| ALLOY INC Item 1A Risk Factors Risk Factors That May Affect Future Results You should carefully consider the following risks and uncertainties that we currently believe may materially affect our company |
| These risks and uncertainties are not the only ones we face |
| Additional risks and uncertainties not presently known to us may also become important factors that impact our business operations |
| If any of the following risks actually occur, our business, financial condition or results of operations could be materially and adversely affected |
| Risks Related to Our Businesses We have incurred significant operating losses in the past and may incur significant operating losses in the future |
| We may never achieve sustained profitability |
| Since our inception in January 1996, we have incurred significant net losses, and as of January 31, 2006, we have an accumulated deficit of approximately dlra254 million |
| We have not historically been profitable and were not profitable for the year ended January 31, 2006 |
| Our financial results for the past three years have been adversely impacted by impairment charges and we cannot provide any assurances that we will not incur similar charges in the future |
| In addition, in the fiscal year beginning February 1, 2006, we will be recording, for the first time, a compensation charge for the fair value of stock-based compensation |
| Even if we were to become profitable, we may not be able to sustain or increase profitability on a quarterly or annual basis |
| Our failure to achieve and sustain profitability will negatively impact the market price of our common stock |
| 7 ______________________________________________________________________ [31]Table of Contents A lack of future earnings or future stock issuances by us may limit our ability to use our net operating loss carryforwards |
| As of January 31, 2006, we had net operating loss (“NOL”) carryforwards of approximately dlra29dtta4 million to offset future taxable income, which expire in various years through 2024, if not utilized |
| The deferred tax asset representing the benefit of these NOL’s has been offset completely by a valuation allowance due to our history of operating losses and the uncertainty of future taxable income |
| A lack of future earnings would adversely affect our ability to utilize these NOL’s |
| In addition, under the provisions of the Internal Revenue Code, substantial changes in our ownership may limit the amount of NOL’s that can be utilized annually in the future to offset taxable income |
| Section 382 of the Internal Revenue Code of 1986, as amended, or Section 382, imposes limitations on a company’s ability to use NOL’s if a company experiences a more-than-50-percent ownership change over a three-year testing period |
| We have experienced three such ownership changes in the past and it is possible that a change in our ownership will occur in the future |
| Since our inception, we have rapidly expanded our business, growing our revenue from dlra2 million for fiscal 1997 to dlra195dtta3 million for fiscal 2005 |
| Our continued growth will depend to a significant degree on our ability to maintain existing sponsorship and advertising relationships and develop new relationships, to identify and integrate successfully acquisitions, and to maintain and enhance the reach and brand recognition of our existing media franchises and any new media franchises that we create or acquire |
| Our ability to implement our growth strategy will also depend on a number of other factors, many of which are or may be beyond our control, including the continuing appeal of our media and marketing properties to consumers, the continued perception by participating advertisers and sponsors that we offer an effective marketing channel for their products and services, our ability to attract, train and retain qualified employees and management and our ability to make additional strategic acquisitions |
| There can be no assurance that we will be able to implement our growth strategy successfully |
| We may fail to use our database and our expertise in marketing to consumers successfully, and we may not be able to maintain the quality and size of our database |
| The effective use of our consumer database and our expertise in marketing are important components of our business |
| If we fail to capitalize on these assets, our business will be less successful |
| As individuals in our database age beyond 10-24, they may no longer be of significant value to our business |
| We must therefore continuously obtain data on new individuals in the demographic in order to maintain and increase the size and value of our database |
| If we fail to obtain sufficient new names and information, or if the quality of the information we gather suffers, our business could be adversely affected |
| Moreover, other focused media businesses possess similar information about some segments of our target market |
| We compete for marketing and advertising revenues based on the comprehensive nature of our database and our ability to analyze and interpret the data in our database |
| Accordingly, if one or more of our competitors were to create a database similar to ours, or if a competitor were able to analyze its data more effectively than we are able to analyze ours, our competitive position, and therefore our business, could suffer |
| Our success depends largely on the value of our brands, and if the value of our brands were to diminish, our business would be adversely affected |
| The prominence with advertisers of our Alloy, CCS and dELiA*s websites as well as our other media and marketing brands are key components of our business |
| If our websites or brands lose their appeal to young consumers or to advertisers trying to reach such consumers, our business would be adversely affected |
| The value of our consumer brands could also be eroded by our failure to keep current with the evolving preferences of our audience |
| These events would likely also reduce media and advertising sales and adversely affect our marketing 8 ______________________________________________________________________ [32]Table of Contents services businesses |
| Moreover, we intend to continue to increase the number of consumers we reach, through means that could include broadening the intended audience of our existing consumer brands or creating or acquiring new media franchises or related businesses |
| Misjudgments by us with respect to these matters could damage our existing or future brands |
| If any of these developments occur, our business would suffer and we may be required to write-down the carrying value of our goodwill |
| Our revenues and income could decline due to general economic trends, declines in consumer spending and seasonality |
| Our revenues are largely generated by discretionary consumer spending or advertising seeking to stimulate that spending |
| Advertising expenditures and consumer spending all tend to decline during recessionary periods, and may also decline at other times |
| Accordingly, our revenues could decline during any general economic downturn |
| In addition, our revenues have historically been higher during our third and fourth fiscal quarters, coinciding with the start of the school calendar and holiday season spending, than in the first half of our fiscal year |
| Therefore, our results of operations in any given quarter may not be indicative of our full fiscal year performance |
| We may be required to recognize impairment charges |
| We are required to perform impairment tests on our identifiable intangible assets with indefinite lives, including goodwill, annually or at any time when certain events occur, which could impact the value of our business segments |
| Our determination of whether an impairment has occurred is based on a comparison of the assets’ fair market values with the assets’ carrying values |
| Significant and unanticipated changes could require a provision for impairment that could substantially affect our reported earnings in a period of such change |
| For instance, during the fourth quarter of fiscal 2005, we completed our annual impairment review and recorded a dlra30dtta7 million charge to reduce the carrying value of goodwill and an approximate dlra1dtta5 million charge to reduce the carrying value of indefinite-lived intangible assets |
| These impairment charges are included within “special charges” on the accompanying Consolidated Statement of Operations |
| Additionally, we are required to recognize an impairment loss when circumstances indicate that the carrying value of long-lived tangible and intangible assets with finite lives may not be recoverable |
| Management’s policy in determining whether an impairment indicator exists, (a triggering event), comprises measurable operating performance criteria as well as qualitative measures |
| If a determination is made that a long-lived asset’s carrying value is not recoverable over its estimated useful life, the asset is written down to estimated fair value, if lower |
| The determination of fair value of long-lived assets is generally based on estimated expected discounted future cash flows, which is generally measured by discounting expected future cash flows identifiable with the long-lived asset at our weighted-average cost of capital |
| Pursuant to Statement of Financial Accounting Standards (“SFAS”) Nodtta 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS Nodtta 144”), we performed an analysis of the recoverability of certain long-lived assets during the fourth quarter of fiscal 2005 and recorded an asset impairment charge of approximately dlra0dtta5 million |
| This impairment charge is included within “special charges” on the accompanying Consolidated Statement of Operations |
| could result in significant liability or materially affect our business |
| Under United States federal income tax laws, even though our spinoff of dELiA*s, Inc |
| qualifies for tax-free treatment, we may nevertheless be subject to tax if acquisitions or issuances of either our common stock or dELiA*s, Inc |
| stock following the spinoff cause our stockholders to subsequently own less than a majority of the outstanding shares of either dELiA*s, Inc |
| In particular, this tax will apply if such issuances or acquisitions occur as part of a plan or series of related transactions that include the spinoff |
| If the subsequent acquisitions or issuances of either the stock of dELiA*s, Inc |
| or our stock triggers this tax, we will be subject to tax on the gain 9 ______________________________________________________________________ [33]Table of Contents that would have resulted from a sale of dELiA*s, Inc |
| stock distributed in the spinoff |
| Because of this, we are limited in undertaking certain corporate actions |
| These limitations on activity could have a material adverse effect on our ability to generate necessary liquidity or execute other corporate transactions, including restructuring or similar transactions, which could limit the value of our stock |
| Many of our competitors are not subject to similar restrictions and may issue their stock to complete acquisitions, raise capital and speed the development of new technology |
| Therefore, these competitors may have a competitive advantage over us |
| Our strategy contemplates strategic acquisitions |
| Our inability to acquire suitable businesses or to manage their integration could harm our business |
| A key component of our business strategy is to expand our reach by acquiring complementary businesses, products and services |
| We compete with other media and related businesses for these opportunities |
| Therefore, even if we identify targets we consider desirable, we may not be able to complete those acquisitions on terms we consider attractive or at all |
| We could have difficulty in assimilating personnel and operations of the businesses we have acquired and may have similar problems with future acquisitions |
| These difficulties could disrupt our business, distract our management and employees and increase our expenses |
| Furthermore, we may issue additional equity securities in connection with acquisitions, potentially on terms that could be dilutive to our existing stockholders |
| Competition may adversely affect our business and cause our stock price to decline |
| Because of the perception that the youth market is an attractive demographic for marketers, the markets in which we operate are competitive |
| Many of our existing competitors, as well as potential new competitors in this market, have longer operating histories, greater brand recognition, larger customer user bases and significantly greater financial, technical and marketing resources than we do |
| These advantages allow our competitors to spend considerably more on marketing and may allow them to use their greater resources more effectively than we can use ours |
| Accordingly, these competitors may be better able to take advantage of market opportunities and be better able to withstand market downturns than us |
| If we fail to compete effectively, our business could be materially and adversely affected and our stock price could decline |
| We rely on third parties for some essential business operations, and disruptions or failures in service may adversely affect our ability to deliver goods and services to our customers |
| We currently depend on third parties for important aspects of our business, including our infrastructure, operations and technology |
| We have limited control over these third parties, and we are not their only client |
| In addition, we may not be able to maintain satisfactory relationships with any of these third parties on acceptable commercial terms |
| Further, we cannot be certain that the quality of products and services that they provide will remain at the levels needed to enable us to conduct our business effectively |
| We depend on our key personnel to operate our business, and we may not be able to hire enough additional management and other personnel to manage our growth |
| Our performance is substantially dependent on the continued efforts of our executive officers and other key employees |
| The loss of the services of any of our executive officers or key employees could adversely affect our business |
| Additionally, we must continue to attract, retain and motivate talented management and other highly skilled employees to be successful |
| We may be unable to retain our key employees or attract, assimilate and retain other highly qualified employees in the future |
| 10 ______________________________________________________________________ [34]Table of Contents Risks Related to Our Intellectual Property If we are unable to protect the confidentiality of our proprietary information and know-how, our competitive position could be affected |
| We rely on the protection of trademarks, trade secrets, know-how, confidential and proprietary information to maintain our competitive position |
| To maintain the confidentiality of trade secrets and proprietary information, we generally enter into confidentiality agreements with our employees, consultants, and contractors upon the commencement of our relationship with them |
| These agreements typically require that all confidential information developed by the individual or made known to the individual by us during the course of the individual’s relationship with us be kept confidential and not disclosed to third parties |
| However, we may not obtain these agreements in all circumstances, and individuals with whom we have these agreements may not comply with their terms |
| Even if obtained, these agreements may not provide meaningful protection for our trade secrets or other proprietary information or an adequate remedy in the event of their unauthorized use or disclosure |
| The loss or exposure of our trade secrets or other proprietary information could impair our competitive position |
| We may be involved in lawsuits to protect or enforce our intellectual property or proprietary rights that could be expensive and time-consuming |
| We may initiate intellectual property litigation against third parties to protect or enforce our intellectual property rights and we may be similarly sued by third parties |
| The defense and prosecution of intellectual property suits, interference proceedings and related legal and administrative proceedings, if necessary, would be costly and divert our technical and management personnel from conducting our business |
| An adverse determination of any litigation or proceeding could affect our business, particularly in countries where the laws may not protect such rights as fully as in the United States |
| Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that disclosure of some of our confidential information could be compelled and the information compromised |
| In addition, during the course of this kind of litigation, there could be public announcements of the results of hearings, motions or other interim proceedings or developments that, if perceived as negative by securities analysts or investors, could have a substantial adverse effect on the trading price of our common stock |
| Our agreement with dELiA*s, Inc |
| have agreed to jointly own all data (excluding credit card data) collected through the alloy |
| com websites and collected offline in connection with our respective businesses, subject to applicable laws and privacy policies |
| Pursuant to an agreement with dELiA*s, Inc, each party is subject to specified restrictions with respect to the use of such data |
| Nevertheless, because we and dELiA*s, Inc |
| jointly own such database information, certain actions that dELiA*s, Inc |
| could take, such as breaching its contractual covenants, could result in our losing a significant portion of the competitive advantage we believe our databases provide to us |
| In such event, our business and results of operations could be adversely affected |
| In addition, because we have agreed to limitations on our use of that data, we might be unable to sell or license any such data to third parties, which limits our ability to generate revenues from such data |
| Our inability or failure to protect our intellectual property or our infringement of other’s intellectual property could have a negative impact on our operating results |
| Our trademarks are valuable assets that are critical to our success |
| The unauthorized use or other misappropriation of our trademarks, or our inability to continue to use any current trademarks, could diminish the value of our brands and have a negative impact on our business |
| We are also subject to the risk that we may infringe on the intellectual property rights of third parties |
| Any infringement or other intellectual property claim 11 ______________________________________________________________________ [35]Table of Contents made against us, whether or not it has merit, could be time-consuming, result in costly litigation, cause product delays or require us to pay royalties or license fees |
| In addition, in connection with the spinoff of dELiA*s, Inc, with respect to certain Alloy and CCS trademarks and servicemarks, we agreed with dELiA*s, Inc |
| that we and they will become joint owners by assignment of such trademarks and servicemarks |
| filed instruments with PTO to request that the PTO divide these jointly owned trademarks and servicemarks between us such that we each would own the registrations for those trademarks and servicemarks for the registration classes covering the goods and services applicable to our respective businesses |
| We cannot assure you that the PTO will grant such request, and in such event we would need to enter into long-term agreements with dELiA*s, Inc |
| regarding our respective use of those trademarks and servicemarks |
| We may have a more difficult time enforcing our rights arising out of any breach by dELiA*s, Inc |
| of any such agreement than we would enforcing a infringement of our trademarks were the PTO to grant the requested division |
| In such event, our business and results of operations could be adversely affected |
| Risks Relating to Government Regulations and Litigation Changing laws, rules and regulations and legal uncertainties could adversely affect our business, financial condition and results of operations |
| Unfavorable changes in existing, or the promulgation of new, laws, rules and regulations applicable to us and our businesses, including those relating to the Internet, online commerce, the regulation of adware and other downloadable applications, broadband and telephony services, consumer protection and privacy, including requirements for criminal background checks for subscribers to online dating services, and sales, use, value-added and other taxes, could decrease demand for products and services, increase costs and/or subject us to additional liabilities, which could adversely affect our business |
| There is, and will likely continue to be, an increasing number of laws and regulations pertaining to the Internet, online commerce, the neutrality of the Internet as a network, liability for information retrieved from or transmitted over the Internet, user privacy, taxation and the quality of products and services |
| We also face risks due to a failure to enforce or legislate, particularly in the area of network neutrality, where governments might fail to protect the Internet’s basic neutrality as to the services and sites that users can access through the network |
| The US Congress is currently considering changes to the existing regulatory regime, including bills to prohibit broadband network discrimination |
| This proposed legislation would prevent broadband network operators from interfering with the ability of consumers to access the Internet, as well as from charging businesses for the distribution and carriage of online content and services over their networks |
| No assurances can be given that this or any other legislation prohibiting or otherwise limiting broadband network discrimination will be adopted |
| There are also legislative proposals pending before the US Congress and various state legislative bodies regarding online privacy, data security and regulation of adware and other downloadable applications, and the continued growth and development of online commerce may continue to prompt calls for more stringent consumer protection laws, which may impose additional burdens on us and online businesses generally |
| In addition, the application of various domestic and international sales, use, value-added and other tax laws, rules and regulations to our historical and new products and services is subject to interpretation by the applicable taxing authorities |
| While we believe that we are generally compliant with these tax provisions, there can be no assurances that taxing authorities will not take a contrary position, or that such positions will not adversely affect our business, financial condition and results of operations |
| 12 ______________________________________________________________________ [36]Table of Contents We could face liability from, or our ability to conduct business could be adversely affected by, government and private actions concerning personally identifiable data, including privacy |
| Our business is subject to federal and state regulations regarding the collection, maintenance and disclosure of personally identifiable information we collect and maintain in our databases |
| If we do not comply, we could become subject to liability |
| While these provisions do not currently unduly restrict our ability to operate our business, if those regulations become more restrictive, they could adversely affect our business |
| In addition, laws or regulations that could impair our ability to collect and use user names and other information online from persons may adversely affect our business |
| For example, COPPA currently limits our ability to collect personal information from website visitors who may be under age 13 |
| Further, claims could also be based on other misuses of personal information, such as for unauthorized marketing purposes |
| If we violate any of these laws, we could face civil penalties |
| In addition, the attorneys general of various states review company websites and their privacy policies from time to time |
| In particular, an attorney general may examine such privacy policies to assure that the policies overtly and explicitly inform users of the manner in which the information they provide will be used and disclosed by the company |
| If one or more attorneys general were to determine that our privacy policies fail to conform with state law, we also could face fines or civil penalties, any of which could adversely affect our business |
| We could face liability for information displayed in our print publication media or displayed on or accessible via our websites |
| We may be subjected to claims for defamation, negligence, copyright or trademark infringement or based on other theories relating to the information we publish in any of our print publication media and on our websites |
| These types of claims have been brought, sometimes successfully, against marketing and media companies in the past |
| We may be subject to liability based on statements made and actions taken as a result of participation in our chat rooms or as a result of materials posted by members on bulletin boards on our websites |
| Based on links we provide to third-party websites, we could also be subjected to claims based upon online content we do not control that is accessible from our websites |
| We could face liability for breaches of security on the Internet |
| To the extent that our activities or the activities of third-party contractors involve the storage and transmission of information, such as credit card numbers, social security numbers or other personal information, security breaches could disrupt our business, damage our reputation and expose us to a risk of loss or litigation and possible liability |
| We could be liable for claims based on unauthorized purchases with credit card information, impersonation or other similar fraud claims |
| We could also be liable for claims relating to security breaches under recently-enacted or future data breach legislation |
| These claims could result in substantial costs and a diversion of our management’s attention and resources |
| We are a defendant in class action and other lawsuits and defending these litigations could hurt our business |
| We have been named as a defendant in a securities class action lawsuit relating to the allocation of shares by the underwriters of our initial public offering |
| For more information on this litigation and other matters, |