Will Alloy Spend Millions On A Dead Brand?

August 23, 2007
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From Jim Metrock:

Alloy, Inc. (aka Alloy Media and Marketing) is the new owner of Channel One.
They bought the company in April of this year.
At the time of purchase Channel One had zero net worth (their assets equaled their liabilities).
This basically means that Alloy obtained Channel One for nothing.

Wow, what a bargain!

I knew Alloy would regret the Channel One purchase as time went on for several reasons: 1. Schools don’t show the program anymore. 2. Channel One has a problem with getting accurate viewership information. 3. Advertising on Channel One is no longer viewed as acceptable by ad agencies and individual companies. 4. The cost of upgrading Channel One’s equipment will be far greater than anticipated.

A recent filing with the Securities and Exchange Commission (SEC) sheds light on a new Channel One nightmare for Alloy. Alloy has violated SEC regulations by its purchase of Channel One. Alloy for some reason considered Channel One a "non-business." If it wasn’t a business, then Alloy didn’t have to disclose certain financial information about Channel One. The SEC told Alloy that Channel One is a "business" and that the registration of the transaction will not be "effective" until the proper information is provided the SEC. Alloy says even if Channel One is a business, they can’t get the information the SEC needs. Yipes.

From Form 8-K/A for ALLOY INC, 7-Aug-2007:

At the time Alloy filed the above-referenced Form 8-K regarding the Channel One acquisition, Alloy believed that the acquisition of the operating assets of Channel One did not constitute the acquisition of a "business", as that term is defined in Rule 11-01(d) of Regulation S-X. The SEC has disagreed with Alloy’s determination. As a result, since a business was deemed to be acquired, and the business qualifies as "significant" under the tests set forth in Rules 3-05 and 1-02(w) of Regulation S-X, audited financial statements for Channel One are required by Rule 3-05 of Regulation S-X and pro forma financial statements reflecting the acquisition are required by Article 11 of Regulation S-X. Alloy sought a waiver from the SEC of these financial statement filing requirements citing several reasons, including that no audited financial statements for the acquired assets of Channel One had been prepared or were available, and that it would be impossible for Alloy to provide those financial statements given the lack of financial information regarding Channel One as a separate business that would be necessary to prepare the financial statements. Alloy’s request for this waiver was not granted by the SEC. The SEC has informed Alloy that until it files audited financial statements for Channel One as required under Rule 3-05 of Regulation S-X and the pro forma financial information required under Article 11 of Regulation S-X, the SEC will not declare effective registration statements or post-effective amendments filed by the Company. This restriction does not apply to currently effective registration statements covering employee benefit plans, transactions involving secondary offerings or sales of securities under Rule 144.

This is simply incredible stuff. Is Alloy saying Primedia (the previous owner) had no financial statements or records for Channel One? Did Alloy buy Channel One without reviewing the company’s financials? I can’t imagine a company buying a company like Channel One without doing a complete financial evaluation. Yet Alloy appears to be saying they were clueless when they bought Channel One.

Alloy could face "delisting" because of this problem. That would mean NASDAQ, the exchange that trades Alloy stock, could drop Alloy and it would become difficult to buy or sell Alloy stock. Alloy has come close to being delisted before. Delisting is a very bad thing for any company, but would be especially bad for Alloy since they are a struggling company. They have never posted an annual net profit since they started in business in 1996. Trouble with Channel One is the last thing this company needs.

But Alloy DOES own Channel One and they HAVE TO respond to the SEC and they HAVE TO spend millions on upgrading the old Channel One equipment and they HAVE TO organize a massive campaign to get school administrators to begin making students watch the Channel One News TV show.

Or … Alloy executives could look into the abyss they are on the edge of and pull back. Alloy could just shut Channel One down and save years of agony and controversy and millions of dollars of precious cash.

Alloy’s CEO Matt Diamond has not just made a mistake – he has made a colossal mistake. Like the schools that thought Channel One’s TV network was free, Diamond thought that the Channel One company was free because he didn’t have to lay out any cash for the purchase. But like the schools, Diamond has found out that there is no "free lunch." The Channel One company like the Channel One TV show is proving to be very, very expensive.