ALOY Alloy (MM)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2010

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number: 0-26023

 

 

Alloy, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware		04-3310676
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
151 West 26th Street, 11th Floor, New York, NY		10001
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code:

(212) 244-4307

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     ¨   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:

The number of shares of the registrant’s common stock issued and outstanding as of August 31, 2010 was 12,874,123, excluding treasury shares.

 

 

 

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ALLOY, INC.

TABLE OF CONTENTS

 

				Page
		PART I—FINANCIAL INFORMATION
Item 1.		Financial Statements		3
		Consolidated Balance Sheets, as of July 31, 2010 (unaudited) and January 31, 2010		3
		Consolidated Statements of Operations, Three and Six-Month Periods Ended July 31, 2010 and 2009 (unaudited)		4
		Consolidated Statements of Cash Flows, Six Months Ended July 31, 2010 and 2009 (unaudited)		5
		Notes to Consolidated Financial Statements		6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		25
Item 4.		Controls and Procedures		25
		PART II—OTHER INFORMATION
Item 1.		Legal Proceedings		26
Item 1A.		Risk Factors		27
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		28
Item 3.		Defaults Upon Senior Securities		29
Item 4.		Reserved		29
Item 5.		Other Information		29
Item 6.		Exhibits		29
		Signatures		30
		Exhibit Index		31

 

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PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements

ALLOY, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

 

		July 31, 2010				January 31, 2010
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	60,501			$	26,178
Accounts receivable, net of allowance for doubtful accounts of $837 and $851, respectively			29,263				26,764
Unbilled accounts receivable			7,670				5,989
Inventory			5,389				3,478
Other current assets			4,802				5,607
Current assets of discontinued operations			—				4,098
Total current assets			107,625				72,114
Fixed assets, net			18,786				19,352
Goodwill			46,092				45,085
Intangible assets, net			5,923				6,776
Other assets			975				1,656
Noncurrent assets of discontinued operations			—				13,155
Total assets		$	179,401			$	158,138
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	19,806			$	10,886
Deferred revenue			11,424				10,305
Accrued expenses and other current liabilities			20,912				17,655
Current liabilities of discontinued operations			—				10,098
Total current liabilities			52,142				48,944
Deferred tax liability			2,717				2,668
Other long-term liabilities			3,568				3,112
Total liabilities			58,427				54,724
Stockholders’ equity:
Common stock; $.01 par value: authorized 200,000 shares; issued and outstanding: 16,925 and 16,600 respectively			172				165
Additional paid-in capital			457,634				454,896
Accumulated deficit			(305,959	)			(321,546	)
			151,847				133,515
Less treasury stock, at cost: 4,064 and 3,963 shares, respectively			(30,873	)			(30,101	)
Total stockholders’ equity			120,974				103,414
Total liabilities and stockholders’ equity		$	179,401			$	158,138

See accompanying notes to consolidated financial statements

 

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ALLOY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

 

		Three Months Ended July 31,								Six Months Ended July 31,
		2010				2009				2010				2009
		(Unaudited)								(Unaudited)
Revenues:
Services revenue		$	35,024			$	32,767			$	72,087			$	65,263
Product revenue			18,209				16,056				23,776				21,781
Total revenue		$	53,233			$	48,823			$	95,863			$	87,044
Cost of Goods Sold:
Costs of goods sold- services			15,772				12,840				33,158				27,300
Costs of goods sold- product			6,318				5,285				7,581				6,553
Total costs of goods sold		$	22,090			$	18,125			$	40,739			$	33,853
Expenses:
Operating			25,490				22,855				46,286				42,134
General and administrative			4,801				5,261				9,774				10,445
Depreciation and amortization**			1,618				1,547				3,271				3,028
Special charges			1,056				—				1,165				—
Total expenses			32,965				29,663				60,496				55,607
Operating income (loss) from continuing operations			(1,822	)			1,035				(5,372	)			(2,416	)
Interest expense			(4	)			(17	)			(9	)			(18	)
Interest income and other			(387	)			6				(394	)			17
Income (loss) before income taxes			(2,213	)			1,024				(5,775	)			(2,417	)
Income tax expense			(249	)			(33	)			(477	)			(156	)
Income (loss) from continuing operations			(2,462	)			991				(6,252	)			(2,573	)
Income from discontinued operations, net of income taxes			20,159				963				21,839				1,804
Net income (loss)		$	17,697			$	1,954			$	15,587			$	(769	)
Net income (loss) per basic share:
Income (loss) from continuing operations		$	(0.21	)		$	0.08			$	(0.54	)		$	(0.22	)
Income from discontinued operations			1.72				0.08				1.88				0.15
Net income (loss) - Basic			1.51				0.16				1.34				(0.07	)
Net income (loss) per diluted share:
Income (loss) from continuing operations		$	(0.21	)		$	0.08			$	(0.54	)		$	(0.22	)
Income from discontinued operations			1.56				0.07				1.71				0.14
Net income (loss) - Diluted			1.35				0.15				1.17				(0.08	)

 

**	Includes amortization of intangibles of $777 and $689 for the three month periods ended July 31, 2010 and 2009, respectively, and includes amortization of intangibles of $1,555 and $1,298 for the six-month periods ended July 31, 2010 and 2009, respectively.

See accompanying notes to consolidated financial statements

 

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ALLOY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

		Six Months Ended July 31,
		2010				2009
		(Unaudited)
Cash Flows from Operating Activities
Net income (loss)		$	15,587			$	(769	)
Less net income from discontinued operations		$	21,839			$	1,804
Net loss from continuing operations		$	(6,252	)		$	(2,573	)
Adjustments to reconcile net loss from continuing operations to net cash provided by operating activities:
Loss on sale of operating assets			—				311
Depreciation and amortization of fixed assets			1,714				1,729
Deferred tax expense			221				—
Impairment charge on investments			109
Amortization of intangible assets			1,557				1,298
Provision for losses on accounts receivable			68				135
Stock compensation			2,646				1,833
Changes in operating assets and liabilities:
Accounts receivable			(4,248	)			9,469
Inventory and other assets			(533	)			(3,387	)
Accounts payable, accrued expenses, and other			13,685				(4,733	)
Net cash provided by (used in) operating activities attributable to discontinued operations			(1,780	)			2,272
Net cash provided by operating activities			7,187				6,354
Cash Flows from Investing Activities
Capital expenditures			(1,146	)			(1,488	)
Acquisitions, net of cash acquired			—				275
Contingent consideration payments related to prior acquisitions			(940	)			—
Purchase of domain name / mailing list / marketing rights			(704	)			(609	)
Net proceeds on the sale of operating assets			—				122
Net cash provided by (used in) investing activities attributable to discontinued operations			30,600				(693	)
Net cash provided by (used in) investing activities			27,810				(2,393	)
Cash Flows from Financing Activities
Issuance of common stock			99				—
Repurchase of common stock			(773	)			(4,169	)
Net cash used in financing activities			(674	)			(4,169	)
Net change in cash and cash equivalents			34,323				(208	)
Cash and cash equivalents:
Beginning of period		$	26,178			$	32,116
End of period		$	60,501			$	31,908

See accompanying notes to consolidated financial statements

 

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ALLOY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

1. Business and Financial Statement Presentation

Alloy, Inc. (the “Company” or “Alloy”) is one of the country’s largest providers of media and marketing programs offering advertisers the ability to reach youth and non-youth targeted consumer segments through a diverse array of assets and marketing programs, including digital, display, direct mail, content production and educational programming. Collectively, our businesses operate under the umbrella name Alloy Media + Marketing, but the division brand names have market recognition, such as Alloy Education, Alloy Entertainment, Alloy Marketing and Promotions (“AMP”), Alloy Access and On Campus Marketing (“OCM”).

Each of the Company’s businesses falls into one of three operating segments—Promotion, Media and Placement. The Promotion segment is comprised of businesses whose products and services are promotional in nature and includes our AMP, OCM and sampling divisions. The Media segment is comprised of Company-owned and represented media assets, including our digital, display board, database, specialty print, educational programming and entertainment businesses. The Placement segment is comprised 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 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 us significant reach into the targeted demographic audience and providing our advertising clients with significant exposure to the intended market.

On June 7, 2010, Alloy Media, LLC, an indirect wholly-owned subsidiary of the Company (“Alloy Media”), sold substantially all of its assets used exclusively in its FrontLine Marketing division (“FrontLine”), together with certain liabilities, for approximately $39,286 in cash, resulting in net cash proceeds to the Company of approximately $36,451, excluding estimated tax. A net gain of $19,648 related to the sale was recorded. The disposition was deemed to be material to the Company requiring pro forma information, which was filed in Form 8-K in conjunction with the sale. The sale of FrontLine is fully discussed in Note 7 to the Consolidated Financial Statements.

For all periods presented, the financial operations and financial position of FrontLine are reported as discontinued operations.

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, 2010 (“fiscal 2009”), taking into account the differences for discontinued operations

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 to 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 with the majority of the Company’s revenues and operating income being earned during the third and fourth quarters of its fiscal year. The results of operations for the three month period ended July 31, 2010 is not necessarily indicative of the operating results for a full fiscal year, particularly in light of the disposition of FrontLine.

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.

Discontinued Operations – The Company determined, in accordance with generally accepted accounting principles (“GAAP”), that for reporting purposes the operations of FrontLine should be reported as discontinued operations for all periods presented.

Management’s plan to divest and the divesture of FrontLine both occurred within the Company’s second fiscal quarter of fiscal 2010. FrontLine has been classified in the Company’s Consolidated Financial Statements as discontinued operations. The discontinued operations on the Statement of Operations have been reported, net of applicable income taxes. Additionally, segment information does not include the results of businesses classified as discontinued operations.

 

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ALLOY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share amounts)

(Unaudited)

 

Recently Issued Accounting Pronouncements

Revenue Recognition

In September 2009, the Financial Accounting Standards Board (“FASB”) issued new revenue recognition guidance on multiple deliverable arrangements. It updates the existing multiple-element revenue arrangements guidance currently included under the Accounting Standards Codification (“ASC”) 605-25. The revised guidance primarily provides two significant changes: 1) eliminates the need for objective and reliable evidence of the fair value for the undelivered element in order for a delivered item to be treated as a separate unit of accounting, and 2) requires the use of the relative selling price method to allocate the entire arrangement consideration. In addition, the guidance also expands the disclosure requirements for revenue recognition. ASU 2009-13 will be effective for the first annual reporting period beginning on or after the fiscal year ending January 31, 2012 (“fiscal 2011”), with early adoption permitted, provided that the revised guidance is retroactively applied to the beginning of the year of adoption. Management is currently evaluating the impact of adopting this guidance on the Company’s consolidated financial statements.

2. Net Earnings Per Share and Stock-Based Compensation

On February 1, 2009 the Company adopted changes issued by the FASB which require the Company to include all unvested restricted stock awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, in the number of shares outstanding in computing earnings per share (“EPS”) using the two-class method. The calculation of earnings per share for common stock presented here has been reclassified to exclude the income attributable to the unvested restricted stock awards from the numerator and exclude the dilutive impact of those shares from the denominator. The Company has retroactively applied the provisions of this guidance.

During the three-month period ended July 31, 2010 and the six-month periods ended July 31, 2010 and 2009, respectively, the Company was in a net loss position. As a result, unvested shares of restricted stock of 1,161, 1,161 and 941 were excluded in the calculation of EPS using the two-class method for the three-month period ended July 31, 2010 and six-month periods ended July 31, 2010 and 2009, respectively, because the effect would be antidilutive due to the net loss for the period.

Diluted earnings (loss) per share is calculated by dividing net earnings (loss) by the weighted average number of shares of common stock outstanding and all dilutive potential common shares that were outstanding during the period. The Company excludes outstanding stock options, and warrants to purchase common stock, and common stock subject to repurchase or which has been issued, but has not vested, from the calculation of diluted earnings (loss) per common share in cases where the inclusion of such securities would be antidilutive.

The computation of basic and diluted earnings per share from continuing operations under the two-class method is as follows:

 

		Three Months Ended July 31,							Six Months Ended July 31,
		2010				2009			2010				2009
Net income (loss) from continuing operations		$	(2,462	)		$	991		$	(6,252	)		$	(2,573	)
Less: income allocated to participating securities from continuing operations			—				72			—				—
Income (loss) available to common stockholders from continuing operations		$	(2,462	)		$	919		$	(6,252	)		$	(2,573	)
Weighted-average common shares outstanding - basic			11,733				11,922			11,607				11,841
Effect of dilutive employee restricted stock			—				941			—				—
Weighted-average common shares and share equivalents outstanding - diluted			11,733				12,863			11,607				11,841
Earnings (loss) per share from continuing operations - basic		$	(0.21	)		$	0.08		$	(0.54	)		$	(0.22	)
Earnings (loss) per share from continuing operations - diluted		$	(0.21	)		$	0.08		$	(0.54	)		$	(0.22	)

 

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ALLOY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share amounts)

(Unaudited)

 

3. Stock-Based Compensation

The total stock-based compensation expense (for stock option and restricted stock grants) for the three-month periods ended July 31, 2010 and 2009 was $1,342 and $1,029, respectively, of which $593 and $510, respectively, were included in operating expenses in the Consolidated Statement of Operations, and $749 and $427, respectively, were included in general and administrative expenses in the Consolidated Statement of Operations. For the six-month periods ended July 31, 2010 and 2009, the total stock-based compensation expense was $2,646 and $1,833, respectively, of which $1,098 and $920, respectively, were included in operating expenses in the Statement of Operations and $1,548 and $913, respectively, were included in general and administrative expenses in the Statement of Operations.

Stock Options

The weighted-average fair value of each option as of the grant date was $3.65 and $1.87 for the six months ended July 31, 2010 and 2009, 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:

 

		Six Months Ended July 31, 2010			Year Ended January 31, 2010
Risk-free interest rate		1.98	%		2.57	%
Expected lives (in years)		4.5			4.5
Expected volatility		45.6	%		47.3	%
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 six-month period ended July 31, 2010:

 

		Options			Weighted-Average Exercise Price Per Share
Outstanding at January 31, 2010		2,270			$	10.21
Options granted		204				8.50
Options exercised		(13	)			7.37
Options forfeited or expired		(83	)			14.33
Outstanding at July 31, 2010		2,378			$	9.92
Fully vested and exercisable at July 31, 2010		1,600			$	11.06
Available for future grants		1,089

Restricted Stock

The Company has historically awarded restricted shares of common stock to directors and certain employees that typically vest over periods of up to three years although in some instances vesting dates have been longer. The majority of these awards are service based, but a portion of these awards combine service and market based components for vesting requirements. Compensation expense related to the restricted stock awards equals the fair market value on the date of grant net of estimated forfeitures, and is expensed ratably over the vesting period. In the three-month period ended July 31, 2010, the Company awarded 183 restricted shares with a weighted-average life of three years and a fair market value of $1,534.

Unearned compensation expense related to restricted stock grants at July 31, 2010 was $6,947. This expense is expected to be recognized over a weighted-average period of approximately 2.1 years. Total compensation expense attributable to restricted stock grants for the three-month periods ended July 31, 2010 and 2009 was $1,006 and $767, respectively. For the six-month periods ended July 31, 2010 and 2009, total compensation expense attributable to restricted stock grants was $1,967 and $1,269, respectively.

 

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ALLOY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share amounts)

(Unaudited)

 

The following is a summary of restricted stock activity for the six-month period ended July 31, 2010:

 

		Shares			Weighted-Average Fair Value Per Share
Unvested at January 31, 2010		1,247			$	6.78
Granted		439				8.10
Vested		(496	)			6.97
Forfeited		(30	)			5.50
Unvested at July 31, 2010 (unaudited)		1,160			$	7.23

Warrants

At July 31, 2010, there were 255 warrants outstanding and exercisable with an average exercise price of $76.52 per share and a weighted average contractual term of 1.5 years.

4. Goodwill and Intangible Assets

Goodwill

The acquired goodwill as of July 31, 2010 and January 31, 2010, is as follows:

 

		July 31, 2010			Adjustments				January 31, 2010
		(Unaudited)
Promotion		$	25,733		$	907	(1)		$	24,826
Media			19,843			100				19,743
Placement			516			—				516
Total		$	46,092		$	1,007			$	45,085

 

(1)	During the first six months of fiscal 2010, the Company recorded a contingent payment of $907 related to the Fulgent earnout.

Intangibles

The acquired intangible assets as of July 31, 2010 and January 31, 2010 are as follows:

 

		Gross Carrying Amounts			Accumulated Amortization			Net
At July 31, 2010:
(Unaudited)
Amortizable intangible assets:
Client relationships		$	7,989		$	6,374		$	1,615
Noncompetition agreements			2,348			1,761			587
Websites			1,893			1,292			601
Mailing lists			4,805			3,310			1,495
Marketing rights			175			160			15
			17,210			12,897			4,313
Indefinite-lived intangible assets:
Trademarks			1,610			—			1,610
Total intangible assets		$	18,820		$	12,897		$	5,923
At January 31, 2010:
Amortizable intangible assets:
Client relationships		$	7,809		$	5,818		$	1,991
Noncompetition agreements			2,168			1,642			526
Websites			1,893			1,069			824
Mailing lists			4,463			2,682			1,781
Marketing rights			175			131			44
			16,508			11,342			5,166
Indefinite-lived intangible assets:
Trademarks			1,610			—			1,610
Total intangible assets		$	18,118		$	11,342		$	6,776

 

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ALLOY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share amounts)

(Unaudited)

 

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 July 31, 2010 and January 31, 2010, there were $7,670 and $5,989, respectively, of unbilled receivables.

6. Detail of Certain Balance Sheet Accounts

 

		July 31, 2010			January 31, 2010
		(Unaudited)
Accrued expenses and other current liabilities
Accrued acquisition costs		$	972		$	905
Accrued compensation and sales commissions			5,604			5,906
Program accrual (1)			4,381			4,323
Promotions accrual (2)			1,455			1,274
Other			8,500			5,247
		$	20,912		$	17,655

 

(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.

7. Discontinued Operations

As discussed in Note 1, on June 7, 2010, Alloy Media sold substantially all of its assets used exclusively in its FrontLine business, together with certain liabilities, for approximately $39,300 in cash, resulting in net cash proceeds to the Company of approximately $36,500, excluding estimated tax.

Below is a summary of the financial statement information for FrontLine which is included as part of discontinued operations for all interim periods presented:

FrontLine Balance Sheet

 

		July 31, 2010			January 31, 2010
		(Unaudited)
Accounts receivable, net		$	—		$	3,995
Other assets			—			103
Total current assets			—			4,098
Fixed assets, net			—			2,768
Goodwill			—			10,212
Intangible assets, net			—			175
Total assets		$	—		$	17,253
Accounts payable		$	—		$	150
Deferred revenue			—			745
Accrued expenses			—			9,203
Total liabilities		$	—		$	10,098

 

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ALLOY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share amounts)

(Unaudited)

 

FrontLine Statement of Operations

 

		Three Months Ended July 31,								Six Months Ended July 31,
		2010				2009				2010				2009
		(Unaudited)								(Unaudited)
Total revenue		$	2,389			$	5,399			$	9,122			$	10,156
Total cost of goods sold			(1,178	)			(2,837	)			(4,340	)			(5,253	)
Total expenses			(688	)			(1,552	)			(2,538	)			(3,011	)
Income from discontinued operations		$	523			$	1,010			$	2,244			$	1,892
Gain on sale of FrontLine			20,276				—				20,276				—
Income taxes			(640	)			(47	)			(681	)			(88	)
Net income from discontinued operations		$	20,159			$	963			$	21,839			$	1,804

The computation of basic and diluted earnings per share from discontinued operations under the two-class method is as follows:

 

		Three Months Ended July 31,						Six Months Ended July 31,
		2010			2009			2010			2009
		(Unaudited)						(Unaudited)
Net income from discontinued operations		$	20,159		$	963		$	21,839		$	1,804
Less: income allocated to participating securities from continuing operations			1,815			70			1,985			133
Income available to common stockholders from discontinued operations		$	18,344		$	893		$	19,854		$	1,671
Weighted-average common shares outstanding - basic			11,733			11,922			11,607			11,841
Effect of dilutive employee restricted stock			1,161			941			1,161			941
Weighted-average common shares and share equivalents outstanding - diluted			12,894			12,863			12,768			12,782
Earnings per share from discontinued operations - basic		$	1.72		$	0.08		$	1.88		$	0.15
Earnings per share from discontinued operations - diluted		$	1.56		$	0.07		$	1.71		$	0.14

 

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ALLOY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share amounts)

(Unaudited)

 

Goodwill and Intangible Assets of Discontinued Operations

In conjunction with the sale of FrontLine, the Company allocated to discontinued operations all intangible assets that were recorded in conjunction with the April 2007 acquisition, including contingent consideration payments that were made to FrontLine executives.

The conclusion was reached primarily due to the fact that FrontLine continued to maintain its’ own operational infrastructure and management team, essentially operating on a standalone basis since April 2007. The Company allocated $10,212 of goodwill and $175 of intangible assets to FrontLine.

Gain on Sale of Discontinued Operations

The Company recognized a gain, net of taxes, on the sale of FrontLine in the amount of $19,648. The following table details the significant components of the net gain:

 

		June 7, 2010
		(Unaudited)
Purchase price per asset sale agreement		$	36,000
Working capital adjustment			3,286
Gross cash proceeds			39,286
Less total transaction costs			2,835
Net cash proceeds			36,451
Less:
FrontLine net assets sold			16,175
Income tax on gain on sale			628
Gain on sale of FrontLine, net of income taxes		$	19,648

8. Special Charges

The “special charges” line item on the Consolidated Statements of Operations is comprised of the following:

 

		Three months ended July 31, 2010
		Promotion			Media			Placement			Corporate			Total
Impairment of auction rate securities		$	—		$	—		$	—		$	110		$	110
Merger transaction costs			—			—			—			946			946
Total special charges		$	—		$	—		$	—		$	1,056		$	1,056
		Six months ended July 31, 2010
		Promotion			Media			Placement			Corporate			Total
Impairment of auction rate securities		$	—		$	—		$	—		$	110		$	110
Merger transaction costs			—			—			—			1,055			1,055
Total special charges		$	—		$	—		$	—		$	1,165		$	1,165

 

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ALLOY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share amounts)

(Unaudited)

 

As described in the Form 8-K filed on June 28, 2010, the Company entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”) with Alloy Media Holdings, L.L.C., a Delaware limited liability company (“Parent”), and Lexington Merger Sub Inc., a wholly-owned subsidiary of Parent (“Merger Subsidiary”). Parent is a newly-formed entity to be owned by ZM Capital, L.P. and other co-investors. In addition, certain members of management of Alloy, including Matthew C. Diamond, Chief Executive Officer and James K. Johnson, President and Chief Operating Officer, in connection with such transaction will exchange a portion of their Alloy shares for an equity interest in Parent. Pursuant to the terms of the Merger Agreement, and subject to the conditions thereof, Merger Subsidiary will merge with and into Alloy, and Alloy will become a wholly-owned subsidiary of Parent (the “Merger”). The Company received notice that the Federal Trade Commission and the Department of Justice terminated the mandatory waiting period under the Hart-Scott-Rodino Act on July 23, 2010 and the Company is waiting SEC approval to distribute to its stockholders the definitive proxy statement soliciting their votes to approve the merger. The Company expects this transaction to close during its third fiscal quarter. The merger transaction costs above include legal and accounting expenses related to such merger.

9. Common Stock

Common Stock Transactions

During the second quarter of fiscal 2010, employees surrendered to the Company approximately 1 share of common stock to satisfy tax-withholding obligations.

Common Stock Transactions – Stock Repurchase Program

During the first six months of fiscal 2010, the Company did not repurchase any shares under the Company’s stock repurchase program.

At July 31, 2010, the Company had an unused authorization of approximately $3,005.

Common Stock Outstanding

The number of shares of common stock outstanding as of July 31, 2010 was 16,924,773, or 12,860,959 excluding treasury shares.

10. Segment Reporting

The following table sets forth the Company’s financial performance by reportable operating segment:

 

		Three Months Ended July 31,								Six Months Ended July 31,
		2010				2009				2010				2009
		(Unaudited)								(Unaudited)
Revenue:
Promotion		$	27,645			$	27,155			$	42,182			$	42,221
Media			14,993				14,768				30,924				28,473
Placement			10,595				6,900				22,757				16,350
Total revenue		$	53,233			$	48,823			$	95,863			$	87,044
Operating income (loss) from continuing operations:
Promotion		$	4,035			$	3,558			$	2,699			$	3,357
Media			(1,892	)			1,121				(877	)			1,109
Placement			599				14				985				247
Corporate			(4,564	)			(3,658	)			(8,179	)			(7,129	)
Total operating income (loss) from continuing operations		$	(1,822	)		$	1,035			$	(5,372	)		$	(2,416	)

 

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ALLOY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share amounts)

(Unaudited)

 

		At July 31, 2010			At January 31, 2010
		(Unaudited)
Total Assets:
Promotion		$	36,664		$	35,949
Media			61,519			60,656
Placement			12,464			11,085
Corporate			68,754			33,195
Total Assets		$	179,401		$	140,885

11. Income Taxes

For the three and six months ended July 31, 2010 and 2009, the Company recorded income tax expense from continuing operations of $249 and $33, and $477 and $156, respectively, which was a combination of state taxes, alternative minimum tax, interest and penalties on uncertain tax positions and income tax expense recorded on books and tax basis differences related to certain of the Company’s prior year acquisitions. The Company continues to maintain a full valuation allowance against its net deferred tax assets. As noted below the Company utilized a portion of its deferred tax assets to offset the gain resulting from the sale of FrontLine.

As of July 31, 2010, the Company’s total liability for net uncertain tax positions, including the liability for interest and penalties as described above, was $883. At January 31, 2010 the liability was $818. During the six-month period ended July 31, 2010, the Company did not settle any of its uncertain tax positions.

During the six-month period ended July 31, 2010, the Company expensed approximately $30 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 2004 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 six-month period ended July 31, 2010, the Company did not reverse any uncertain tax positions due to expiring statutes.

It is expected that the amount of uncertain tax positions 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.

Gain on Sale of FrontLine

As more fully discussed in Note 7, the Company sold the assets and certain liabilities of FrontLine and recognized a book gain of $20,276. The taxable gain on the sale of FrontLine totaled $22,415, all of which will be offset by the Company’s net operating losses for federal income tax purposes. For state income tax purposes, the Company applied an effective state income tax rate to the taxable gain. The Company, will however, be subject to alternative minimum tax for federal income tax purposes. The Company recorded $478 in federal income tax expense and $359 in state income tax expense related to the gain for the three and six months ended July 31, 2010. These amounts were offset by a reversal of a deferred tax liability in the amount of $209, which represented the differences between the book basis and the tax basis in FrontLine’s assets as of the date of sale.

12. Commitments and Contingencies

Other

The Company received an information request in late January 2009 from the New York State Attorney General (“NYS AG”) inquiring about the Company’s activities in marketing credit cards to college students. The Company subsequently was informed that the NYS AG is conducting an investigation into the Company’s marketing practices in this area. The Company is cooperating with the NYS AG in the investigation and is without sufficient information to determine the extent, if any, of potential monetary liability or other restrictions on its activities that may result from the investigation of the NYS AG. The Company’s last communication with the NYS AG was in July 2009.

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

 

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ALLOY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share amounts)

(Unaudited)

 

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 nine 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 nine 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. After many months of negotiation, on April 2, 2009, the representative class plaintiffs and the defendants filed a Notice of Motion for Preliminary Approval of Settlement accompanied by a global Stipulation and Agreement of Settlement. The proposed Settlement provides that all claims against the issuers and underwriters will be dismissed with prejudice in exchange for the aggregate payment of $586 million. Under the terms of the proposed Settlement, neither the Company nor Messrs. Johnson or Diamond are required to pay any portion of the $586 million payment. The proposed Settlement is subject to numerous contingencies, including, but not limited to, preliminary Court approval, certification of a settlement class and final approval after providing members of the plaintiff class with notice. On or about June 10, 2009, the Court granted Plaintiff’s motion for an order: (i) preliminarily approving the proposed stipulation; (ii) certifying the Settlement classes for the purposes of the proposed stipulation only; (iii) approving the form and program of class notice described in the stipulation; and (iv) scheduling a hearing before the Court to determine whether the proposed stipulation should be finally approved. On October 5, 2009, the Court granted final approval of the settlement. Various members of the plaintiff class have filed notices of appeal seeking to challenge the terms of the settlement. At this point, there can be no assurance that the settlement will be affirmed.

On June 29, 2010, the Company, its directors, and ZelnickMedia LLC (“Zelnick”) were named as defendants in a putative class action complaint, captioned Teitelbaum v. Diamond., et al., C.A. No. 5604 , filed in the Court of Chancery of the State of Delaware. On July 8, 2010, a second lawsuit was filed in the Court of Chancery of the State of Delaware, captioned City of Livonia Employees Retirement System v. Diamond, et al., C.A. No. 5626 . This lawsuit also named as defendants Alloy Media Holdings, L.L.C., Lexington Merger Sub Inc., Natixis Caspian Private Equity, LLC, Rosemont Solebury Co-Investment Fund, L.P. and Genspring Family Offices, LLC. On July 26, 2010, the actions were consolidated under the caption In re Alloy, Inc. Shareholder Litigation, C.A. No. 5626 . On August 9, 2010, plaintiffs filed an amended complaint, purportedly on behalf of a class of stockholders, alleging that the intrinsic value of Alloy common stock is materially in excess of the amount offered for those securities in the merger and that our directors breached their fiduciary duties by agreeing to the merger price, thereby depriving plaintiffs of the opportunity to realize any increase in the value of Alloy stock. The amended complaint also alleges that the Preliminary Proxy omits material information concerning the merger and is materially misleading. The amended complaint further alleges that Zelnick, Parent, Merger Sub and the other additional defendants named therein, aided and abetted the supposed breaches of fiduciary duty by our directors. The action seeks injunctive and other equitable relief, damages, fees and costs. Simultaneously with filing their amended complaint, plaintiffs filed a motion for expedited proceedings, seeking an order setting a schedule for expedited discovery and a hearing on their application for injunctive relief prior to the shareholder meeting. On August 25, 2010, the court denied plaintiffs’ motion. On August 27, 2010, defendants filed motions to dismiss the amended complaint and to stay discovery pending resolution of the motions to dismiss. The Company believes that the claims asserted in the lawsuits are without merit.

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.

 

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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, 2010 (“fiscal 2009”). Unless otherwise indicated, all dollar amounts presented are in thousands, except per share amounts.

Executive Summary

Alloy (NASDAQ: “ALOY”) is one of the country’s largest providers of media and marketing programs offering advertisers the ability to reach youth and non-youth targeted consumer segments through a diverse array of assets and marketing programs, including digital, display, direct mail, content production and educational programming. Collectively, our businesses operate under the umbrella name Alloy Media + Marketing, but the division brand names have their own recognition in the market, including Alloy Education, Alloy Entertainment, Alloy Marketing and Promotions (“AMP”), Alloy Access and On Campus Marketing (“OCM”).

Each of our businesses falls in one of three operating segments—Promotion, Media and Placement. The Promotion segment is comprised of businesses whose products and services are promotional in nature and includes our AMP, OCM and sampling divisions. The Media segment is comprised of Company-owned and represented media assets, including our digital, display board, database, specialty print, educational programming and entertainment businesses. The 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 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 specialty print publications, 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.

We have historically expanded our Media segment through acquisitions and internally generated growth. We intend to continue to expand our Media segment as we believe this segment provides the greatest opportunity to increase long-term profitability and shareholder value. For example, in our Alloy Digital business, we continue to expand our online network, to deliver original, short-form video programming to increase our attractiveness to advertisers. Also, in our Alloy Entertainment business, we are working to monetize our library of book titles through television, motion picture, and short-form video programming. In our Promotion and Placement segments, we plan to continue to try to maximize profitability through cost management, not necessarily growth. However, with respect to all segments, we continually review our strategy and consider possible acquisition and divestiture opportunities.

On June 24, 2010, the Company announced that an investor group led by Zelnick agreed to acquire the Company for $9.80 per share in cash and that certain members of Alloy’s senior management will invest in the transaction in conjunction with Zelnick. This transaction is subject to Alloy stockholder approval, the satisfaction of certain financial conditions and other customary terms and conditions. The Company received notice that the Federal Trade Commission and the Department of Justice terminated the mandatory waiting period under the Hart-Scott-Rodino Act on July 23, 2010. The Company is awaiting SEC approval to distribute to its stockholders the definitive proxy statement soliciting their votes to approve the merger. The Company expects this transaction to close during its third fiscal quarter.

If the proposed merger is not completed or we are not otherwise acquired, the Company’s board of directors will review and consider other strategic alternatives, including, among other things, the possible sale of certain of our lines of business, maintaining the status quo, returning capital to stockholders, divesting certain non-core assets to focus on the media segment, seeking a minority investment from a strategic or financial partner or attempting to implement a sale of the Company with either a financial or strategic buyer.

 

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We believe our business should continue to grow as we strive to capitalize on the following key assets:

 

•

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 41,000 display media boards on college and high school campuses throughout the United States; (iii) placing advertising in over 3,000 college and high school newspapers; (iv) distributing educational programming to approximately 8,000 secondary schools in the United States; and (v) maintaining and expanding our ability to execute large scale promotional service programs.

 

•

Established 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. Our Alloy Entertainment franchise is widely recognized as a developer of original books, with a number of books developed into television series and feature films.

 

•

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 and non-youth marketers.

 

•

Content . We are able to successfully develop original, commercial entertainment properties primarily geared toward teens, young adults and families. These properties typically begin as a book property and are subsequently developed into television series, feature films or web series.

Results of Operations and Financial Condition

The principal components of our expenses are cost of goods or services, which includes placement, production and distribution costs (including advertising placement fees, catalog and signage fees, temporary help and production costs), operating expenses (including personnel costs, commissions, promotions and bad debt expenses), general and administrative expenses, depreciation and amortization and special charges.

The Promotion segment has considerable variable costs. As a result, an increase or decrease in revenue will typically result in segment operating income increasing or decreasing by a similar percentage.

The Media segment has relatively low variable costs. As a result, in a period of rising revenue, segment operating income will typically increase at a rate that exceeds the increase in revenue. Conversely, in a period of declining revenue, segment operating income will typically decrease at a rate that exceeds the decrease in revenue.

The Placement segment has a combination of variable and fixed costs. As a result, an increase in revenue will typically result in segment operating income increasing in relation to the increase in revenue. As well, a decrease in revenue will typically result in segment operating income decreasing by a greater percentage due to the segment’s fixed costs.

The Corporate segment has primarily fixed costs, but these may increase or decrease depending upon the amount of stock compensation, professional fees, medical benefits and other variable expenses.

Three Months Ended July 31, 2010 Compared with Three Months Ended July 31, 2009

 

		Three months ended July 31, 2010 (Unaudited)
		Promotion			Media				Placement			Corporate				Total
Revenues:
Services revenue		$	9,436		$	14,993			$	10,595			—			$	35,024
Product revenue			18,209			—				—			—				18,209
Total revenue		$	27,645		$	14,993			$	10,595			—			$	53,233
Cost of goods sold:
Cost of goods sold – services		$	4,262		$	3,843			$	7,667			—			$	15,772
Cost of goods sold – product			6,318			—				—			—				6,318
Total cost of goods sold		$	10,580		$	3,843			$	7,667			—			$	22,090
Expenses:
Operating		$	11,713		$	11,342			$	1,998		$	437			$	25,490
General and administrative			993			636				327			2,845				4,801
Depreciation and amortization			324			1,064				4			226				1,618
Special charges			—			—				—			1,056				1,056
Total expenses		$	13,030		$	13,042			$	2,329		$	4,564			$	32,965
Operating income (loss)		$	4,035		$	(1,892	)		$	599		$	(4,564	)		$	(1,822	)

 

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		Three months ended July 31, 2009 (Unaudited)
		Promotion			Media			Placement			Corporate				Total
Revenues:
Services revenue		$	11,099		$	14,768		$	6,900			—			$	32,767
Product revenue			16,056			—			—			—				16,056
Total revenue		$	27,155		$	14,768		$	6,900			—			$	48,823
Cost of goods sold:
Cost of goods sold – services		$	5,993		$	1,657		$	5,190			—			$	12,840
Cost of goods sold – product			5,285			—			—			—				5,285
Total cost of goods sold		$	11,278		$	1,657		$	5,190			—			$	18,125
Expenses:
Operating		$	10,954		$	9,852		$	1,275		$	774			$	22,855
General and administrative			1,130			1,052			415			2,664				5,261
Depreciation and amortization			236			1,085			6			220				1,547
Total expenses		$	12,320		$	11,989		$	1,696		$	3,658			$	29,663
Operating income (loss)		$	3,557		$	1,122		$	14		$	(3,658	)		$	1,035

Revenue

Revenue in the second quarter of fiscal 2010 was $53,233, an increase of $4,410, or 9.0%, from revenue of $48,823 in the second quarter fiscal 2009. Revenue increased in each of our segments.

Promotion

Promotion segment revenue in the second quarter of fiscal 2010 was $27,645, an increase of $490, or 1.8%, from revenue of $27,155 in the second quarter of fiscal 2009. Revenue increased in the Company’s OCM businesses of $2,150, respectively, partially offset by a decrease in the AMP Agency and sampling business of $1,660.

Media

Media segment revenue in the second quarter of fiscal 2010 was $14,993, an increase of $225, or 1.5%, from revenue of $14,768 in the second quarter of fiscal 2009. The increase was primarily due to increases in our Digital, Alloy Education and Display Board businesses of $790, $720, and $190, respectively, which were partially offset by decreases in our Channel One business of $1,000 and Alloy Entertainment and print businesses of $470.

Placement

Placement segment revenue in the second quarter of fiscal 2010 was $10,595, an increase of $3,695, or 53.6 %, from revenue of $6,900 in the second quarter of fiscal 2009. The increase was primarily due to increases in military, multicultural, broadcast, and general market advertising of $3,610.

 

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Cost of Goods Sold

Promotion

Promotion segment cost of goods sold in the second quarter of fiscal 2010 was $10,580, a decrease of $698, or 6.2%, from cost of goods sold of $11,278 in the second quarter of fiscal 2009. The decrease was primarily due to temporary labor ($530) and production costs ($210).

 

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Media

Media segment cost of goods sold in the second quarter of fiscal 2010 was $3,843 an increase of $2,186, from cost of goods sold of $1,657, in the second quarter fiscal 2009. The increase was primarily due to an increase in net production costs for Channel One ($2,130) and increased payroll costs ($100), which were offset by a decrease in temporary labor ($25).

Placement

Placement segment cost of goods sold in the second quarter of fiscal 2010 was $7,667, an increase of $2,477, or 47.7%, from cost of goods sold in the second quarter of fiscal 2009 of $5,190. The increase is in direct proportion to the increase in revenue.

Operating Expenses

Promotion

Promotion segment operating expenses in the second quarter of fiscal 2010 were $11,713, an increase of $759, or 6.9%, from operating expenses of $10,954 in the second quarter of fiscal 2009. The increase was primarily due to increases in payroll ($470), travel costs ($140), marketing costs ($120), and facilities costs ($105), which were offset by a decrease in mailing costs ($225).

Media

Media segment operating expenses in the second quarter of fiscal 2009 were $11,342 an increase of $1,490, or 15.1%, from operating expenses of $9,852 in the second quarter of fiscal 2009. The increase was primarily due to increases in general corporate costs ($1,295), payroll costs ($415), and facilities costs ($280), which were offset by decreases in maintenance ($555) and consulting costs ($115).

Placement

Placement segment operating expenses in the second quarter of fiscal 2010 were $1,998, an increase of $723, or 56.7%, from operating expenses of $1,275 in the second quarter of fiscal 2009. The increase was primarily due to an increase in payroll costs ($800), which was offset by a decrease in general corporate costs ($135).

Corporate

The Corporate segment operating expenses in the second quarter of fiscal 2010 were $437, a decrease of $337, or 43.5%, from operating expenses of $774, in the second quarter of fiscal 2009. The decrease was primarily due to a decrease in information technology costs ($385), which was offset by an increase in general corporate costs ($50).

General and Administrative

Promotion

Promotion segment general and administrative expenses in the second quarter of fiscal 2010 were $993, a decrease of $137, or 12.1%, as compared to $1,130 in the second quarter of fiscal 2009. The decrease was primarily due to a decrease in general corporate costs ($140).

Media

Media segment general and administrative expenses in the second quarter of fiscal 2010 were $636, a decrease of $416, or $39.5%, as compared to $1,052 in the second quarter of fiscal 2009. The decrease was primarily due to decreases in general corporate costs ($430) and payroll costs ($85).

Placement

Placement segment general and administrative expenses in the second quarter of fiscal 2010 were $327, a decrease of $88, or 21.2%, as compared to general and administrative expenses of $415 in the second quarter of fiscal 2009. The decrease was primarily due to a decrease in general corporate costs.

Corporate

The Corporate segment general and administrative expenses in the second quarter of fiscal 2010 were $2,845, an increase of $181, or 6.8%, from general and administrative expenses of $2,664 in the second quarter of fiscal 2009. The increase was primarily due to higher general corporate cost ($325), and stock based compensation expense ($240), which were offset by a decrease in payroll ($260) and professional fees ($135).

 

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Special Charges

Special charges for the second quarter of fiscal 2010 were $1,056, which included $946 of merger transaction costs and an impairment charge to our auction rate securities of $110. There were no special charges recorded during the second quarter of fiscal 2009.

Six Months Ended July 31, 2010 Compared with Six Months Ended July 31, 2009

 

		Six months ended July 31, 2010 (Unaudited)
		Promotion			Media				Placement			Corporate				Total
Revenues:
Services revenue		$	18,406		$	30,924			$	22,757			—			$	72,087
Product revenue			23,776			—				—			—				23,776
Total revenue		$	42,182		$	30,924			$	22,757			—			$	95,863
Cost of goods sold:
Cost of goods sold – services		$	9,177		$	7,049			$	16,932			—			$	33,158
Cost of goods sold – product			7,581			—				—			—				7,581
Total cost of goods sold		$	16,758		$	7,049			$	16,932			—			$	40,739
Expenses:
Operating		$	20,171		$	21,365			$	4,219		$	531			$	46,286
General and administrative			1,904			1,238				612			6,020				9,774
Depreciation and amortization			650			2,150				9			462				3,271
Special charges			—			—				—			1,165				1,165
Total expenses		$	22,725		$	24,753			$	4,840		$	8,178			$	60,496
Operating income (loss)		$	2,699		$	(878	)		$	985		$	(8,178	)		$	(5,372	)

 

		Six months ended July 31, 2009 (Unaudited)
		Promotion			Media			Placement			Corporate				Total
Revenues:
Services revenue		$	20,440		$	28,473		$	16,350			—			$	65,263
Product revenue			21,781			—			—			—				21,781
Total revenue		$	42,221		$	28,473		$	16,350			—			$	87,044
Cost of goods sold:
Cost of goods sold – services		$	10,955		$	4,236		$	12,109			—			$	27,300
Cost of goods sold – product			6,553			—			—			—				6,553
Total cost of goods sold		$	17,508		$	4,236		$	12,109			—			$	33,853
Expenses:
Operating		$	18,679		$	19,419		$	2,947		$	1,089			$	42,134
General and administrative			2,229			1,593			1,032			5,591				10,445
Depreciation and amortization			448			2,116			15			449				3,028
Total expenses		$	21,356		$	23,128		$	3,994		$	7,129			$	55,607
Operating income (loss)		$	3,357		$	1,109		$	247		$	(7,129	)		$	(2,416	)

 

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Revenue

Revenue for the six months ended July 31, 2010 was $95,863, an increase of $8,819, or 10.1%, from revenue of $87,044 for the six months ended July 31, 2009. Revenue increased in our Placement and Media segments by $6,400 and $2,450, respectively, which were offset by a slight decrease in our Promotion segment.

Promotion

Promotion segment revenue for the six months ended July 31, 2010 was $42,182, a decrease of $39, or 0.1%, from revenue of $42,221 for the six months ended July 31, 2009. Revenue decreased in the Company’s AMP Agency business of $1,840, which was offset by an increase in the OCM business of $1,800.

Media

Media segment revenue for the six months ended July 31, 2010 was $30,924, an increase of $2,451, or 8.6%, from revenue of $28,473 for the six months ended July 31, 2009. The increase was primarily due to increases in our Alloy Digital, Display Board, and Alloy Education and Alloy Entertainment businesses of $1,630, $1,190, $1,170, and $790, respectively, which were offset by a decrease in our Channel One and print businesses of $1,940 and $440, respectively.

Placement

Placement segment revenue for the six months ended July 31, 2010 was $22,757 an increase of $6,407, or 39.2 %, from revenue of $16,350 for the six months ended July 31, 2009. The increase was primarily due to increases in college, multicultural, military, broadcast and general market advertising of $6,480.

Cost of Goods Sold

Promotion

Promotion segment cost of goods sold for the six months ended July 31, 2010 was $16,758, a decrease of $750, or 4.3%, from cost of goods sold of $17,508 for the six months ended July 31, 2009. The decrease was primarily due to decreases in payroll and temporary labor costs ($695), and production costs ($130), which were offset by an increase in travel costs ($80).

Media

Media segment cost of goods sold for the six months ended July 31, 2010 was $7,049, an increase of $2,813, or 66.4%, from cost of goods sold of $4,236 for the six months ended July 31, 2009. The increase was primarily due to increases in net production costs for Channel One ($2,535), and payroll costs ($350).

Placement

Placement segment cost of goods sold for the six months ended July 31, 2010 was $16,932, an increase of $4,823, or 39.8%, from cost of goods sold of $12,109 for the six months ended July 31, 2009. The increase is in direct proportion to the increase in revenue.

Operating Expenses

Promotion

Promotion segment operating expenses for the six months ended July 31, 2010 were $20,171, an increase of $1,492, or 8.0%, from operating expenses of $18,679 for the six months ended July 31, 2009. The increase was primarily due increased payroll ($1,020), travel costs ($215), and general corporate costs ($180), which were partially offset by a decrease in mailing costs ($405).

 

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Media

Media segment operating expenses for the six months ended July 31, 2010 were $21,365, an increase of $1,946, or 10.0%, from operating expenses of $19,419 for the six months ended July 31, 2009. The increase was primarily due to increases in general corporate costs ($1,640), payroll costs ($630), and facilities costs ($375), which were offset by decreases in maintenance costs ($720) and consulting costs ($170).

Placement

Placement segment operating expenses for the six months ended July 31, 2010 were $4,219, an increase of $1,272, or 43.2%, from operating expenses of $2,947 for the six months ended July 31, 2009. The increase was primarily due to increases in payroll related costs ($1,100) and general corporate costs ($110).

Corporate

The Corporate segment operating expenses for the six months ended July 31, 2010 were $531, a decrease of $558, or 51.2%, from operating expenses of $1,089 for the six months ended July 31, 2009. The decrease was primarily due to decreases in information technology costs ($420), payroll costs ($65), and general corporate costs.

General and Administrative

Promotion

Promotion segment general and administrative expenses for the six months ended July 31, 2010 were $1,904, a decrease of $325, or 14.6%, as compared to general and administrative expenses of $2,229 for the six months ended July 31, 2009. The decrease was primarily due to decreases in general corporate costs ($345) and travel costs ($15), which were offset by an increase in payroll costs ($50).

Media

Media segment general and administrative expenses for the six months ended July 31, 2010 were $1,238, a decrease of $355, or 22.3%, as compared to general and administrative expenses of $1,593 for the six months ended July 31, 2009. The decrease was primarily due to decreases in general corporate costs ($200) and payroll related costs ($130).

Placement

Placement segment general and administrative expenses for the six months ended July 31, 2010 were $612, a decrease of $420, or 40.7%, as compared to general and administrative expenses of $1,032 for the six months ended July 31, 2009. The decrease was primarily due to a decrease in general corporate costs ($410).

Corporate

The Corporate segment general and administrative expenses for the six months ended July 31, 2010 were $6,020, an increase of $429, or 7.7%, from general administrative expenses of $5,591 for the six months ended July 31, 2009. The increase was primarily due to increases in stock based compensation ($645), general corporate costs ($600) and information technology costs ($80), which were offset by lower payroll costs ($585) and professional fees ($300).

Special Charges

Special charges for the six months ended July 31, 2010 were $1,165, which included $1,055 of merger transaction costs and an impairment charge to our auction rate securities of $110. There were no special charges recorded during the six months ended July 31, 2009.

Liquidity and Capital Resources

Cash from Operations

Cash provided by operating activities was $7,187 for the six months ended July 31, 2010. Net loss from continuing operations was $6,252 and uses of working capital items totaled $8,904, which was primarily due to increases in accounts receivable due to lower collections, offset by higher accrued expenses. These uses of cash for continuing operations were offset by non cash items of $6,315, which were primarily depreciation, amortization and stock based compensation. Net cash provided by discontinued operations totaled $1,780, consisting of FrontLine’s net income of $21,839 and non-cash depreciation and amortization, offset by the gain on the sale of FrontLine of $20,276.

        Cash provided by operating activities was $6,354 for the six months ended July 31, 2009. Factors contributing to our cash provided by operating activities were uses of working capital of $1,349, primarily as a result of improvements in our accounts receivable collections, non-cash items of $4,995, which included depreciation and amortization, bad debt and stock based compensation expense. These items were offset by our net loss of $769 and the loss on the sale of assets related to the health club network of $311. Net income from discontinued operations was $1,804, which was primarily related to the net income earned by FrontLine. Net cash provided by discontinued operations totaled $2,272, consisting primarily of the net income of FrontLine of $1,804.

 

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Investing Activities

Cash provided by investing activities was $27,810 during the six months ended July 31, 2010. The increase during the six months ended July 31, 2010, was primarily due to the cash provided by discontinued operations of $30,600, consisting of $36,450 of proceeds received on the sale of FrontLine, offset by $5,700 of contingent consideration paid to FrontLine and $153 of capital expenditures. The net cash provided by discontinued operations was offset by capital expenditures of $1,146, contingent consideration payments of $940 related to the Fulgent Media Group, Inc. and Pixel Bridge, Inc. earnouts, and purchases of mailing lists and other intangible assets of $704.

Cash used in investing activities was $2,393 during the six months ended July 31, 2009. Capital expenditures were $1,488 and purchases of mailing lists and other intangible assets totaled $609. These uses were offset by sources of net cash through acquisitions and the sale of the health club network. Net cash used by discontinued operations was $693 and consisted primarily of capital expenditures of FrontLine for the period.

Financing Activities

Cash used in financing activities in the amount of $674 for the six months ended July 31, 2010, was primarily the result of shares of common stock surrendered to the Company by our employees to satisfy their tax withholding obligations upon the vesting of their restricted stock of $773, offset by the exercise of employee stock options of $99.

Cash used in financing activities was $4,169 during the six months ended July 31, 2009, as a result of repurchases of our common stock.

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 enter into a new credit facility or raise additional capital. If we raise additional funds through the issuance of equity securities, our stockholders may experience significant dilution. Alternatively, or in addition to equity related funding, we may seek various short term and term credit facilities, such as those that we have had in the past, with one or more institutional lenders. If financing is not available for working capital and for investment, we may have to adjust our operations and restrict our product development and enhancement as well as curtail acquisitions of products and services that expand our offerings. There is no assurance that we will be able to obtain financing when needed, or on terms that are acceptable to management. A lack of financing in sufficient amounts to our requirements could adversely affect our growth and ability to respond to competitive pressures. Any of these events could have a material and adverse effect on our business, results of operations and financial condition.

At July 31, 2010, our auction rates securities balance was $504. In August, we liquidated the remaining outstanding portion of our auction rate securities balance for $504 in cash.

As a condition to the Zelnick merger agreement, Alloy has agreed to pay Zelnick a termination fee of $3,900 if the merger agreement is terminated for certain reasons, including if there is an adverse recommendation change, which includes Alloy failing to make, or withdrawing or modifying in a manner adverse to Zelnick, the recommendation of Alloy’s board of directors to Alloy’s stockholders to approve and adopt the merger agreement (or recommend an acquisition proposal or take any action or make any statement inconsistent with the recommendation of Alloy’s board of directors to approve and adopt the merger agreement). Alloy has also agreed to reimburse Zelnick up to $2,500 for expenses actually incurred in certain circumstances, including if the merger is not completed by December 15, 2010 or if stockholder approval has not been obtained or if there is a material, uncured breach by Alloy under the merger agreement that would cause the failure of a closing condition.

Critical Accounting Policies and Estimates

During the first six months of fiscal 2010, 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 2009, for additional information relating to our use of estimates and other critical accounting policies.

Discontinued Operations – The Company determined, in accordance with generally accepted accounting principles (“GAAP”), that for reporting purposes the operations of FrontLine should be reported as discontinued operations for all periods presented.

Management’s plan to divest and the divesture of FrontLine both occurred within the Company’s second fiscal quarter of fiscal 2010. FrontLine has been classified in the Company’s Consolidated Financial Statements as discontinued operations. The discontinued operations on the Statement of Operations have been reported, net of applicable income taxes. Additionally, segment information does not include the results of businesses classified as discontinued operations.

 

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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 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:

 

•

changes in business and economic conditions and other adverse conditions in our markets;

 

•

increased competition;

 

•

our ability to achieve and maintain profitability;

 

•

lack of future earnings and ability to continue to grow our business;

 

•

ability to maintain quality and size of database;

 

•

our ability to protect or enforce our intellectual property or proprietary rights;

 

•

changes in consumer preferences;

 

•

volatility of stock price causing substantial declines;

 

•

litigation that may have an adverse effect on our financial results or reputation;

 

•

reliance on third-party suppliers; and

 

•

our ability to successfully implement our operating, marketing, acquisition and expansion strategies.

For a discussion of these and other factors, please see the risks discussed in our Annual Report on Form 10-K for fiscal 2009 in Item 1A—Risk Factors and the risks discussed in this Quarterly Report.

The forward-looking statements and our evaluation of the Company should take into consideration the proposed going private transaction that is subject to shareholder approval and a number of conditions that must satisfied to be able to consummate the transaction and the current and future costs payable by the Company.

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.

 

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.

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.

 

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PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings.

Other

The Company received an information request in late January 2009 from the New York State Attorney General (“NYS AG”) inquiring about the Company’s activities in marketing credit cards to college students. The Company subsequently was informed that the NYS AG is conducting an investigation into the Company’s marketing practices in this area. The Company is cooperating with the NYS AG in the investigation and is without sufficient information to determine the extent, if any, of potential monetary liability or other restrictions on its activities that may result from the investigation of the NYS AG. The Company’s last communication with the NYS AG was in July 2009.

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 nine 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 nine 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. After many months of negotiation, on April 2, 2009, the representative class plaintiffs and the defendants filed a Notice of Motion for Preliminary Approval of Settlement accompanied by a global Stipulation and Agreement of Settlement. The proposed Settlement provides that all claims against the issuers and underwriters will be dismissed with prejudice in exchange for the aggregate payment of $586 million. Under the terms of the proposed Settlement, neither the Company nor Messrs. Johnson or Diamond are required to pay any portion of the $586 million payment. The proposed Settlement is subject to numerous contingencies, including, but not limited to, preliminary Court approval, certification of a settlement class and final approval after providing members of the plaintiff class with notice. On or about June 10, 2009, the Court granted Plaintiff’s motion for an order: (i) preliminarily approving the proposed stipulation; (ii) certifying the Settlement classes for the purposes of the proposed stipulation only; (iii) approving the form and program of class notice described in the stipulation; and (iv) scheduling a hearing before the Court to determine whether the proposed stipulation should be finally approved. On October 5, 2009, the Court granted final approval of the settlement. Various members of the plaintiff class have filed notices of appeal seeking to challenge the terms of the settlement. At this point, there can be no assurance that the settlement will be affirmed.

On June 29, 2010, the Company, its directors, and ZelnickMedia LLC (“Zelnick”) were named as defendants in a putative class action complaint, captioned Teitelbaum v. Diamond., et al., C.A. No. 5604 , filed in the Court of Chancery of the State of Delaware. On July 8, 2010, a second lawsuit was filed in the Court of Chancery of the State of Delaware, captioned City of Livonia Employees Retirement System v. Diamond, et al., C.A. No. 5626 . This lawsuit also named as defendants Alloy Media Holdings, L.L.C., Lexington Merger Sub Inc., Natixis Caspian Private Equity, LLC, Rosemont Solebury Co-Investment Fund, L.P. and Genspring Family Offices, LLC. On July 26, 2010, the actions were consolidated under the caption In re Alloy, Inc. Shareholder Litigation, C.A. No. 5626 . On August 9, 2010, plaintiffs filed an amended complaint, purportedly on behalf of a class of stockholders, alleging that the intrinsic value of Alloy common stock is materially in excess of the amount offered for those securities in the merger and that our directors breached their fiduciary duties by agreeing to the merger price, thereby depriving plaintiffs of the opportunity to realize any increase in the value of Alloy stock. The amended complaint also alleges that the Preliminary Proxy omits material information concerning the merger and is materially misleading. The amended complaint further alleges that Zelnick, Parent, Merger Sub and the other additional defendants named therein, aided and abetted the supposed breaches of fiduciary duty by our directors. The action seeks injunctive and other equitable relief, damages, fees and costs. Simultaneously with filing their amended complaint, plaintiffs filed a motion for expedited proceedings, seeking an order setting a schedule for expedited discovery and a hearing on their application for injunctive relief prior to the shareholder meeting. On August 25, 2010, the court denied plaintiffs’ motion. On August 27, 2010, defendants filed motions to dismiss the amended complaint and to stay discovery pending resolution of the motions to dismiss. The Company believes that the claims asserted in the lawsuits are without merit.

 

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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.

 

Item 1A.

Risk Factors

Due to the proposed Merger transaction and the related diversion of our management’s attention from the operation of our business, our business and results of operations may be adversely affected.

As described in the Company’s Form 8-K, filed with the SEC on June 28, 2010 and preliminary proxy statement filed August 30, 2010, we have entered into the Merger Agreement, which, subject to stockholder approval and various other conditions, would result in our being acquired by an investment group. As a result of the proposed Merger transaction, our management and board of directors have spent and will continue to spend a significant amount of time on the proposed Merger transaction and the Company has incurred associated expenses of approximately of $1,055. Our business and operating results may suffer due to the diversion of management’s attention, and expenses, and if the Merger is not consummated these costs may have a material impact on our financial results.

If the proposed Merger is not completed and we are not otherwise acquired, our business could be harmed and our stock price could decline.

The consummation of the Merger is conditioned upon, among other things, the adoption of a Merger Agreement by our stockholders, regulatory approvals and other customary closing conditions. Therefore the Merger may not be completed or may not be completed in a timely manner. If the Merger Agreement is terminated and there are no other bidders for the Company, the market price of our common stock will likely decline, and, as noted above, our business may have been adversely affected due to the diversion of management’s attention from the operations of our business. Our stock price may decline as a result of the fact that we have incurred and will continue to incur significant expenses related to the Merger prior to its closing that will not be recovered if the Merger is not completed. In addition, our employees may be concerned due to the possibility that any party that acquires the Company may make personnel changes or eliminate employees. This could result in our employees seeking opportunities with other employers. If we lose employees due to the fact that we may be acquired, we may have difficulty rehiring or replacing those workers if we are not acquired, which would adversely affect our operations.

If the proposed Merger is not completed or we are not otherwise acquired, we may have to consider other strategic alternatives, including the possible sale of certain of our lines of business.

Our board of directors may have to consider other strategic alternatives, including the possible sale of certain of our lines of business, if the proposed Merger is not completed or we are not otherwise acquired. If the proposed Merger is not completed, our board of directors will review and consider various alternatives available to the Company, including, among others, maintaining the status quo, returning capital to stockholders, divesting certain non-core assets to focus on the media segment, seeking a minority investment from a strategic or financial partner or attempting to implement a sale of the Company with either a financial or strategic buyer. These alternative transactions may involve various additional risks to our business, including, among others, distraction of our management team and associated expenses as described above in connection with the proposed Merger, the risk we may be unable to consummate any such alternative transaction, valuation issues, more limited access to capital, and other variables which may adversely affect our operations. To the extent the Company divests certain businesses in order to focus on its media and entertainment sectors, the Company will face various challenges associated with both dramatically reducing the scope of, and restructuring, its businesses. Additionally, as a much smaller company following any restructuring, the Company would likely be unattractive and uneconomic as a public company and would continue to lack any institutional coverage by securities analysts. Our business and operating results may suffer due to any restructuring transactions and our business and operating results may suffer due to diversion of management’s attention.

The Merger Agreement contains provisions that could discourage or make it difficult for a third party to acquire the Company prior to the completion of the proposed Merger.

The Merger Agreement contains provisions that make it difficult for the Company to entertain a third-party proposal for an acquisition of the Company. These provisions include the general prohibition on Alloy’s soliciting or engaging in discussions or negotiations regarding any alternative acquisition proposal, subject to certain exceptions, and the requirement that Alloy pay a termination fee of $3,900 to Alloy Media Holdings, L.L.C. if the Merger Agreement is terminated in specified circumstances.

 

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These provisions might discourage an otherwise-interested third party from considering or proposing an acquisition of the Company, even one that may be deemed of greater value than the proposed Merger to our stockholders. Furthermore, even if a third party elects to propose an acquisition, the concept of a termination fee may result in that third party’s offering of a lower value to our stockholders than such third party might otherwise have offered.

Failure to complete the proposed Merger could negatively impact our business, financial condition, results of operations or stock price.

The completion of the proposed Merger is subject to a number of conditions and there can be no assurance that the conditions to the completion of the proposed Merger will be satisfied or that the proposed Merger will otherwise occur. If the proposed Merger is not completed, we will be subject to several risks, including:

 

•

the current price of our common stock may reflect a market assumption that the proposed Merger will occur, meaning that a failure to complete the proposed Merger could result in a decline in the price of our common stock;

 

•

we may be required to pay a termination fee of $3,900 and reimbursement expenses up to $2,500 to Alloy Media Holdings, L.L.C. if the Merger Agreement is terminated under certain circumstances which would negatively affect our liquidity;

 

•

we expect to incur substantial transaction costs in connection with the proposed Merger whether or not the proposed Merger is completed;

 

•

we would not realize any of the anticipated benefits of having completed the proposed Merger; and

 

•

under the Merger Agreement, we are subject to certain restrictions on the conduct of our business prior to completing the proposed Merger, which restrictions could adversely affect our ability to realize certain of our business strategies.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

Issuer Purchases of Equity Securities

During the second quarter of fiscal 2010, we did not purchase any shares under the Company’s stock repurchase program. At July 31, 2010, we had an unused authorization of approximately $3,005.

The following table provides information with respect to purchases by the Company of shares of its common stock during the second quarter of fiscal 2010:

(Amounts in thousands, except per share amounts)

 

		Total Number of Shares Purchased			Average Price 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:
May-10		—			$	—		—		$	3,005
June-10		—			$	—		—			3,005
July-10		1	(1)		$	9.50		—			3,005
Total		1						—		$	3,005

 

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(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.

 

Item 3.

Defaults upon Senior Securities.

Not applicable.

 

Item 4.

Reserved.

 

Item 5.

Other Information.

Not applicable.

 

Item 6.

Exhibits.

(a) Exhibits

The exhibits that are in this report immediately follow the index.

 

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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 /    J OSEPH D. F REHE
		Joseph D. Frehe
		Chief Financial Officer
		(Principal Financial Officer and
		Duly Authorized Officer)
Date:		September 9, 2010

 

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EXHIBIT INDEX

 

EXHIBIT NUMBER
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 September 9, 2010, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*		Certification of Joseph D. Frehe, Chief Financial Officer, dated September 9, 2010, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

*	Filed herewith.

 

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