period
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$
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11,955
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$
|
12,636
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|
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See accompanying notes to consolidated financial statements
5
ALLOY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
1.
Business and Financial Statement Presentation
Alloy, Inc. (the “Company”) is a media and marketing services company that
reaches targeted consumer segments using a diverse array of assets in interactive, display, direct mail, content production and educational programming businesses. The Company operates its business through three operating segments—Promotion,
Media and Placement. The Promotion segment is comprised of businesses whose products and services are promotional in nature and includes the Alloy Marketing and Promotions business and on-campus marketing and sampling divisions. The Media segment is
comprised of company-owned and represented entertainment media assets, including the display board, Internet, database, specialty print, educational programming and entertainment businesses. The Placement segment is made up of businesses that
aggregate and market third party media properties owned by others primarily in the college, military and multicultural markets. These three operating segments utilize a wide array of owned and represented online and offline media and marketing
assets, such as websites, magazines, college and high school newspapers, on-campus message boards, satellite delivered educational programming, and college guides, giving the Company significant reach into the targeted demographic audience and
providing its advertising clients with significant exposure to the intended market.
The accompanying unaudited consolidated financial
statements have been prepared by the Company pursuant to the rules of the Securities and Exchange Commission (“SEC”). These financial statements should be read in conjunction with the more detailed financial statements and notes thereto
included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2008 (“fiscal 2007”).
In
the opinion of management, all adjustments, consisting of only normal and recurring adjustments, necessary for a fair statement of the financial position, results of consolidated operations and cash flows of the Company for the periods presented,
have been made. Certain previously reported amounts have been reclassified to conform with the current presentation. The Company’s business is seasonal. The Company’s third quarter has historically been its most significant in terms of
revenue and operating income. The majority of the Company’s revenues and operating income is earned during the third and fourth quarters of its fiscal year. The results of operations for the three month periods ended April 30, 2008 and
2007 are not necessarily indicative of the operating results for a full fiscal year.
Use of Estimates
– The preparation of the
Company’s financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that
are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
Recently Issued Accounting Pronouncements
In December 2007, the FASB issued SFAS 141(R),
Business Combinations
(“SFAS 141R”). SFAS 141R replaces SFAS 141,
Business
Combinations
and applies to all transactions or other events in which an entity obtains control of one or more businesses. SFAS 141R requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and
liabilities assumed in the transaction;
6
ALLOY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share
amounts)
establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to
disclose additional information needed to evaluate and understand the nature and financial effect of the business combination. SFAS 141R is effective prospectively for fiscal years beginning after December 15, 2008 and may not be applied before
that date. The Company is currently evaluating the impact of adopting this statement on its consolidated financial statements.
Recently Adopted
Accounting Pronouncements
Fair Value
The Company adopted the provisions of SFAS 157,
Fair Value Measurements
(“SFAS 157”) on February 1, 2008. SFAS 157 defines fair value, establishes a valuation framework for measuring fair value pursuant to generally
accepted accounting principles, and expands disclosures about fair value measurements. The provisions of this standard apply to other accounting pronouncements that require or permit fair value measurements. SFAS 159,
The Fair Value Option for
Financial Assets and Financial Liabilities
(“SFAS 159”) provides companies with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The Company did not elect the fair value measurement option under SFAS 159 for any of its financial assets or liabilities.
The Company’s financial assets consist of auction rate securities that must be measured under the new fair value standard. The
Company does not have non-financial assets or liabilities that are required to be measured at fair value on a recurring basis. The Company’s financial assets and liabilities are to be measured using inputs from the three levels of the fair
value hierarchy, which are as follows:
|
|
•
|
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Level 1 – inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the
measurement date;
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|
|
•
|
|
Level 2 – inputs included quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in
markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e. interest rates or yield curves etc.), inputs that are derived principally from or corroborated by observable market data by correlation
or other means (market corroborated inputs); and
|
|
|
•
|
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Level 3 – unobservable inputs that reflect our assumptions about the assumptions that market participants would use in pricing assets or liabilities based on
the best information available.
|
Assets and Liabilities Measured at Fair Value on a Recurring Basis
In accordance with fair value hierarchy described above, the following table shows the fair value of The Company’s financial assets and liabilities
that are required to be measured at fair value on a recurring basis at April 30, 2008.
7
ALLOY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share
amounts)
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
Description
|
|
Classification
|
|
Value at
April 30, 2008
|
|
Quoted Prices in Active
Markets for Identical
Assets (Level 1)
|
|
Significant Other
Observable
Inputs (Level 2)
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
Current assets
|
|
Auction rate securities
|
|
$
|
3,225
|
|
$ —
|
|
$
|
3,225
|
|
$ —
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
|
$
|
3,225
|
|
$ —
|
|
$
|
3,225
|
|
$ —
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2. Net Earnings (Loss) Per Share
The Company calculates its loss per share under the provisions of SFAS 128,
Earnings Per Share
(“SFAS 128”). SFAS 128 requires dual
presentation of “basic” income (loss) and “diluted” income per share on the face of the statement of operations. In accordance with SFAS 128, basic income (loss) per common share is computed by dividing the net (loss) income
attributable to common stockholders by the weighted average number of shares of common stock outstanding during each period. Diluted income per share is calculated by dividing net income attributable to common stockholders by the weighted average
number of shares of common stock outstanding and all dilutive potential common shares that were outstanding during the period.
The
following table sets forth the computation of basic per share for the three months ended April 30, 2008 and April 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
April 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,569
|
)
|
|
$
|
(1,708
|
)
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares
|
|
|
|
|
|
|
|
|
|
Weighted-average basic shares outstanding
|
|
|
13,537
|
|
|
|
13,138
|
|
|
Loss per basic share
|
|
$
|
(0.12
|
)
|
|
$
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
|
|
Shares of unvested restricted stock outstanding are subject to repurchase by the Company and
therefore not included in the calculation of the weighted-average shares outstanding for basic loss per share. Certain items may not recalculate due to rounding differences.
The Company does not have diluted earnings per share calculation as the Company was in a net loss position in the first quarter of fiscal 2008 and the
first quarter of fiscal 2007.
3. Stock-Based Compensation
The total stock-based compensation expense (for stock option and restricted stock grants) for the three-month periods ended April 30, 2008 and 2007 was $1,034 and $763, respectively, of which $359 and $468,
respectively, were included in operating costs in the Statement of Operations, and $675 and $295, respectively, were included in general and administrative expenses in the Statement of Operations.
8
ALLOY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share
amounts)
Stock Options
The weighted-average fair value of each option as of the grant date was $2.94 and $5.33 for the three months ended April 30, 2008 and 2007, respectively. The fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
April 30, 2008
|
|
|
Year Ended
January 31, 2008
|
|
|
Risk-free interest rate
|
|
1.73
|
%
|
|
4.66
|
%
|
|
Expected lives (in years)
|
|
4.5
|
|
|
4.5
|
|
|
Expected volatility
|
|
46.2
|
%
|
|
56.7
|
%
|
|
Expected dividend yield
|
|
—
|
|
|
—
|
|
Forfeitures are estimated on the date of grant. On an annual basis, the forfeiture rate and compensation expense
are adjusted and revised, as necessary, based on actual forfeitures.
The following is a summary of stock option activity for the
three-month period ended April 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
Weighted-Average
Exercise Price
Per Share
|
|
Outstanding at January 31, 2008
|
|
1,778
|
|
|
$
|
13.15
|
|
Options granted
|
|
551
|
|
|
|
7.37
|
|
Options exercised
|
|
—
|
|
|
|
—
|
|
Options forfeited or expired
|
|
(12
|
)
|
|
|
11.08
|
|
|
|
|
|
|
|
|
|
Outstanding at April 30, 2008
(unaudited)
|
|
2,317
|
|
|
$
|
11.79
|
|
|
|
|
|
|
|
|
|
Fully vested and exercisable at April 30, 2008
(unaudited)
|
|
1,210
|
|
|
$
|
14.23
|
|
|
|
|
|
|
|
|
|
Available for future grants
|
|
1,134
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of options exercised during the three-month period ended April 30, 2008 was $1.
Restricted Stock
The Company
has awarded restricted shares of common stock to directors and certain employees. Certain of these awards are service-based and vest over periods of up to seven years. The cost of the restricted stock awards, which is the fair market value on the
date of grant net of estimated forfeitures, is expensed ratably over the vesting period. In the three-month period ended April 30, 2008, the Company awarded 187 restricted shares with a weighted-average life of three years and a fair market
value of $1,402.
During the first quarter of fiscal 2008, the Company granted 29 restricted shares to each its Chief Executive Officer and
its Chief Operating Officer which have specific market performance based vesting and will only vest if the Company’s stock achieves a certain market price. These shares are valued using the Monte Carlo valuation approach. Compensation expense
recorded by the Company during the quarter was nominal due to the timing of the grant date.
9
ALLOY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share
amounts)
Unearned compensation expense related to restricted stock grants at April 30, 2008 was $5,583.
The expense is expected to be recognized over a weighted-average period of approximately 3.0 years. Total compensation expense attributable to restricted stock grants for the three-month periods ended April 30, 2008 and 2007 was $588 and $382,
respectively.
The following is a summary of restricted stock activity for the three-month period ended April 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted-Average
Fair Value
Per Share
|
|
Unvested at January 31, 2008
|
|
589
|
|
|
$
|
11.46
|
|
Granted
|
|
187
|
|
|
|
7.47
|
|
Vested
|
|
(137
|
)
|
|
|
12.91
|
|
Forfeited
|
|
(9
|
)
|
|
|
11.74
|
|
|
|
|
|
|
|
|
|
Unvested at April 30, 2008
(unaudited)
|
|
630
|
|
|
$
|
9.93
|
|
|
|
|
|
|
|
|
Warrants
At April 30, 2008, there were 267 warrants outstanding and exercisable with an average exercise price of $75.52 per share and a weighted average contractual term of 3.6 years.
4. Goodwill and Intangible Assets
Goodwilll
The acquired goodwill as of April 30, 2008 and January 31, 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
April 30, 2008
|
|
January 31, 2008
|
|
|
|
(Unaudited)
|
|
|
|
Promotion
|
|
$
|
23,414
|
|
$
|
23,414
|
|
Media
|
|
|
22,742
|
|
|
22,742
|
|
Placement
|
|
|
3,955
|
|
|
3,955
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
50,111
|
|
$
|
50,111
|
|
|
|
|
|
|
|
|
Intangibles
The acquired intangible assets as of April 30, 2008 and January 31, 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Carrying
Amounts
|
|
Accumulated
Amortization
|
|
Net
|
|
At April 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Client relationships
|
|
$
|
6,202
|
|
$
|
4,575
|
|
$
|
1,627
|
|
Noncompetition agreements
|
|
|
1,863
|
|
|
1,415
|
|
|
448
|
|
Websites
|
|
|
550
|
|
|
533
|
|
|
17
|
|
Mailing lists
|
|
|
2,492
|
|
|
863
|
|
|
1,629
|
|
Marketing rights
|
|
|
175
|
|
|
29
|
|
|
146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,282
|
|
|
7,415
|
|
|
3,867
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
3,405
|
|
|
—
|
|
|
3,405
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
14,687
|
|
$
|
7,415
|
|
$
|
7,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At January 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Client relationships
|
|
$
|
10,373
|
|
$
|
8,511
|
|
$
|
1,862
|
|
Noncompetition agreements
|
|
|
4,196
|
|
|
3,721
|
|
|
475
|
|
Websites
|
|
|
1,450
|
|
|
1,427
|
|
|
23
|
|
Mailing lists
|
|
|
2,309
|
|
|
685
|
|
|
1,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,328
|
|
|
14,344
|
|
|
3,984
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
3,405
|
|
|
—
|
|
|
3,405
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
21,733
|
|
|
14,344
|
|
$
|
7,389
|
|
|
|
|
|
|
|
|
|
|
|
10
ALLOY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share
amounts)
5. Unbilled Accounts Receivable
Unbilled accounts receivable are a normal part of the Company’s business. Placement and Media segment receivables are typically invoiced in the month following the receipt of the proof-of-performance
documentation. At April 30, 2008 and January 31, 2008, there were $9,988 and $8,164, respectively, of unbilled receivables.
6. Detail of
Certain Balance Sheet Accounts
|
|
|
|
|
|
|
|
|
|
|
April 30, 2008
|
|
January 31, 2008
|
|
|
|
(Unaudited)
|
|
|
|
Accrued expenses & other current liabilities
|
|
|
|
|
|
|
|
Accrued compensation and sales commissions
|
|
$
|
5,191
|
|
$
|
5,387
|
|
Program accrual
(1)
|
|
|
4,022
|
|
|
3,543
|
|
Promotions accrual
(2)
|
|
|
1,064
|
|
|
1,229
|
|
Other
|
|
|
4,765
|
|
|
4,456
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,042
|
|
$
|
14,615
|
|
|
|
|
|
|
|
|
|
(1)
|
The program accrual consists primarily of program costs
including other commissions, labor, supplies, printing, delivery and fulfillment.
|
|
(2)
|
The promotions accrual consists primarily of hourly outside
labor costs and travel and expense related fees.
|
11
ALLOY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share
amounts)
7. Common Stock
Common Stock Transactions
During the first quarter of fiscal 2008, the Company repurchased 9 shares of its
restricted stock from employees upon their termination of service, at a price per share of $0.01, pursuant to the terms of the Company’s standard form of restricted stock agreement.
In addition, during the first quarter of fiscal 2008, employees surrendered to the Company approximately 44 shares of common stock to satisfy
tax-withholding obligations.
Common Stock Transactions – Stock Repurchase Program
On January 29, 2003, Alloy adopted a stock repurchase program authorizing the repurchase of up to $10,000 of its common stock from time to time in
the open market at prevailing market prices or in privately negotiated transactions. During fiscal 2007, the Company repurchased 51 shares for approximately $457 under this plan. During the first quarter of fiscal 2008, the Company repurchased 71
shares for approximately $503 under this plan. At April 30, 2008, the Company had an unused authorization of approximately $6,057.
8. Segment
Reporting
The following table sets forth the Company’s financial performance by reportable operating segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
April 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(Unaudited)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Promotion
|
|
$
|
15,752
|
|
|
$
|
13,540
|
|
|
Media
|
|
|
19,896
|
|
|
|
10,416
|
|
|
Placement
|
|
|
13,497
|
|
|
|
13,831
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
49,145
|
|
|
$
|
37,787
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
Promotion
|
|
$
|
(675
|
)
|
|
$
|
(111
|
)
|
|
Media
|
|
|
1,235
|
|
|
|
(325
|
)
|
|
Placement
|
|
|
518
|
|
|
|
1,467
|
|
|
Corporate
|
|
|
(2,511
|
)
|
|
|
(2,919
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total operating loss
|
|
$
|
(1,433
|
)
|
|
$
|
(1,888
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At April 30, 2008
|
|
At January 31, 2008
|
|
|
|
(Unaudited)
|
|
|
|
Total Assets:
|
|
|
|
|
|
|
|
Promotion
|
|
$
|
38,554
|
|
$
|
34,478
|
|
Media
|
|
|
68,003
|
|
|
64,750
|
|
Placement
|
|
|
19,323
|
|
|
21,262
|
|
Corporate
|
|
|
23,643
|
|
|
27,926
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
149,523
|
|
$
|
148,416
|
|
|
|
|
|
|
|
|
12
ALLOY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share
amounts)
9. Supplemental Cash Flow Information
Supplemental information on cash flows is summarized as follows:
|
|
|
|
|
|
|
|
|
Three Months Ended
April 30,
|
|
|
|
2008
|
|
2007
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
Issuance of common stock in conjunction with acquisitions
|
|
—
|
|
1,811
|
10. Income Taxes
The Company adopted the provisions of FASB Interpretation 48,
Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement 109
(“FIN 48”), on February 1, 2007.
As of April 30, 2008, the Company’s total liability for unrecognized tax benefits, including the liability for interest and penalties
described above was $1,184. During the three month period ended April 30, 2008 approximately $260 of unrecognized tax benefits was settled. The settlement approximated the original amount accrued.
During the three-month period ended April 30, 2008, the Company expensed approximately $38 of interest expense and penalties related to the
unrecognized tax benefits.
The Company’s subsidiaries join in the filing of a United States federal consolidated income tax return.
The United States federal statute of limitations remains open for the years 2003 onward. To the Company’s knowledge, it is not currently under examination by the Internal Revenue Service.
State income tax returns are generally subject to examination for a period of three to five years after filing of the respective return. The state impact
of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states. During the three month period ended April 30, 2008, approximately $48 of unrecognized tax benefits
was reversed due to expiring statutes.
It is expected that the amount of unrecognized tax benefits will change in the next 12 months;
however, the Company does not expect the change to have a significant impact on the results of operations or the financial position of the Company.
11.
Credit Facility
At April 30, 2008, the Company was in default of the quick ratio financial ratio and covenant as well as the
covenant limiting equity issuances and dispositions under its credit agreement with Bank of America, N.A. (the “Credit Facility”). The Company has received a waiver from Bank of America and has amended the Credit Facility to prevent
further default with respect to such issues. Refer to Note 13 for further detail.
13
At April 30, 2008, the Company had $4,000 of outstanding borrowing on its Credit Facility. The
loan’s maturity date was extended to July 30, 2008 at the three month LIBOR rate of interest. The Company’s total available borrowings under the Credit Facility totaled $20,750 at April 30, 2008. Interest expense related to the
Credit Facility for the first quarter of fiscal 2008 totaled $65.
12. Litigation
On or about November 5, 2001, a putative class action complaint was filed in the United States District Court for the Southern District of New York
naming as defendants Alloy, specified company officers and investment banks, including James K. Johnson, Jr., Matthew C. Diamond, BancBoston Robertson Stephens, Volpe Brown Whelan and Company, Dain Rauscher Wessel and Ladenburg Thalmann &
Co., Inc. The complaint purportedly was filed on behalf of persons purchasing the Company’s stock between May 14, 1999 and December 6, 2000, and alleged violations of Sections 11, 12(a)(2) and 15 of the Securities Act,
Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder. On April 19, 2002, the plaintiffs amended the complaint to assert violations of Section 10(b) of the Exchange Act. The claims mirror allegations asserted against
scores of other issuers. Pursuant to an omnibus agreement negotiated with representatives of the plaintiffs’ counsel, Messrs. Diamond and Johnson were dismissed from the litigation without prejudice. By opinion and order dated February 19,
2003, the District Court denied in part and granted in part a global motion to dismiss filed on behalf of all issuers. With respect to Alloy, the Court dismissed the Section 10(b) claim and let the plaintiffs proceed on the Section 11
claim. In June 2004, as a result of a mediation, a settlement agreement was executed on behalf of the issuers (including Alloy), insurers and plaintiffs and submitted to the Court. While final approval of the settlement was pending, on
December 5, 2006, the U.S. Court of Appeals for the Second Circuit vacated the District Court’s class certification order with respect to six focus group cases and remanded the matter for further consideration. On June 25, 2007, as a
result of the Second Circuit’s decision, the settlement agreement was terminated. On August 14, 2007, plaintiffs filed second amended complaints against six focus group issuers. By opinion and order dated March 26, 2008, the District
Court denied in part and granted in part motions to dismiss the amended complaints. Specifically, the District Court dismissed claims brought under Section 11 of the Securities Act by those plaintiffs who sold their securities for a price in
excess of the initial offering price and claims brought by plaintiffs who purchased securities outside of the previously certified class period and denied the remainder of the motions. Issuers’ liaison counsel, the plaintiffs and the
underwriters have filed briefs addressing class certification issues in the focus group cases and discovery with respect to various issuers and underwriters has been ongoing. At this time, we can neither predict whether the District Court will
certify a new class nor determine the impact of the District Court’s class certification ruling on the pendency of our case.
The Company is involved
in additional legal proceedings that have arisen in the ordinary course of business. The Company believes that, apart from the actions set forth above, there is no claim or litigation pending, the outcome of which could have a material adverse
effect on the Company’s financial condition or operating results.
13. Subsequent Event
Credit Facility
At April 30, 2008, the Company
was in default of the quick ratio financial ratio and covenant as well as the covenants limiting “dispositions” (as defined in the Credit Facility) and equity issuances under the Credit Facility. Subsequent to its first quarter fiscal 2008
close, the Company obtained a waiver from Bank of America with respect to these instances of default, and, to prevent further default, the Credit Facility was amended. The Company believes that it is currently in compliance with the Credit Facility
covenants.
The Company entered into a waiver and amendment agreement to the Credit Facility as of May 22, 2008, which agreement restated
the definition of “disposition” and allowed the Company to exclude all non cash special charges that were recorded during fiscal 2007 for purposes of calculating extraordinary charges. The amendment also increased the revolving loan from
$15,000 to $25,000.
The Company also entered into a waiver and amendment agreement to the Credit Facility as of June 4, 2008. As part of
this agreement, the Bank of America, N.A., waived the Company’s failure to comply with the quick ratio financial ratio for the fiscal quarter ended April 30, 2008. This agreement also amended the ratio of quick assets to current liabilities for
each fiscal quarter from 1:35 to 1:00 to 1:10 to 1:00 for the fiscal quarters ending April 30th, and July 31st, and 1:35 to 1:00 for the fiscal quarters ending October 31st and January 31st, during the term of the Credit Facility. The agreement also
waived any instances of default with respect to equity issuances under the Company’s 2007 Equity Compensation Plan through the date of such agreement and permits the Company to issue shares of its common stock under such plan going forward.
14
ALLOY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share
amounts)
Channel One
In the Annual Report on Form 10-K for the fiscal year ended January 31, 2008, the Company identified a risk that it would not be able to file registration statements for the registration of securities until 2009,
based on an accounting comment from the Staff of the SEC. This issue has been resolved in favor of the Company, in which the SEC indicated that the financial reports relating to its Channel One acquisition were complete, and there was no need to
provide separate financial statements or pro forma financial statements for Channel One in the acquisition 8-KA filed on August 7, 2007. Therefore, there is no impediment to the Company filing a registration statement for the sale of it securities
or for the resale of securities issued by the Company based on the Channel One acquisition.
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
|
The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and
the related notes thereto included elsewhere in this Form 10-Q. Descriptions of all documents incorporated by reference herein or included as exhibits hereto are qualified in their entirety by reference to the full text of such documents so
incorporated or referenced. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors,
including, but not limited to, those set forth under “Forward-Looking Statements” and elsewhere in this report and in Item 1A of Part I, “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year
ended January 31, 2008 (“fiscal 2007”). Unless otherwise indicated, all dollar amounts presented are in thousands, except per share amounts.
Executive Summary
Alloy is a media and marketing services company that reaches targeted consumer segments using a diverse
array of assets in interactive, display, direct mail, content production and educational programming businesses. We operate our business through three operating segments—Promotion, Media and Placement. Our Promotion segment is comprised of
businesses whose products and services are promotional in nature and includes our Alloy Marketing and Promotion business (“AMP”), on-campus marketing unit (“OCM”) and sampling business. Our Media segment is comprised of
company-owned and represented entertainment media assets, including our display board, Internet, database, specialty print, educational programming, and entertainment businesses. Our Placement segment is made up of our businesses that aggregate and
market third party media properties owned by others primarily in the college, military and multicultural markets. These three operating segments utilize our wide array of owned and represented online and offline media and marketing assets, such as
websites, magazines, college and high school newspapers, on-campus message boards, satellite delivered educational programming and college guides, giving us significant reach into the targeted demographic audience and providing our advertising
clients with significant exposure to the intended market.
A variety of factors influence our revenue, including but not limited to:
(i) economic conditions and the relative strength or weakness of the United States economy, (ii) advertiser and consumer spending patterns, (iii) the value of our consumer brands and database, (iv) the continued perception by our
advertisers and sponsors that we offer effective marketing solutions, (v) use of our websites, and (vi) competitive and alternative advertising mediums. In addition, our business is seasonal. Our third quarter has historically been our
most significant in terms of revenue and operating income. The majority of our revenues and operating income is earned during the third and fourth quarters of our fiscal year. Quarterly comparisons are also affected by these factors.
15
In fiscal year ending January 31, 2009 (“fiscal 2008”), we intend to continue to expand our Media
segment through acquisitions and internally generated growth, as we believe this segment provides the greatest opportunity to increase long-term profitability and shareholder value. We also intend to review ways we can continue to capitalize on the
increases recognition of our Alloy Entertainment brand. In our Promotion and Placement segments, we plan to continue to try to maximize profitability through cost management, and to a lesser extent growth.
In addition, we also believe our business should continue to grow as we strive to capitalize on the following key assets:
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Broad Access.
We are able to reach a significant portion of targeted consumers by: (i) producing a wide range of college guides, books and recruitment
publications; (ii) owning and operating over 60,000 display media boards on college and high school campuses throughout the United States; (iii) placing advertising in over 2,900 college and high school newspapers; (iv) distributing
educational programming to approximately 8,500 secondary schools in the United States; (v) maintaining and expanding our ability to execute large scale promotional service programs; and (vi) utilizing our national in-store advertising and
display network comprising approximately 7,000 grocery and other stores.
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•
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Comprehensive Database.
As of April 30, 2008, our database contained information on millions of individuals. In addition to names and addresses, our
database contains a variety of valuable information that may include age, postal address, stated interests, on-line behavior, educational level and socioeconomic factors. We continually refresh and grow our database with information we gather
through our media properties and marketing services, as well as through acquisitions of companies that have database information and by purchasing or licensing the information from third parties. We analyze this data in detail, which we believe
enables us to not only offer advertisers cost-effective ways of reaching highly targeted audiences but also to improve response rates from our own direct marketing sales efforts.
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•
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Established Marketing Franchises.
Our principal marketing franchises are well known by market consumers and by advertisers. For advertisers, Alloy Media +
Marketing, the umbrella name for all of our media and marketing brands, as well as many of our company-owned brands have a history in creating and implementing advertising and marketing programs primarily targeting the youth market.
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•
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Strong Relationship with Advertisers and Marketing Partners.
We strive to provide advertisers and our marketing partners with highly targeted, measurable and
effective means to reach their target market. Our seasoned advertising sales force has established strong relationships with youth marketers.
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16
Results of Operations and Financial Condition
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Three months ended April 30, 2008 (Unaudited)
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Promotion
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Media
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Placement
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Corporate
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Total
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Revenues:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Services revenue
|
|
$
|
9,960
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|
|
$
|
19,896
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|
$
|
13,497
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|
|
—
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|
|
$
|
43,353
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Product revenue
|
|
|
5,792
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|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
5,792
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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Total revenue
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$
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15,752
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$
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19,896
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$
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13,497
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—
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$
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49,145
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Cost of goods sold:
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|
|
|
|
|
|
|
|
|
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|
|
|
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Cost of goods sold – services
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|
$
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5,161
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|
|
$
|
5,925
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|
$
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10,100
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|
|
—
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|
|
$
|
21,186
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Cost of goods sold – product
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|
|
1,271
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|
|
|
—
|
|
|
—
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|
|
—
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|
|
|
1,271
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total cost of goods sold
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$
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6,432
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|
|
$
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5,925
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$
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10,100
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—
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$
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22,457
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Expenses:
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|
|
|
|
|
|
|
|
|
|
|
|
|
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Operating
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|
$
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8,557
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|
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$
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11,488
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$
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2,153
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|
$
|
120
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|
|
$
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22,318
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General and administrative
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|
|
1,218
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|
|
|
184
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|
|
719
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|
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2,212
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|
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4,333
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Depreciation and amortization
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|
|
220
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|
|
|
1,064
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|
7
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|
|
179
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|
|
|
1,470
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total expenses
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$
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9,995
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|
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$
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12,736
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$
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2,879
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$
|
2,511
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|
|
$
|
28,121
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Operating (loss) income
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|
$
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(675
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)
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|
$
|
1,235
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|
$
|
518
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|
$
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(2,511
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)
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|
$
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(1,433
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)
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|
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|
|
|
|
|
|
|
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|
|
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|
|
|
|
|
|
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Three months ended April 30, 2007 (Unaudited)
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Promotion
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Media
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Placement
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Corporate
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Total
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|
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Revenues:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Services revenue
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|
$
|
8,079
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|
|
$
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10,416
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|
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$
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13,831
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|
$
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—
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|
|
$
|
32,326
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Product revenue
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|
|
5,461
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|
|
|
—
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|
|
—
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—
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|
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5,461
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|
|
|
|
|
|
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|
|
|
|
|
|
|
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Total revenue
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$
|
13,540
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|
|
$
|
10,416
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$
|
13,831
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$
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0
|
|
|
$
|
37,787
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Cost of goods sold:
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|
|
|
|
|
|
|
|
|
|
|
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Cost of goods sold – services
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|
$
|
3,799
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|
|
$
|
3,386
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|
|
$
|
10,176
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|
—
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|
|
$
|
17,361
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Cost of goods sold – product
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|
|
1,198
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|
|
|
—
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|
|
—
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—
|
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|
|
1,198
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|
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|
|
|
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Total cost of goods sold
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|
$
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4,997
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|
|
$
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3,386
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$
|
10,176
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0
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$
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18,559
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Expenses:
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Operating
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|
$
|
6,376
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|
|
$
|
6,766
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|
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$
|
1,974
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$
|
854
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$
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15,970
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General and administrative
|
|
|
2,022
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|
|
|
42
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|
|
|
205
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|
|
1,860
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|
|
|
4,129
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Depreciation and amortization
|
|
|
256
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|
|
|
547
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|
9
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|
|
205
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|
|
|
1,017
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total expenses
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|
$
|
8,654
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|
|
$
|
7,355
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|
|
$
|
2,188
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|
$
|
2,919
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|
|
$
|
21,116
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Operating (loss) income
|
|
$
|
(111
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)
|
|
$
|
(325
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)
|
|
$
|
1,467
|
|
$
|
(2,919
|
)
|
|
$
|
(1,888
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)
|
|
|
|
|
|
|
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The principal components of our operating expenses are placement, production and distribution
costs (including ad placement fees, catalog and signage fees, temporary help and production costs), selling expenses (including personnel costs, commissions, promotions and bad debt expenses), general and administrative expenses, depreciation and
amortization and special charges. Our Promotion and Placement segments have significant variable costs, while the Media segment’s costs are largely fixed in nature. As a result, an increase or decrease in revenue attributable to the Promotion
and Placement segments typically results in segment operating income increasing or decreasing by a similar percentage. However, because the Media segment has relatively low variable costs, in a period of rising revenue operating income in the Media
segment typically grows faster than the growth of revenue and, conversely, in a period of declining revenue, operating income typically falls faster than the decline in revenue.
17
Revenue
Revenue for the first quarter of fiscal 2008 was $49,145, an increase of $11,358, or 30.1%, from first quarter fiscal 2007 revenue of $37,787. Revenue in our Media and Promotions segments increased $9,480 and $2,212, respectively, which was
offset by a decrease in revenue in our Placement segment of $334.
Promotion
Promotion segment revenue in the first quarter of fiscal 2008 was $15,752, an increase of approximately $2,212, or 16.3%, from revenue of $13,540 million
in the first quarter of fiscal 2007. Revenue increased in our on-campus marketing, sampling and AMP Agency businesses.
Media
Media segment revenue in the first quarter of fiscal 2008 was $19,896, an increase of $9,480, or 91%, from revenue of $10,416 in the first quarter of
fiscal 2007. This increase was a result of increases in revenue in our entertainment and interactive businesses, and both Channel One and Frontline revenue being included in first quarter of fiscal 2008 revenue.
Placement
Placement segment revenue in the
first quarter of fiscal 2008 was $13,497, a decrease of $334, or 2.4 %, from revenue of $13,831 in the first quarter of fiscal 2007. The decrease was primarily due to decreases in college, high school and military advertising and was slightly
offset by an increase in multicultural advertising.
Cost of Goods Sold
Promotion
Promotion segment cost of goods sold in the first quarter of fiscal 2008 was
$6,432, an increase of $1,435, or 28.7% from cost of goods sold in the first quarter of fiscal 2007 of $4,997. The increase was primarily due to increased outside and temporary labor ($185) and production costs ($1,333) primarily in our AMP Agency
business, which was offset by a decrease in travel and related costs ($248).
Media
Media segment cost of goods sold in the first quarter of fiscal 2008 was $5,925, an increase of $2,539, or 75.0%, from the first quarter fiscal 2007 cost
of goods sold of $3,386. The increase was primarily due to increases in production costs ($507) and outside labor cost of goods sold ($645), increases in payroll ($750), and the inclusion of Channel One and Frontline.
Placement
Placement segment cost of goods
sold expense in the first quarter of fiscal 2008 was $10,100, a decrease of $76, or 0.7%, from the first quarter of fiscal 2007 cost of goods sold of $10,176. The decrease is in direct proportion to the decrease in revenue.
18
Operating Expenses
Promotion
Promotion segment operating expenses in the first quarter of fiscal 2008 were $8,557, an increase of
$2,181, or 34.2%, from operating expenses of $6,376 in the first quarter of fiscal 2007. The increase was primarily due to increases in payroll related costs ($699), facilities costs ($1,077), bad debt expense ($224) and general operating costs
($67).
Media
Media segment
operating expenses in the first quarter of fiscal 2008 was $11,488, an increase of $4,722, or 69.7%, from operating expenses of $6,766 in the first quarter of fiscal 2007. The increase was primarily due to increases in temporary labor and consulting
expenses ($348), payroll related costs ($2,269), maintenance expense ($1,239) related to Channel One’s operations, and depreciation expense ($427) due to increases in capital expenditures for Channel One.
Placement
Placement segment operating
expenses in the first quarter of fiscal 2008 were $2,153, an increase of $179, or 9.1%, from operating expenses of $1,974 in the first quarter of fiscal 2007. The increase was primarily due to an increase in bad debt expense ($420) and payroll
related costs ($417), which were partially offset by a decrease in facilities costs ($325).
Corporate
The Corporate segment operating expenses in the first quarter of fiscal 2008 were $120, a decrease of $734, or 85.9%, from operating expenses of $854, in
the first quarter of fiscal 2007. The decrease was primarily due to decreases in information technology related spending ($306) and facilities costs ($182).
General and Administrative
Promotion
Promotion segment general and administrative expenses in the first quarter of fiscal 2008 were $1,218, a decrease of $804, or 39.7%, as compared to $2,022 in the first quarter of fiscal 2007. The decrease was
primarily due to decreases in payroll related and general corporate expenses.
Media
Media segment general and administrative expenses in the first quarter of fiscal 2008 were $184, an increase of $142 as compared to general and
administrative expenses of $42 in the first quarter of fiscal 2007. The increase was primarily due to increases in general corporate costs, facilities costs, payroll related expenses and stock based compensation.
Placement
Placement segment general and
administrative expenses in the first quarter of fiscal 2008 was $719, an increase of $514, as compared to general and administrative expenses of $205 in the first quarter of fiscal 2007. The increase was primarily due to increases in payroll related
costs ($72) and general corporate costs ($252).
Corporate
The Corporate segment general and administrative expenses in the first quarter of fiscal 2008 was $2,212, an increase of $352 or 18.9%, from general administrative expenses of $1,860 in the first quarter of fiscal
2007. The increase was primarily due to increases in consulting costs ($130), facilities costs and stock compensation expense ($60).
19
Liquidity and Capital Resources
Cash from Operations
Net cash used in operating activities was $649 during the first quarter of
fiscal 2008 compared with net cash used in operating activities of $1,128 during the first quarter of fiscal 2007. The decrease in cash used in operating activities is principally attributable to our lower operating loss and an increase in noncash
items totaling $1,980, which included depreciation and amortization and compensation expense, partially offset by changes in working capital of $2,094, mainly attributable to an increase in other assets.
Investing Activities
Cash provided by investing
activities was approximately $1,186 during the first quarter of fiscal 2008 compared with cash provided by investing activities of approximately $7,223 during the first quarter of fiscal 2007. The decrease in cash provided by investing activities
during the first quarter of fiscal 2008 was principally attributable to the decrease in proceeds from the sale and maturity of marketable securities partially offset by an increase in capital expenditures and purchases of mailing lists. The Company
did not have any acquisitions in the first quarter of fiscal 2008 and did not purchase any new marketable securities.
Capital expenditures
increased $3,082 to $4,231 in the first quarter of fiscal 2008 compared with $1,149 in the first quarter of fiscal 2007. A significant portion of these expenditures was related to capital expenditures for Channel One.
Our short-term investment portfolio was $3,225 in the first quarter of fiscal 2008 as compared with $13,275 in the first quarter of fiscal 2007.
Depending upon our operating needs, we may liquidate portions of our portfolio.
Financing Activities
Net cash used in financing activities was $852 during the first quarter of fiscal 2008 compared with net cash provided by financing activities of $175
during the first quarter of fiscal 2007.
At April 30, 2008, we were in default of the quick ratio financial ratio and covenant as
well as the covenant limiting equity issuances and dispositions under our credit agreement with Bank of America, N.A. (the “Credit Facility”). The Bank granted a waiver with respect to such instances of default and, to prevent further
default, the Credit Facility was amended on each May 22, 2008 and June 4, 2008.
The May 22, 2008 waiver and amendment restated the
definition of “disposition” and allowed us to exclude all non cash special charges that were recorded during fiscal 2007 for purposes of calculating extraordinary charges. The amendment also increased our revolving loan from $15,000 to
$25,000.
The June 4, 2008 waiver and amendment revised the ratio of quick assets to current liabilities to be applied going forward from
1:35 to 1:00 to 1:10 to 1:00 for each fiscal quarter ending April 30, and July 31, and to 1:35 to 1:00 for each fiscal quarter ending October 31 and January 31, during the term of the Credit Facility. The amendment also allows us
to issue up to 2,000 shares of our common stock under our 2007 Equity Compensation Plan. As part of the amendment, we also received a waiver from Bank of America, N.A., for our failure of the quick ratio financial ratio for the fiscal quarter ended
April 30, 2008. As a result, we believe we are in compliance with our debt covenants.
20
At April 30, 2008, we have $4,000 of outstanding borrowing on the Credit Facility. The
loan’s maturity date was extended to July 30, 2008. Our total available borrowings under the Credit Facility was $20,750 at April 30, 2008.
We continually project our anticipated cash requirements, which include our working capital needs, potential acquisitions and interest payments. Funding requirements may be financed primarily through our operations,
the sale of equity, the use of our credit facility, or through equity-linked and debt securities. We believe that cash generated from operations and amounts available under our Credit Facility are adequate to meet our reasonably foreseeable
operating and capital expenditure requirements. During fiscal 2008, we expect to spend approximately $10,000 to $12,000 in capital expenditures as we continue to build the infrastructure for Channel One and our remaining Media segment.
We believe our existing cash, cash equivalents and investments balances, together with anticipated cash flows from operations, should be sufficient to
meet our working capital and operating requirements for at least the next twelve months.
If our current sources of liquidity and cash
generated from our operations are insufficient to satisfy our cash needs, we may be required to raise additional capital or utilize our Credit Facility. Since we have $4,000 of outstanding borrowings, as described above, we are required to make
quarterly interest payments and are subject to certain financial and other covenants. If we raise additional funds through the issuance of equity securities, our stockholders may experience significant dilution.
Our board of directors has authorized us to repurchase up to $10,000 of our common stock. As of April 30, 2008, our unused repurchase authorization
for our common stock was approximately $6,057.
As of April 30, 2008, Alloy had $3,225 in auction rate securities in its marketable
securities portfolio, of which $2,525 were reinvested in February 2008 and March 2008, but experienced failed auctions of $700 in April 2008. We are currently attempting to liquidate all securities. We believe that these securities will liquidate
over the next twelve months.
Critical Accounting Policies and Estimates
During the first three months of fiscal 2008, there were no changes in our policies regarding the use of estimates and other critical accounting policies.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” found in our Annual Report on Form 10-K for fiscal 2007, for additional information relating to our use of estimates and other critical
accounting policies.
Off-Balance Sheet Arrangements
We do not maintain any off-balance sheet transactions, arrangements, obligations or other relationships with unconsolidated entities or others that are reasonably likely to have a material current or future effect on
our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Forward-Looking Statements
Statements in this report expressing our expectations and beliefs regarding our future results
or performance are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as
21
amended (the “Exchange Act”) that involve a number of substantial risks and uncertainties. When used in this Form 10-Q, the words
“anticipate,” “may,” “could,” “plan,” “believe,” “estimate,” “expect” and “intend” and similar expressions are intended to identify such forward-looking statements.
Such statements are based upon management’s current expectations and are subject to risks and uncertainties that could cause actual
results to differ materially from those set forth in or implied by the forward-looking statements. Actual results may differ materially from those projected or suggested in such forward-looking statements as a result of various factors, including,
but not limited to the following:
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•
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changes in business and economic conditions and other adverse conditions in our markets;
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|
|
•
|
|
our inability to achieve and maintain profitability;
|
|
|
•
|
|
lack of future earnings;
|
|
|
•
|
|
inability to maintain quality and size of database;
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|
|
•
|
|
our ability to protect or enforce our intellectual property or proprietary rights;
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|
|
•
|
|
changes in consumer preferences;
|
|
|
•
|
|
events subsequent to spinoff of dELiA*s, Inc. could materially affect business;
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|
|
•
|
|
volatility of stock price causing substantial declines;
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|
|
•
|
|
our business may not grow in the future;
|
|
|
•
|
|
litigation that may have an adverse effect on our financial results or reputation;
|
|
|
•
|
|
reliance on third-party suppliers;
|
|
|
•
|
|
our ability to successfully implement our operating, marketing, acquisition and expansion strategies; and
|
|
|
•
|
|
natural disasters and terrorist attacks.
|
For a discussion of these and other factors, see the risks discussed in our Annual Report on Form 10-K for fiscal 2007 in Item 1A—Risk Factors and the risks discussed in this Quarterly Report.
Although we believe the expectations reflected in the forward-looking statements are reasonable, they relate only to events as of the date on which the
statements are made, and we cannot assure you that our future results, levels of activity, performance or achievements will meet these expectations. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness
of the forward-looking statements. We do not intend to update any of the forward-looking statements after the date of this report to conform these statements to actual results or to changes in our expectations, except as may be required by law.
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Item 3.
|
Quantitative and Qualitative Disclosures about Market Risk.
|
We do not own any derivative financial instruments in our portfolio. Accordingly, we do not believe there is any material market risk exposure with respect to derivatives or other financial instruments that would
require disclosure under this item.
|
Item 4.
|
Controls and Procedures.
|
Our
Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by
this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures are effective in ensuring that all material information required to be included in this
quarterly report has been made known to them in a timely fashion.
22
Our Chief Executive Officer and Chief Financial Officer also conducted an evaluation of our internal
controls over financial reporting to determine whether any changes occurred during the quarter covered by this report that have materially affected, or are reasonably likely to affect, our internal control over financial reporting. Based on the
evaluation, there have been no such changes during the quarter covered by this report.
23
PART II. OTHER INFORMATION
|
Item 1.
|
Legal Proceedings.
|
On or
about November 5, 2001, a putative class action complaint was filed in the United States District Court for the Southern District of New York naming as defendants Alloy, specified company officers and investment banks, including James K.
Johnson, Jr., Matthew C. Diamond, BancBoston Robertson Stephens, Volpe Brown Whelan and Company, Dain Rauscher Wessels and Ladenburg Thalmann & Co., Inc. The complaint purportedly was filed on behalf of persons purchasing our stock between
May 14, 1999 and December 6, 2000, and alleged violations of Sections 11, 12(a)(2) and 15 of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder. On or about April 19, 2002, the plaintiffs
filed an amended complaint against Alloy, the individual defendants and the underwriters of our initial public offering. The amended complaint asserted violations of Section 10(b) of the Exchange Act and mirrored allegations asserted against
scores of other issuers sued by the plaintiffs’ counsel. Pursuant to an omnibus agreement negotiated with representatives of the plaintiffs’ counsel, Messrs. Diamond and Johnson were dismissed from the litigation without prejudice. In
accordance with the court’s case management instructions, we joined in a global motion to dismiss the amended complaint, which was filed by the issuers’ liaison counsel. By opinion and order dated February 19, 2003, the District Court
denied in part and granted in part the global motion to dismiss. With respect to Alloy, the court dismissed the Section 10(b) claim and let the plaintiffs proceed on the Section 11 claim. Alloy participated in court-ordered mediation with
the other issuer defendants, the issuers’ insurers and plaintiffs to explore whether a global resolution of the claims against the issuers could be reached. In June 2004, as a result of the mediation, a Settlement Agreement was executed on
behalf of the issuers (including Alloy), insurers and plaintiffs and submitted to the court. The fairness hearing was held on April 24, 2006. On December 5, 2006, the U.S. Court of Appeals for the Second Circuit vacated the District
Court’s class certification order with respect to six focus group cases and remanded the matter for further consideration. On January 5, 2007, plaintiffs filed a Petition for Rehearing and Rehearing En Banc with the Second Circuit. On
April 6, 2007, the Second Circuit denied plaintiffs’ Petition and indicated that plaintiffs were not precluded from seeking certification of a more limited class in the District Court. On June 25, 2007, as a result of the Second
Circuit’s decision, the Settlement Agreement was terminated pursuant to a Stipulation and Order. On August 14, 2007, in an attempt to address the class certification deficiencies cited by the Second Circuit, plaintiffs filed Second Amended
Complaints against the six focus group issuers. On November 9, 2007, motions to dismiss the Second Amended Complaints were filed on behalf of the focus group issuers. At this time, we can neither predict whether the motions to dismiss will be
granted nor determine the impact of the motions on the pendency of our case.
We are involved in additional legal proceedings that have
arisen in the ordinary course of business. We believe that, apart from the actions set forth above, there is no claim or litigation pending, the outcome of which could have a material adverse effect on our financial condition or operating results.
In the Annual
Report on Form 10-K for fiscal 2007, we identified a risk that we would not be able to file registration statements for the registration of securities until 2009, based on an accounting comment from the Staff of the SEC. This issue has been resolved
in our favor, in which the SEC indicated that the financial reports relating to our Channel One acquisition were complete, and there was no need to provide separate financial statements or pro forma financial statements for Channel One in the
acquisition 8-K/A filed on August 7, 2007. Therefore, there is no impediment to us filing a registration statement for the sale of our securities or for the resale of securities issued by us based on the Channel One acquisition.
24
The 6
th
risk factor of the Annual Report on Form 10-K for fiscal 2007, is hereby deleted.
|
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds.
|
Issuer Purchases of Equity Securities
On January 29, 2003, we adopted a stock repurchase
program authorizing the repurchase of up to $10 million of our common stock from time to time in the open market at prevailing market prices or in privately negotiated transactions. During fiscal 2003, we repurchased 150,000 shares for approximately
$3.0 million under this program. During fiscal 2007, we repurchased 51,000 shares for approximately $0.5 million under this plan. During the first quarter of fiscal 2008, we repurchased 71,000 shares for approximately $0.5 million under this plan.
At April 30, 2008, we had an unused authorization of approximately $6.1 million.
The following table provides information with
respect to purchases by the Company of shares of its common stock during the first quarter of fiscal 2008:
(Amounts in thousands, except
per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number
of Shares
Purchased
|
|
|
Average Price
Paid per Share
|
|
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or
Programs
|
|
Approximate Dollar
Value of Shares that
May Yet be
Purchased Under
the Plans
or
Programs
|
|
Month of:
|
|
|
|
|
|
|
|
|
|
|
|
|
February-08
|
|
28
|
(1)
|
|
$
|
7.80
|
|
—
|
|
$
|
6,556
|
|
March-08
|
|
33
|
(2)
|
|
|
7.17
|
|
33
|
|
|
6,319
|
|
April-08
|
|
38
|
(2)
|
|
|
6.90
|
|
38
|
|
|
6,057
|
|
|
|
9
|
(3)
|
|
|
0.01
|
|
—
|
|
|
6,057
|
|
|
|
16
|
(1)
|
|
$
|
7.24
|
|
—
|
|
|
6,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
124
|
|
|
|
|
|
71
|
|
$
|
6,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represent shares of common stock surrendered to us by our employees to satisfy their tax withholding obligations upon
the vesting of their restricted stock, valued at the closing price of the common stock as reported by The NASDAQ Stock Market on the date of the surrender.
|
|
(2)
|
In March 2008, we purchased 33 shares in the open market at an
average price of $7.17. In April 2008, we purchased 38 shares in the open market at an average price of $6.90. These purchases occurred periodically throughout the months of March and April 2008.
|
|
(3)
|
Represents shares of unvested restricted stock repurchased from
our employees upon their termination of service, at a price per share of $0.01, pursuant to the terms of our standard form of restricted stock agreement.
|
|
Item 3.
|
Defaults upon Senior Securities.
|
Not
applicable.
|
Item 4.
|
Submission of Matters to a Vote of Security Holders.
|
Not applicable.
25
|
Item 5.
|
Other Information.
|
(a)
Exhibits
The exhibits that are in this report immediately follow the index.
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, INC.
|
|
|
|
|
By:
|
|
/s/ Joseph D. Frehe
|
|
|
|
Joseph D. Frehe
|
|
|
|
Chief Financial Officer
|
|
|
|
(Principal Financial Officer and
|
|
|
|
Duly Authorized Officer)
|
|
|
|
Date: June 9, 2008
|
EXHIBIT INDEX
|
|
|
|
|
10.1*
|
|
Second Amendment and Waiver to Credit Agreement by and among Alloy, Inc., Bank of America, N.A., as Administrative Agent and L/C Issuer, and the Other Lenders Party Thereto, dated as of
May 22, 2008.
|
|
|
|
|
10.2*
|
|
Third Amendment and Waiver to Credit Agreement by and among Alloy, Inc., Bank of America, N.A., as Administrative Agent and L/C Issuer, and the Other Lenders Party Thereto, dated as of June 4,
2008.
|
|
|
|
|
10.3*†
|
|
Form of Restricted Stock Grant Notice and Restricted Stock Agreement for Alloy, Inc. 2007 Employee, Director and Consultant Stock Incentive Plan (terms of grant subject to executive employment
agreement or offer letter).
|
|
|
|
|
10.4*†
|
|
Form of Restricted Stock Grant Notice and Restricted Stock Agreement for Alloy, Inc. 2007 Employee, Director and Consultant Stock Incentive Plan (terms of grant subject to market-based vesting
and executive employment agreement or offer letter).
|
|
|
|
|
31.1*
|
|
Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.
|
|
|
|
|
31.2*
|
|
Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.
|
|
|
|
|
32.1*
|
|
Certification of Matthew C. Diamond, Chief Executive Officer, dated June 9, 2008, pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
|
|
|
|
|
32.2*
|
|
Certification of Joseph D. Frehe, Chief Financial Officer, dated June 9, 2008, pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
|
|
†
|
Management contract or compensatory plan or arrangement.
|
26
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