U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______ to ______
Commission File Number: 001-14498
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BLUEFLY, INC.
(Name of registrant as specified in its charter)
Delaware 13-3612110
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
42 West 39th Street, New York, NY 10018
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (212) 944-8000
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Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock,
par value $.01 per share
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Indicate by check mark whether disclosure of delinquent filers in response to
Item 405 of Regulation S-K is not contained in this form, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K [X]
As of March 22, 2002, there were 9,205,331 shares of Common Stock, $.01 par
value, of the registrant outstanding. The aggregate market value of the voting
and non-voting common equity held by non-affiliates as of such date, based upon
the last sale price of such equity reported on the National Associated of
Securities Dealers Automated Quotation SmallCap Market, was approximately
$15,550,000.
PART I
Item 1. Description of Business
General
Bluefly, Inc. is a leading Internet retailer of designer fashion brands at
outlet store prices. We sell over 400 brands of designer apparel, fashion
accessories and home products at discounts that typically range between 30% and
75% off comparable retail prices. In the 12 months of calendar year 2001, we
offered over 62,000 different types of items for sale in categories such as
men's, women's and children's clothing and accessories as well as house and home
accessories. Since its inception, www.bluefly.com has served over 285,000
customer accounts and shipped to over 21 countries.
We were incorporated in 1991 under the laws of the state of New York as Pivot
Corporation. In 1994, we changed our name to Pivot Rules, Inc. In May of 1997,
we completed our initial public offering, and our common stock is listed on the
Nasdaq SmallCap Market under the symbol "BFLY." In May of 1998, our Board of
Directors approved the development of the Bluefly.com Web site. In June 1998, we
discontinued our golf sportswear division, Pivot Rules, in order to devote all
of our energy and resources to building Bluefly.com. The Web site was publicly
launched in September 1998. In October 1998, shortly after selling the Pivot
Rules brand and trademarks, we changed our name to Bluefly, Inc. to match the
name of our website. On February 2, 2001, we reincorporated in Delaware through
a merger with a wholly owned subsidiary. Our executive offices are located at 42
West 39th Street, New York, New York 10018, and our telephone number is (212)
944-8000. Our Internet address is www.bluefly.com.
In this report, the terms "we", "us", "Bluefly" and the "Company" refer to
Bluefly, Inc. and its predecessors and subsidiaries, unless the context
indicates otherwise.
Recent Developments
On March 27, 2002, we entered into a Standby Commitment Agreement (the "Soros
Standby Agreement") with Quantum Industrial Partners LDC, a Cayman Islands
limited duration company ("QIP"), and SFM Domestic Investments LLC, a Delaware
limited liability company ("SFMDI", QIP and SFMDI are each affiliates of Soros
Private Equity Partners LLC and are collectively and individually sometimes
referred to as "Soros"). Under the Soros Standby Agreement, Soros has agreed to
provide us with up to four million dollars ($4,000,000) of additional financing
on a standby basis (the "Standby Commitment Amount") at any time prior to
January 1, 2003; provided, however, that we may draw down on the Standby
Commitment Amount only at such time that our total cash balances are less than
$1,000,000. Such financing can be made in one or more tranches as determined by
the members of our Board of Directors who are not Soros designees, and any and
all financings made shall be on terms that are consistent with those in the
market at the time the draw is made for similar investments by investors similar
to Soros in companies similar to us. Subject to certain limitations the Standby
Commitment Amount shall be reduced on a dollar-for-dollar basis by the gross
cash proceeds received by the Company or any of its subsidiaries from the
issuance of any equity or convertible securities after March 27, 2002. In
exchange for this commitment, but not as a substitute for additional
consideration that Soros would receive if and when any financing is made
pursuant to the Soros Standby Agreement, we issued to Soros a warrant to
purchase 100,000 shares of our Common Stock, par value $0.01 per share ("Common
Stock"), at an exercise price of $1.68 per share (the 20 day trailing average of
the closing sale price of our Common Stock on the date of issuance), exercisable
at any time until March 27, 2007. In connection with the issuance of this
warrant, Soros agreed that the issuance of this warrant shall not trigger the
anti-dilution provision of Section 5.8.6 of our Certificate of Incorporation.
See, "Risk Factors - "Certain Events Could Result in Significant Dilution of
Your Ownership of our Common Stock."
On March 22, 2002, we amended our Financing Agreement (the "Rosenthal Financing
Agreement") with Rosenthal & Rosenthal, Inc. ("Rosenthal"), pursuant to which
Rosenthal provides us with certain credit accommodations, including loans and
advances, factor-to-factor guarantees, letters of credit in favor of suppliers
or factors and purchases of payables owed to our suppliers (the "Loan
Facility"). Under the terms of this amendment (the "Rosenthal Amendment"), we
extended the Rosenthal Financing Agreement until March 30, 2003, reduced the
annual fee we pay Rosenthal for the Loan Facility from $20,000 to $10,000,
agreed to a decrease from $2.5 million to $1.5 million in the face amount of the
standby letter of credit that Soros is maintaining (the "Soros Guarantee") to
help secure the Loan Facility, and limited the maximum amount available under
the Loan Facility to an amount equal to the Soros Guarantee plus the lowest of
(x) $1 million, (y) 20% of the book value of our inventory and (z) the full
liquidation value of our inventory. In addition, pursuant to the Rosenthal
Amendment, we adjusted the threshold amount that entitles Rosenthal to take
control of certain of our cash accounts for a period of time to be 90% of the
maximum amount available under the Loan Facility instead of 90% of the Soros
Guarantee as had been provided previously.
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As of March 22, 2002, the maximum amount available under the Loan Facility was
approximately $2.5 million, of which $2.2 million was outstanding as of such
date. See, "Risk Factors - "We Have Granted A Lien On Substantially All Of Our
Assets" and "We May Not Generate Sufficient Cash Flow To Pay Our Indebtedness
Under The Rosenthal Financing Agreement."
As partial consideration for the Rosenthal Amendment, we extended from March 30,
2006 to March 30, 2007 the termination date of the warrant we issued to
Rosenthal on March 30, 2001 to purchase 50,000 shares of our Common Stock at an
exercise price of $2.34 per share.
On March 22, 2002, in connection with the Rosenthal Amendment, we amended the
Reimbursement Agreement (the "Reimbursement Agreement") pursuant to which Soros
agreed to guarantee a portion of the Loan Facility to reduce the total amount of
standby letters of credit that Soros is obligated to issue to secure the Loan
Facility to $1.5 million from $4 million. We are obligated to reimburse Soros
for any amounts it pays to Rosenthal pursuant to the Reimbursement Agreement.
Our obligation to Rosenthal is secured by a lien on substantially all of our
assets and we have granted Soros a subordinated lien on substantially all of our
assets, including our cash balances, in order to secure our reimbursement
obligations. In exchange for Soros' agreement to maintain the Soros Guarantee
until August 15, 2003, we issued to Soros a warrant to purchase 60,000 shares of
our Common Stock at an exercise price of $1.66 per share (the 20 day trailing
average of the closing sale price of our Common Stock on the date of issuance),
exercisable at any time until March 30, 2007. In connection with the issuance of
this warrant, Soros agreed that the issuance of this warrant shall not trigger
the anti-dilution provision of Section 5.8.6 of our Certificate of
Incorporation.
Based on current plans and assumptions relating to our operations as well as
proceeds from prior financings together with the Soros Standby Agreement, the
Loan Facility, existing resources and cash generated from operations, we believe
that we have sufficient resources to satisfy our cash requirements through the
end of 2002. Of course, there can be no assurance that such expectations will
prove to be correct. Moreover, we may seek additional debt and/or equity
financing in order to grow of our business. The environment for raising
investment capital by companies in the Internet industry has been difficult and
there can be no assurance that additional financing or other capital will be
available upon terms acceptable to us, or at all. The inability to obtain
additional financing, if needed, would have a material adverse effect on our
business, prospects, financial condition and results of operations. See, "Risk
Factors - "We Are Making A Substantial Investment In Our Business And May Need
To Raise Additional Funds" and "Certain Events Could Result in Significant
Dilution of Your Ownership of our Common Stock."
On March 12, 2002, we entered into a Software License and Service Agreement with
Blue Martini Software, Inc ("Blue Martini"). Beginning in March 2002, with the
assistance of consultants from Blue Martini, we plan to develop an improved
version of our Web site based on Blue Martini Software. Once launched, we expect
that the upgraded Web site will provide us with better tools to create and
manage on-site marketing promotions, more robust analytical tools to measure the
performance of on-site promotions, greater site stability, and a more efficient
platform from which to scale our technology infrastructure should any future
growth in our business dictate such a need. We expect to launch the new Web site
during the third quarter of 2002. Of course, there can be no assurance that the
new Web site will be launched when scheduled, that such expectations will prove
to be correct or that any results will have a positive effect on our business.
See, "Risk Factor - The Development Of A New Web Site May Place A Significant
Strain On Our Management And Certain Key Personnel."
Business Strategy
Bluefly strives to be the "Store of First Resort for Fashion" by offering the
most compelling combination of selection, value, service and convenience. By
selectively acquiring end-of-season and excess inventory of high-end designer
fashion products and offering a friendly, convenient and upscale shopping
atmosphere, we believe that we are creating a hybrid retail environment that
combines the best of the three traditional retail channels: full price
department stores; catalogs; and traditional off-price stores.
Each of the three traditional retail channels offers something different to
consumers. Full price department stores typically offer a wide selection of top
designer products and make substantial efforts to provide good customer service.
Often missing from the full price department store experience are convenience
(of necessity, consumers must travel to and from the store, which in some
instances can take several hours) and discounts (while full price stores
generally have price mark-downs, their typical discount to the consumer is
significantly lower than that of off-price stores). While catalogs offer
convenience and good
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customer service, they generally do not offer discounts or a wide selection of
designer products (many catalogs, such as J.Crew, Lands' End, and Victoria
Secret, are "vertical brands" that sell one brand of products). Off-price
stores, such as T.J. Maxx and Ross Stores, typically offer significant discounts
to the customer but do not offer the designer brand selection and customer
service of full price department stores or the convenience of catalogs.
Bluefly seeks to combine the best that these three traditional channels have to
offer with added benefits offered only by the Internet. At Bluefly.com, we aim
to offer the designer selection of a full price department store, the customer
service of a high-end retailer or catalog, the discounts of an off-price store,
the convenience of 24/7 shopping from home or the office, and sophisticated
search and sort functionality made possible by the Internet. We recognize that
we will not be able to satisfy all of our customers, all of the time, but then
no retailer can. Our proposition to the consumer is simply this: "Come to
Bluefly.com first for all of your fashion needs. We will do our best to exceed
your expectations and, if we have what you are looking for, you will receive top
designer merchandise at a discount and outstanding customer service in a
friendly, convenient, upscale environment. In those instances (which we hope to
be rare) where our designer selection does not meet your needs, the cost to you
will be the few minutes it took to browse or search our Web site. We, on the
other hand, will have the opportunity to complete many more sales with you if we
successfully build an experience that convinces you to visit us first to see if
we can fill your fashion needs." For these reasons, we hope to become the "Store
of First Resort for Fashion."
Our business is also designed to provide a compelling value proposition for our
suppliers and, in particular, the more than 400 top designer brands that we
offer on our Web site. We recognize that liquidating excess inventory can be a
"necessary evil" and that brand dilution can occur when a brand's product is
offered in a traditional discount environment. We would like to make the
liquidation of excess inventory a positive experience for our vendors rather
than a distasteful one. We intend to do this by treating our suppliers with
honesty and respect and by creating a high-end retail environment that offers
only a premium matrix of brands. In doing so, we hope that Bluefly's younger,
affluent customer base will come to understand our suppliers' brands as the
designer intended.
We do not believe that we can become the "Store of First Resort for Fashion"
without using the Internet as a platform. The direct marketing of excess and
end-of-season apparel, fashion accessories and home products requires a
cost-effective medium that can display a large number of products, many of which
are in limited supply, and some of which are neither available in all sizes nor
easily replenished. We believe print catalogs are not well suited to this task.
The paper, printing, mailing and other production costs of a print catalog can
be significant. To support these costs, a traditional cataloger typically
requires products that are replenishable, available in a full range of sizes and
in substantial quantities. Similarly, retailing on television is costly and
requires substantial quantities of products that are available in all sizes in
order for it to be an economical medium. In addition, the number of items that
can be displayed on television is limited, and television does not allow viewers
to search for products that interest them. The availability of excess inventory
of high-end apparel and accessories is often at odds with these needs as such
merchandise is rarely replenishable and frequently offered in incomplete color
and size ranges.
The Internet, however, can be a far less expensive and far more effective
medium. By using the Internet as our platform, the number of items that we offer
is not limited by the high costs of printing and mailing catalogs. With the
Internet, we can automatically update product images as new products arrive and
other items sell out. By integrating real-time databases containing information
about both inventory and customers' size and brand preferences, we can create a
personalized shopping environment and allow our customers to search for the
products that specifically interest them, and more importantly, limit what they
see to the items in their size. In addition, we believe that we are able to more
economically and efficiently maintain an upscale environment through the design
of a single online storefront.
We believe that we have created a customer experience that is fundamentally
better than that offered by traditional off-price retailers. Similarly, we
believe that our upscale atmosphere, professional photography and premium brand
matrix create a superior distribution channel for designers who wish to
liquidate their end-of-season and excess merchandise without suffering the brand
dilution inherent in traditional off-price channels.
E-Commerce And The Online Apparel Market
The dramatic growth of e-commerce has been widely reported and is expected to
continue. In May 2001, Jupiter Media Metrix estimated that U.S. online retail
sales would increase from $34 billion in 2001 to $104 billion in 2005 and $130
billion by 2006.
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In January 2002, Forrester Research, Inc. ("Forrester") estimated that online
purchases by U.S. consumers increased by 12% in 2001 to $47.6 billion. We
believe that a number of factors will contribute to the growth of e-commerce,
including (i) shoppers' growing familiarity and comfort with shopping online;
(ii) the proliferation of devices to access the Internet, and (iii)
technological advances that make navigating the Internet faster and easier.
According to a September 2001 report by Forrester, U.S. online apparel sales
reached $5.6 billion in 2001 and are expected to reach over $17 billion in 2005.
We believe that the market for online sales of apparel is growing faster than
many other retail categories as a result of a confluence of trends, including
(i) the growth of the number of women online, (ii) the expansion of online
traffic from technology oriented users to users with mainstream demographics and
(iii) the development of sophisticated tools to search complex product
categories such as apparel. Of course, there can be no assurance that such
expectations will prove to be correct or that they will have a positive effect
on our business.
Catalog Sales As A Predictor of Future Growth
In many respects, shopping for apparel online is similar to purchasing apparel
through a print catalog. In both cases, the tactile experience is absent from
the transaction and shoppers must make purchase decisions on the basis of a
photograph and a textual description. While we believe that sophisticated
database technology, personalization technology, and the interactivity of the
Web will ultimately make the Internet a far more compelling medium than
catalogs, we also believe that the success of apparel sales via catalogs is a
good predictor of the future success of apparel sales via the Internet.
In this regard, it may be worth noting that, based on a 2000 report by the
Direct Marketing Association, of the $67.7 billion of U.S. catalog sales to
consumers, over $11 billion is attributable to apparel and apparel related
items. The success of companies such as J.Crew and Lands' End is perhaps the
best evidence that people are prepared to purchase clothing and accessories
remotely despite the fact that no catalog can convey the tactile element of
clothing or provide a fitting room in which consumers can try on clothing.
Marketing
We are seeking to position ourselves as the fashion consumer's store of first
resort, combining the service and selection found at high-end retailers with
savings typically available only at off-price stores or company-owned outlet
stores. We seek to incorporate this branding effort into all aspects of our
operations, including advertising, customer service, site experience, packaging
and delivery. We acquire new customers through multiple channels, including
traditional and online advertising, direct marketing and print advertising.
Merchandising
Our merchandising efforts are led by a team of buyers who hail from such
venerable retailers as Saks Fifth Avenue, Bergdorf Goodman and Henri Bendel. We
buy merchandise directly from designers as well as from retailers and other
third party, indirect resources. Currently, we offer products from more than 400
name brand designers, which we believe to be the widest selection of designers
available from any online store. We have established direct supply relationships
with over 200 such designers. We believe that we have been successful in opening
up over 200 direct supply relationships, in part, because we have devoted
substantial resources to establishing Bluefly.com as a high-end retail
environment. In this regard, we are committed to displaying all of our
merchandise in an attractive manner, offering superior customer service and
gearing all aspects of our business towards creating a better channel for top
designers to liquidate their excess inventory.
For a number of reasons, we believe that our inventory risk can be lower than
that of traditional retailers:
o By centralizing our inventory, we believe that we will be able to
optimize inventory turns because we will not be forced to anticipate
sales by region or allocate merchandise between multiple locations;
o Our Web site captures a tremendous amount of customer data that we
can use to optimize our purchase of inventory;
o Unlike traditional brick-and-mortar retailers and catalogs, we can
change the pricing of our products almost
5
instantaneously and can price products based on supply and demand;
and
o Unlike traditional brick-and-mortar retailers, which have a limited
amount of shelf space, significant rent payments and attendant sales
personnel costs, we hold inventory in a warehouse with a lower per
square foot rental charge, lower personnel costs and more shelf
space.
These factors can create lower inventory carrying costs. Of course, there can be
no assurance that we will be able to leverage successfully any of these
potential advantages.
Warehousing And Fulfillment
When we receive an order, the information is transmitted to our third party
warehouse and fulfillment center located in Virginia, where the items included
in the order are picked, packed and shipped directly to the customer. Our
inventory database is updated on a real-time basis, allowing us to display on
our Web site only those styles, sizes and colors of product available for sale.
We strive to pick, pack and ship all of our orders within 48 hours of receipt of
the order. In December 2001, during our peak weeks of the holiday season,
approximately 99% of our orders were shipped within 24 hours of receipt of the
order.
Customer Service
We believe that a high level of customer service and support is critical to
differentiating ourselves from traditional off-price retailers and maximizing
customer acquisition and retention efforts. Our customer service effort starts
with our Web site, which is designed to provide an intuitive shopping
experience. An easy to use help center is available on the Web site and is
designed to answer many of our customers' most frequently asked questions. For
customers who prefer e-mail or telephone assistance, customer service
representatives are available seven days a week to provide assistance. To insure
that customers are satisfied with their shopping experience, we generally allow
returns for any reason within 90 days of the sale for a full refund.
Technology
We have implemented a broad array of state-of-the-art technologies that
facilitate Web site management, complex database search functionality, customer
interaction and personalization, transaction processing, fulfillment and
customer service functionality. Such technologies include a combination of
proprietary technology and commercially available, licensed technology. To
address the critical issues of privacy and security on the Internet, we
incorporate, for transmission of confidential personal information between
customers and our Web server, Secure Socket Layer Technology ("SSL") such that
all data is transmitted via a fully DES 128-bit encrypted session.
In March 2002, we moved to another major Internet service provider to host
Bluefly.com and provide certain hardware and software as well as year-round
24-hour systems support. The server and network architecture is designed to
provide high speed, reliable access 24 hours a day, 365 days a year and allow
for rapid scaling of hardware and bandwidth to accommodate sudden increases in
site traffic. See, "Risk Factor - We Are Heavily Dependent on Third-Party
Relationships."
In March 2002, we also entered into a Software License and Service Agreement
with Blue Martini. Beginning in March 2002, with the assistance of consultants
from Blue Martini, we plan to develop an improved version of our Web site based
on Blue Martini Software. Once launched, we expect that the upgraded Web site
will provide us with better tools to create and manage on-site marketing
promotions, more robust analytical tools to measure the performance of on-site
promotions, greater site stability, and a more efficient platform from which to
scale our technology infrastructure should any future growth in our business
dictate such a need. We expect to launch the new Web site during the third
quarter of 2002. Of course, there can be no assurance that the new Web site will
be launched when scheduled, that such expectations will prove to be correct or
that they will have a positive effect on our business. See, "Risk Factor - The
Development Of A New Web Site May Place A Significant Strain On Our Management
And Certain Key Personnel."
Competition
Electronic commerce generally, and, in particular, the online retail apparel and
fashion accessories market, is a new, dynamic, high-growth market. Our
competition for online customers comes from a variety of sources, including
existing land-based
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retailers such as Neiman Marcus, Saks Fifth Avenue, The Gap, Nordstrom, and
Macy's, which are using the Internet to expand their channels of distribution,
and less established companies such as eLuxury, which are building their brands
online. In addition, our competition for customers comes from traditional direct
marketers such as L.L. Bean, Lands' End, J.Crew and Spiegel's, television direct
marketers such as QVC, and land-based off-price retail stores, such as T.J.
Maxx, Marshalls, Filene's Basement and Loehmanns, which may or may not use the
Internet in the future to grow their customer base. Many of these competitors
have longer operating histories, significantly greater resources, greater brand
recognition and more firmly established supply relationships. Moreover, we
expect additional competitors to emerge in the future.
We believe that the principal competitive factors in our market include: brand
recognition, merchandise selection, price, convenience, customer service, order
delivery performance, site features, and content. Although we believe that we
compare favorably with our competitors, we recognize that this market is
relatively new and is evolving rapidly, and, accordingly, there can be no
assurance that this will continue to be the case.
Intellectual Property
We rely on various intellectual property laws and contractual restrictions to
protect our proprietary rights in services and technology, including
confidentiality, invention assignment and nondisclosure agreements with
employees and contractors. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use our intellectual property
without our authorization. In addition, we pursue the registration of our
trademarks and service marks in the U.S. and internationally. However, effective
intellectual property protection may not be available in every country in which
the services are made available online.
We rely on technologies that we license from third parties. These licenses may
not continue to be available to us on commercially reasonable terms in the
future. As a result, we may be required to obtain substitute technology of lower
quality or at greater cost, which could materially adversely effect our
business, financial condition, results of operations and cash flows.
We do not believe that our business, sales policies or technologies infringe the
proprietary rights of third parties. However, third parties have in the past and
may in the future claim that our business, sales policies or technologies
infringe their rights. We expect that participants in the e-commerce market will
be increasingly subject to infringement claims as the number of services and
competitors in the industry grows. Any such claim, with or without merit, could
be time consuming, result in costly litigation or require us to enter into
royalty or licensing agreements. Such royalty or licensing agreements might not
be available on terms acceptable to us, or at all. As a result, any such claim
of infringement against us could have a material adverse effect upon our
business, financial condition, results of operations and cash flows.
Governmental Approvals And Regulations
We are not currently subject to direct regulation by any domestic or foreign
governmental agency, other than regulations applicable to businesses generally,
and laws or regulations directly applicable to online commerce. Although we are
not aware of any permits or licenses that are required in order for us to sell
apparel and fashion accessories on the Internet, permits or licenses may be
required from international, federal, state or local governmental authorities to
operate or to sell certain other products on the Internet in the future. No
assurances can be given that we will be able to obtain such permits or licenses.
We may be required to comply with future national and/or international
legislation and statutes regarding conducting commerce on the Internet in all or
specific countries throughout the world. No assurance can be made that we will
be able to comply with such legislation or statutes. Our Internet operations are
not currently impacted by federal, state, local and foreign environmental
protection laws and regulations.
Employees
As of March 15, 2002, we had 59 full-time employees and seven part-time
employees, as compared to 77 full-time and nine part-time employees as of March
31, 2001. None of our employees are represented by a labor union and we consider
our relations with our employees to be good.
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Risk Factors
Forward-Looking Statements and Associated Risks. This Annual Report contains
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements include, without limitation, any statement that may
predict, forecast, indicate, or imply future results, performance, or
achievements, and may contain the words "believe," "anticipate," "expect,"
"estimate," "project," "will be," "will continue," "will likely result," or
words or phrases of similar meaning. Forward-looking statements involve risks
and uncertainties that may cause actual results to differ materially from the
forward-looking statements ("Cautionary Statements"). The risks and
uncertainties include, but are not limited to those matters addressed herein
under "Risk Factors." All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on the Company's behalf are
expressly qualified in their entirety by the Cautionary Statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of their dates. The Company undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
We Have A History Of Losses And Expect That Losses Will Continue In The Future.
As of December 31, 2001, we had an accumulated deficit of $63,968,000. We
incurred net losses from continuing operations of $25,006,000, $21,109,000 and
$13,257,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
We have incurred substantial costs to develop our Web site and infrastructure.
In order to expand our business, we intend to invest in sales, marketing,
merchandising, operations, information systems, site development and additional
personnel to support these activities. We therefore expect to continue to incur
substantial operating losses at least until the fourth quarter of 2002. Although
we expect to be profitable in the fourth quarter of 2002, we anticipate losses
in the first two quarters of 2003 and perhaps beyond. Our ability to become
profitable depends on our ability to generate and sustain substantially higher
net sales while maintaining reasonable expense levels, both of which are
uncertain. If we do achieve profitability, we cannot be certain that we would be
able to sustain or increase profitability on a quarterly or annual basis in the
future.
We Are Making A Substantial Investment In Our Business And May Need To Raise
Additional Funds. We may need additional financing to effect our business plan.
In March 2002, we amended the Rosenthal Financing Agreement to reduce the
maximum amount available for borrowing under the facility. See "Recent
Developments." We anticipate, based on current plans and assumptions relating to
our operations, that the proceeds from prior financings together with the
Standby Commitment Agreement, the Loan Facility, existing resources and cash
generated from operations, should be sufficient to satisfy our cash requirements
through the end of fiscal 2002. However, we may seek additional debt and/or
equity financing in order to maximize the growth of our business. The
environment for raising investment capital by companies in the Internet industry
has been difficult and there can be no assurance that additional financing or
other capital will be available upon terms acceptable to us, or at all. The
inability to obtain additional financing, if needed, would have a material
adverse effect on our business, prospects, financial condition and results of
operations. See, "Risk Factors - Certain Events Could Result In Significant
Dilution Of Your Ownership Of Common Stock."
We Have Granted A Lien On Substantially All Of Our Assets. Under the terms of
the Rosenthal Financing Agreement, Rosenthal provides us with certain credit
accommodations, including loans and advances, factor-to-factor guarantees,
letters of credit in favor of suppliers or factors and purchases of payables
owed to our suppliers (the "Loan Facility"). Pursuant to the Rosenthal Financing
Agreement, we gave a first priority lien to Rosenthal on substantially all of
our assets, including our cash balances. In connection with the Rosenthal
Financing Agreement, we entered into a Reimbursement Agreement with Soros
pursuant to which Soros agreed to guarantee a portion of the Loan Facility, we
agreed to reimburse Soros for any amounts it paid to Rosenthal pursuant to such
guarantee and we granted Soros a subordinated lien on substantially all of our
assets, including our cash balances, in order to secure our reimbursement
obligations. If we are unable to meet certain obligations under the Rosenthal
Financing Agreement, Rosenthal and Soros would be entitled, among other things,
to sell the assets on which liens have been granted to satisfy our obligations
under the Rosenthal Financing Agreement and the Reimbursement Agreement. See,
"Risk Factors -- Certain Events Could Result in Significant Dilution of Your
Ownership of our Common Stock."
We May Not Generate Sufficient Cash Flow To Pay Our Indebtedness Under The
Rosenthal Financing Agreement. Our ability to make payments under the Rosenthal
Financing Agreement will depend on our ability to generate cash in the future.
To a certain extent, this is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control. We cannot assure you that our business will generate sufficient cash
flow from operations to
8
enable us to pay our indebtedness under the Rosenthal Financing Agreement
throughout the term of the agreement. A default under the Rosenthal Financing
Agreement also could result in a significant dilution of your ownership of our
common stock. See, "Risk Factors - We Have Granted A Lien On Substantially All
Of Our Assets" and "Certain Events Could Result In Significant Dilution of Your
Ownership of Our Common Stock."
We May Not Generate Sufficient Cash Flow To Comply With Our Financial Covenants
Under The Rosenthal Financing Agreement. Our ability to comply with our
financial covenants under the Rosenthal Financing Agreement depends on our
ability to generate cash in the future. To a certain extent, this is subject to
general economic, financial, competitive, legislative, regulatory and other
factors that are beyond our control. We cannot assure you that our business will
generate sufficient cash flow from operations to enable us to comply with our
financial covenants under the Rosenthal Financing Agreement. A default under the
Rosenthal Financing Agreement also could result in a significant dilution of
your ownership of our common stock. See, "Risk Factors - We Have Granted A Lien
On Substantially All Of Our Assets" and "Certain Events Could Result In
Significant Dilution of Your Ownership of Our Common Stock."
Our Limited Operating History Makes Forecasting Our Revenues Difficult. Having
launched Bluefly.com in September 1998, we have a limited operating history and
it is therefore difficult for us to forecast our revenues accurately. We base
our current and future expense levels and operating plans on expected revenues,
but in the short term a significant portion of our expenses are fixed.
Accordingly, we may be unable to adjust our spending in a timely manner to
compensate for any unexpected revenue shortfall. This inability could cause our
net loss in a given quarter to be greater than expected and could also cause our
operating results in some future quarter to fall below the expectations of
securities analysts and investors. In that event, the trading price of our
common stock could decline significantly.
We Purchase Product From Some Indirect Supply Sources, Which Increases Our Risk
of Litigation. We purchase merchandise both directly from brand owners and
indirectly from retailers and third party distributors. The purchase of
merchandise from parties other than the brand owners increases the risk that we
will mistakenly purchase and sell non-authentic or damaged goods. We have taken
steps to ensure that we sell only authentic, high quality name brand products
and to avoid selling any non-authentic or damaged goods. While we believe that
our procedures are effective, the possibility for error exists and therefore we
face potential liability under applicable laws, regulations, agreements and
orders for the sale of non-authentic or damaged goods. Moreover, any claims by a
brand owner, with or without merit, could be time consuming, result in costly
litigation, generate bad publicity for us, and have a material adverse impact on
our business, prospects, financial condition and results of operations.
Brand Owners Could Establish Procedures To Limit Our Ability To Purchase
Products Indirectly. Brand owners have implemented, and are likely to continue
to implement, procedures to limit or control off-price retailers' ability to
purchase products indirectly. In addition, several brand owners in the U.S. have
distinctive legal rights rendering them the only legal importer of their
respective brands into the U.S. If we acquire such product indirectly from
distributors and other third parties who may not have complied with applicable
customs laws and regulations, such goods could be subject to seizure from our
inventory by U.S. Customs Service, and the importer may have a civil action for
damages against us. See, "Risk Factors - We Do Not Have Long Term Contracts With
Our Vendors And Therefore The Availability Of Merchandise Is At Risk."
Our Growth May Place A Significant Strain On Our Management And Administrative
Resources And Cause Disruptions In Our Business. Our historical growth has
placed, and any further growth is likely to continue to place, a significant
strain on our management and administrative resources. Any failure to manage
growth effectively could have a material adverse effect on our business,
financial condition and results of operations. To be successful, we must
continue to implement information management systems and improve our operating,
administrative, financial and accounting systems and controls. We will also need
to train new employees and maintain close coordination among our executive,
accounting, finance, marketing, merchandising, operations and technology
functions. Moreover, our business is dependent upon our ability to expand our
third-party fulfillment operations, customer service operations, technology
infrastructure, and inventory levels to accommodate increases in demand,
particularly during the peak holiday selling season. Our planned expansion
efforts in these areas could cause disruptions in our business. Any failure to
expand our third-party fulfillment operations, customer service operations,
technology infrastructure or inventory levels at the pace needed to support
customer demand could have a material adverse effect on our business, prospects,
financial condition and results of operations.
9
The Development Of A New Web Site May Place A Significant Strain On Our
Management And Certain Key Personnel. On March 12, 2002, we entered into a
Software License and Service Agreement with Blue Martini. Beginning in March
2002, with the assistance of consultants from Blue Martini, we plan to develop
an improved version of our Web site based on Blue Martini Software. The
development of an upgraded Web site is a major undertaking and will consume
significant amounts of time and attention from certain members of the management
team and other key personnel. While we believe that this project is a wise
investment in our future, the return on this investment is not certain and the
time and attention required to develop the new Web site could result in our
inability to undertake certain initiatives that could have a more immediate,
positive impact on our business and/or distract us from other areas of our
business that require the time and attention of those involved in the
development of the new Web site.
We Are Heavily Dependent On Third-Party Relationships. We are heavily dependent
upon our relationships with our fulfillment operations provider and Web hosting
provider, as well as delivery companies like UPS and the United States Postal
Service to service our customers' needs. To the extent that there is a slowdown
in mail service or package delivery services, whether as a result of labor
difficulties, terrorist activity or otherwise, our business, prospects,
financial condition and results of operations could be adversely impacted. We
began using a new fulfillment operations provider in August 2000 and a new Web
hosting facility in March 2002 and have a limited operating history with each of
these service providers. The failure of our fulfillment operations provider or
Web hosting provider to properly perform their services for us could have a
material adverse effect on our business, prospects, financial condition and
results of operations. Our business is also generally dependent upon our ability
to obtain the services of other persons and entities necessary for the
development and maintenance of our business. If we fail to obtain the services
of any such person or entities upon which we are dependent on satisfactory
terms, or we are unable to replace such relationship, it would have a material
adverse impact on our business, prospects, financial condition and results of
operations.
Certain Events Could Result In Significant Dilution Of Your Ownership Of Our
Common Stock. As of December 31, 2001, there were outstanding options to
purchase 4,343,203 shares of Common Stock issued under our 1997 and 2000 Stock
Option Plans, warrants to purchase 475,000 shares issued to Soros, and
additional warrants and options to purchase an aggregate of 160,500 shares of
Common Stock. This excludes the warrants issued to Soros in March 2002, in
connection with the Soros Standby Agreement and the Reimbursement Agreement.
See, "Recent Developments." The exercise of our outstanding options and warrants
would dilute the then existing stockholders' percentage ownership of our stock,
and any sales in the public market of Common Stock underlying such securities
could adversely affect prevailing market price of the Common Stock.
To the extent that Rosenthal draws on any standby letter of credit issued by
Soros during the continuance of a default under the Rosenthal Financing
Agreement or that at any time the total amount outstanding under the Loan
Facility exceeds 90% of the maximum amount available under the Loan Facility, we
will be required to issue to Soros another warrant (each a "Contingent Warrant")
to purchase a number of shares of Common Stock equal to the quotient of (a) any
amounts drawn under the Soros Guarantee and (b) 75% of the average closing price
of our Common Stock on the ten days preceding the date of issuance of such
warrant. Each Contingent Warrant will be exercisable for ten years from the date
of issuance at an exercise price equal to 75% of the average closing price of
our Common Stock on the ten days after the date of issuance.
The 500,000 shares of Series A Preferred Stock outstanding are convertible into
an aggregate of 4,273,504 shares of Common stock (plus any shares of Common
Stock issued upon conversion in payment of any accrued and unpaid dividends on
the Series A Preferred Stock). The 8,910,782 shares of Series B Preferred Stock
outstanding are convertible into an aggregate of 8,910,782 shares of Common
Stock (plus any shares of Common Stock issued upon conversion in payment of any
accrued and unpaid dividends on the Series B Preferred Stock). The Series B
Preferred Stock contains anti-dilution provisions pursuant to which, subject to
certain exceptions, in the event that we issue or sell Common Stock or new
securities convertible into Common Stock in the future for less than $2.34 per
share of Common Stock, the number of shares of Common Stock to be issued upon
the conversion of the Series B Preferred Stock would be increased to a number
equal to the face amount of the Series B Preferred Stock (plus any accrued and
unpaid dividends) divided by the price at which such Common Stock or other new
securities are sold.
Under the Soros Standby Agreement, Soros has agreed to provide us with up to
four million dollars ($4,000,000) of additional financing on a standby basis at
any time prior to January 1, 2003; provided, however, that we may draw down on
the Standby Commitment Amount only at such time that our total cash balances are
less than $1,000,000.
10
Any and all financings made shall be on terms that are consistent with those in
the market at the time the draw is made for similar investments by investors
similar to Soros in companies similar to us. The terms of such financing are
likely to entail additional issuances of equity securities to Soros which will
result in further dilution to your ownership of Common Stock and which may
trigger the anti-dilution provisions under the Series B Preferred Stock referred
to above.
We Are In Competition With Companies Much Larger Than Ourselves. Electronic
commerce generally and, in particular, the online retail apparel and fashion
accessories market, is a new, dynamic, high-growth market and is rapidly
changing and intensely competitive. Our competition for online customers comes
from a variety of sources including:
o existing land-based, full price retailers, such as Neiman Marcus,
Saks Fifth Avenue, Nordstrom, The Gap, and Macy's, which are using
the Internet to expand their channels of distribution;
o less established companies, such as eLuxury, which are building
their brands online;
o traditional direct marketers, such as L.L. Bean, Lands' End, J. Crew
and Spiegel's;
o television direct marketers such as QVC; and
o traditional off-price retail stores such as T.J. Maxx, Marshalls,
Ross, Filene's Basement and Loehmanns, which may or may not use the
Internet to grow their customer base.
We expect competition in our industry to intensify and believe that the list of
our competitors will grow. Many of our competitors and potential competitors
have longer operating histories, significantly greater resources, greater brand
name recognition and more firmly established supply relationships. We believe
that the principal competitive factors in our market include:
o brand recognition;
o merchandise selection;
o price;
o convenience;
o customer service;
o order delivery performance;
o site features; and
o content.
Although we believe we compare favorably with our competitors, we recognize that
this market is relatively new and is evolving rapidly. There can be no assurance
that we will be able to compete successfully against competitors and future
competitors, and competitive pressures faced by us may have a material adverse
effect on our business, prospects, financial condition and results of
operations.
We Do Not Have Long Term Contracts With Our Vendors And Therefore The
Availability Of Merchandise Is At Risk. Although we believe we can establish and
maintain relationships with brand owners and third-party distributors of
merchandise who will offer competitive sources of merchandise, there can be no
assurance that we will be able to obtain the quantity, selection or brand
quality of items that we believe is necessary. The Company acquired
approximately 5.3% and 15.3% of its inventory from one supplier in 2001 and
2000, respectively. We have no agreements controlling the long-term availability
of merchandise or the continuation of particular pricing practices. Our
contracts with suppliers typically do not restrict such suppliers from selling
products to other buyers. There can be no assurance that our current suppliers
will continue to sell products to us on current terms or that we will be able to
establish new or otherwise extend current supply relationships to ensure product
acquisitions in a timely and efficient manner and on acceptable commercial
terms. Our ability to develop and
11
maintain relationships with reputable suppliers and obtain high quality
merchandise is critical to our success. If we are unable to develop and maintain
relationships with suppliers that would allow us to obtain a sufficient amount
and variety of quality merchandise on acceptable commercial terms, our business,
prospects, financial condition and results of operation would be materially
adversely affected. See, "Risk Factors - Brand Owners Could Establish Procedures
to Limit Our Ability to Purchase Products Indirectly."
We Are New To The Industry And Need To Establish Brand Name Recognition. We
believe that establishing, maintaining and enhancing our brand is a critical
aspect of our efforts to attract and expand our online traffic. The number of
Internet sites that offer competing services, many of which already have well
established brands in online services or the retail apparel industry generally,
increases the importance of establishing and maintaining brand name recognition.
Promotion of Bluefly.com will depend largely on our success in providing a high
quality online experience supported by a high level of customer service, which
cannot be assured. In addition, to attract and retain online users, and to
promote and maintain Bluefly.com in response to competitive pressures, we may
find it necessary to increase substantially our advertising and marketing
expenditures. If we are unable to provide high quality online services or
customer support, or otherwise fail to promote and maintain Bluefly.com, or if
we incur excessive expenses in an attempt to promote and maintain Bluefly.com,
our business, prospects, financial condition and results of operations would be
materially adversely affected.
We May Not Be Able To Implement Our Growth Strategy. Our future success, and in
particular our revenues and operating results, depend upon our ability to
successfully execute several key aspects of our business plan. We must
continually increase the dollar volume of transactions booked through
Bluefly.com, either by generating significantly higher and continuously
increasing levels of traffic to Bluefly.com or by increasing the percentage of
visitors to our online sites who purchase products, or through some combination
thereof. We must also achieve a high level of repeat purchasers and gross
profit. In addition, we must deliver a high level of customer service and
compelling content. There can be no assurance that we will be effective in
increasing:
o the dollar volume of products purchased through Bluefly.com;
o traffic to Bluefly.com;
o the percentage of visitors who purchase products;
o the gross profit; or
o the number of repeat purchasers.
The failure to do one or more of the foregoing would likely have a material
adverse effect on our business, prospects, financial condition and results of
operations.
Due To Our Use Of The Internet And Web Servers As Presentation Vehicles, Our
Success Depends On Continued Development And Maintenance Of These Technologies
By Other Companies. The Internet and other online services may not be accepted
as a viable commercial marketplace for a number of reasons, including
potentially inadequate development of the necessary network infrastructure or
delayed development of technologies that provide access to the Internet and
improve the performance of Internet services. To the extent that the Internet
and other online services, such as AOL, continue to experience significant
growth in their number of users, their frequency of use or an increase in their
bandwidth requirements, there can be no assurance that the infrastructure for
the Internet and other online services will have sufficient bandwidth or other
technical features to support the increased demands placed upon them. In
addition, the Internet or other online services could lose their viability due
to delays in the development or adoption of new standards and protocols required
to handle increased levels of Internet or other online service activity, or due
to increased governmental regulation. Changes in or insufficient availability of
telecommunications services to support the Internet or other online services
also could result in slower response times and adversely affect usage of the
Internet and other online services generally and Bluefly.com in particular. If
use of the Internet and other online services does not continue to grow or grows
more slowly than expected or if the infrastructure for the Internet and other
online services does not effectively support growth that may occur, our
business, prospects, financial condition and results of operations would be
materially adversely affected.
Unexpected Changes In Fashion Trends Can Affect Our Business. Fashion trends can
change rapidly, and our business is sensitive to such changes. There can be no
assurance that we will accurately anticipate shifts in fashion trends and adjust
our
12
merchandise mix to appeal to changing consumer tastes in a timely manner. If we
misjudge the market for our products or are unsuccessful in responding to
changes in fashion trends or in market demand, we could experience insufficient
or excess inventory levels or higher markdowns, either of which would have a
material adverse effect on our business, financial condition and results of
operations.
We Will Be Subject To Cyclical Variations In The Apparel And E-Commerce Markets.
The apparel industry historically has been subject to substantial cyclical
variations. Furthermore Internet usage slows down in the summer months. We and
other apparel vendors rely on the expenditure of discretionary income for most,
if not all, sales. Recently, the retail apparel market has suffered a downturn
in sales requiring many retailers to significantly reduce prices and discount
merchandise. The current downturn and any future downturn, whether real or
perceived, in economic conditions or prospects could adversely affect consumer
spending habits and, therefore, have a material adverse effect on our business,
prospects, financial condition and results of operations. Alternatively, any
upturn, whether real or perceived, in economic conditions or prospects could
adversely impact our ability to acquire merchandise and, therefore, have a
material adverse effect on our business, prospects, financial condition and
results of operations, as our supply of merchandise is dependent on the
inability of designers and retailers to sell their merchandise in full-price
venues. See, "Risk Factors - We Do Not Have Long Term Contracts With Our Vendors
And Therefore The Availability of Merchandise Is At Risk."
There Can Be No Assurance That Our Technology Systems Will Be Able To Handle
Increased Traffic. A key element of our strategy is to generate a high volume of
traffic on, and use of, Bluefly.com. Accordingly, the satisfactory performance,
reliability and availability of Bluefly.com, transaction processing systems and
network infrastructure are critical to our reputation and our ability to attract
and retain customers, as well as maintain adequate customer service levels. Our
revenues will depend on the number of visitors who shop on Bluefly.com and the
volume of orders we can handle. Unavailability of our Web site or reduced order
fulfillment performance would reduce the volume of goods sold and could also
adversely affect consumer perception of our brand name. We may experience
periodic system interruptions from time to time. If there is a substantial
increase in the volume of traffic on Bluefly.com or the number of orders placed
by customers, we will be required to expand and upgrade further our technology,
transaction processing systems and network infrastructure. There can be no
assurance that we will be able to accurately project the rate or timing of
increases, if any, in the use of Bluefly.com or expand and upgrade our systems
and infrastructure to accommodate such increases on a timely basis.
We Operate In A Rapidly Changing, Highly Competitive Market And We May Not Have
Adequate Resources To Compete Successfully. To remain competitive, we must
continue to enhance and improve the responsiveness, functionality and features
of Bluefly.com. The online commerce industry is characterized by:
o rapid technological change;
o evolving user and customer requirements and preferences;
o frequent new product, service and technology introductions; and
o the emergence of new industry standards and practices.
Each of these characteristics could render the technology we use obsolete. Our
future success will depend, in part, on our ability to:
o license leading technologies useful in our business;
o enhance our Web site;
o develop new services and technologies that address the increasingly
sophisticated and varied needs of our prospective customers; and
o respond to technological advances and emerging industry standards
and practices on a cost effective and timely basis.
If we are unable, for technical, legal, financial or other reasons, to adapt in
a timely manner in response to changing market conditions or customer
requirements, our business, prospects, financial condition and results of
operations would be materially adversely affected.
13
Our Business Will Suffer If Online Apparel Commerce Is Not Widely Accepted. Our
future revenues and any future profits are dependent upon the widespread
acceptance and use of the Internet and other online services as an effective
medium of commerce by consumers. Rapid growth in the use of and interest in the
Web, the Internet and other online services is a recent phenomenon, and there
can be no assurance that acceptance and use will continue to develop or that a
sufficiently broad base of consumers will adopt, and continue to use, the
Internet and other online services as a medium of commerce and, in particular,
online apparel commerce. Demand and market acceptance for recently introduced
services and products over the Internet are subject to a high level of
uncertainty and there exist few proven services and products. We rely, and will
continue to rely, on consumers who have historically used traditional means of
commerce to purchase merchandise. Our success depends on consumer acceptance and
utilization of the Internet as a place to shop for apparel.
We May Be Subject To Higher Return Rates. We recognize that purchases of apparel
and fashion accessories over the Internet may be subject to higher return rates
than traditional store bought merchandise. We have established a liberal return
policy in order to accommodate our customers and overcome any hesitancy they may
have with Internet shopping. If return rates are higher than expected, our
business, prospects, financial condition and results of operations could be
materially adversely affected.
Our Success Is Largely Dependent Upon Our Executive Personnel. We believe our
success will depend to a significant extent on the efforts and abilities of our
executive personnel. We have entered into employment agreements with each of our
executive officers, with expiration dates ranging from July 2002 to November
2003. We maintain a $1,200,000 key person life insurance policy on our Chief
Executive Officer. The loss of the services of any of our executive officers
could have a material adverse effect on our business, prospects, financial
condition and results of operations.
Our Success Is Dependent Upon Our Ability To Attract New Key Personnel. Our
operations will also depend to a great extent on our ability to attract new key
personnel with relevant experience and retain existing key personnel in the
future. The market for qualified personnel is extremely competitive. Our failure
to attract additional qualified employees could have a material adverse effect
on our business, prospects, financial condition and results of operations.
There Are Inherent Risks Involved In Expanding Our Operations. We may choose to
expand our operations by developing new Web sites in addition to the upgraded
Web site we intend to launch based on Blue Martini Software, promoting new or
complementary products or sales formats, expanding the breadth and depth of
products and services offered, expanding our market presence through
relationships with third parties, adopting non-Internet based channels for
distributing our products, or consummating acquisitions or investments.
Expansion of our operations in this manner would require significant additional
expenses and development, operations and editorial resources and would strain
our management, financial and operational resources. There can be no assurance
that we would be able to expand our efforts and operations in a cost-effective
or timely manner or that any such efforts would increase overall market
acceptance. Furthermore, any new business or Web site that is not favorably
received by consumer or trade customers could damage our reputation.
We May Be Liable For Infringing The Intellectual Property Rights Of Others.
Third parties may assert infringement claims against us. From time to time in
the ordinary course of business we have been, and we expect to continue to be,
subject to claims alleging infringement of the trademarks and other intellectual
property rights of third parties. These claims and any resulting litigation, if
it occurs, could subject us to significant liability for damages. In addition,
even if we prevail, litigation could be time-consuming and expensive and could
result in the diversion of our time and attention. Any claims from third parties
may also result in limitations on our ability to use the intellectual property
subject to these claims unless we are able to enter into agreements with the
third parties making these claims. We could also incur substantial costs in
asserting our intellectual property or proprietary rights.
We Cannot Guarantee The Protection Of Our Intellectual Property. Our
intellectual property is critical to our success, and we rely on trademark,
copyright, and trade secret protection to protect our proprietary rights. Third
parties may infringe or misappropriate our trademarks or other proprietary
rights, which could have a material adverse effect on our business, prospects,
results of operations or financial condition. While we enter into
confidentiality agreements with our employees, consultants and strategic
partners and generally control access to and distribution of our proprietary
information, the steps we have taken to protect our proprietary rights may not
prevent misappropriation. We are pursuing registration of various trademarks and
service marks in the United States and abroad. Effective trademark, copyright
and trade secret protection may
14
not be available in every country in which our products will be available. We
intend to effect appropriate registrations internationally and domestically as
we expand our operations. There can be no assurance that the United States or
foreign jurisdictions will afford us any protection for our intellectual
property. There also can be no assurance that any of our intellectual property
rights will not be challenged, invalidated or circumvented. In addition, we do
not know whether we will be able to defend our proprietary rights since the
validity, enforceability and scope of protection of proprietary rights in
Internet-related industries is uncertain and still evolving.
Unauthorized Security Breaches To Our Service Could Harm Our Business. A
fundamental requirement for online commerce and communications is the secure
transmission of confidential information over public networks. We rely on
encryption and authentication technology licensed from third parties to provide
the security and authentication necessary to effect secure transmission of
confidential information, such as customer credit card numbers. In addition, we
maintain an extensive confidential database of customer profiles and transaction
information. There can be no assurance that advances in computer capabilities,
new discoveries in the field of cryptography, or other events or developments
will not result in a compromise or breach of the algorithms we use to protect
customer transaction and personal data contained in our customer database. If
any such compromise of our security were to occur, it could have a material
adverse effect on our reputation, business, prospects, results of operations and
financial condition. A party who is able to circumvent our security measures
could misappropriate proprietary information or cause interruptions in our
operations. We may be required to expend significant capital and other resources
to protect against such security breaches or to alleviate problems caused by
such breaches.
Our Business Could Be Harmed By Consumers' Concerns About The Security of
Transactions Over the Internet. Concerns over the security of transactions
conducted on the Internet and commercial online services and the privacy of
users may also inhibit the growth of the Internet and commercial online
services, especially as a means of conducting commercial transactions.
We Face Legal Uncertainties Relating To The Internet In General and To Our
Industry In Particular And May Become Subject To Costly Government Regulation.
We are not currently subject to direct regulation by any domestic or foreign
governmental agency, other than regulations applicable to businesses generally,
and laws or regulations directly applicable to online commerce. However, it is
possible that laws and regulations may be adopted that would apply to the
Internet and other online services. Furthermore, the growth and development of
the market for online commerce may prompt calls for more stringent consumer
protection laws that may impose additional burdens on those companies conducting
business online. The adoption of any additional laws or regulations may decrease
the growth of the Internet or other online services, which could, in turn,
decrease the demand for our products and services and increase our cost of doing
business, or otherwise have a material adverse effect on our business,
prospects, financial condition and results of operations.
The applicability to the Internet of existing laws in various jurisdictions
governing issues such as property ownership, sales and other taxes, libel and
personal privacy is uncertain and may take years to resolve. Any such new
legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to our business, or the
application of existing laws and regulations to the Internet and online commerce
could have a material adverse effect on our business, prospects, financial
condition and results of operations. If we were alleged to have violated
federal, state or foreign, civil or criminal law, even if we could successfully
defend such claims, it could have a material adverse effect on our business,
prospects, financial condition and results of operations.
We Face Uncertainties Relating To Sales And Other Taxes. We are not currently
required to pay sales or other similar taxes in respect of shipments of goods
into states other than Virginia and New York. However, one or more states may
seek to impose sales tax collection obligations on out-of-state companies such
as our company that engage in online commerce. In addition, any new operation in
states outside Virginia and New York could subject shipments into such states to
state sales taxes under current or future laws. A successful assertion by one or
more states or any foreign country that the sale of merchandise by us is subject
to sales or other taxes, could have a material adverse effect on our business,
prospects, financial condition and results of operations.
Soros Owns A Majority Of Our Stock. As of March 27, 2002, through its holdings
of Common Stock, as well as Preferred Stock and warrants convertible into Common
Stock, Soros beneficially owned, in the aggregate, approximately 78% of our
15
Common Stock. The holders of Preferred Stock vote on an "as-converted" basis
with the holders of the Common Stock. By virtue of their ownership of Preferred
Stock, Soros has the right to appoint two designees to our Board of Directors,
each of whom has seven votes on any matter voted upon by our Board of Directors.
Collectively, these two designees have 14 out of 19 possible votes on each
matter voted upon by our Board of Directors. In addition, we are required to
obtain the approval of holders of Preferred Stock prior to taking certain
actions. The holders of the Preferred Stock have certain pre-emptive rights to
participate in future equity financings and certain anti-dilution rights which
could result in the issuance of additional securities to such holders. In view
of their large percentage of ownership and rights as the holders of Preferred
Stock, Soros effectively controls our management and policies, such as the
election of our directors, the appointment of new management and the approval of
any other action requiring the approval of our stockholders, including any
amendments to our certificate of incorporation, a sale of all or substantially
all of our assets or a merger. The draw down of funds by the Company under the
Soros Standby Agreement is likely to result in additional issuances of equity
securities to Soros that will increase Soros' ownership of Common Stock. See,
"Risk Factors - Certain Events Could Result In Significant Dilution of Your
Ownership Of Common Stock."
Change Of Control Covenant And Liquidation Preference of Series A Preferred
Stock And Series B Preferred Stock. We have agreed with Soros, that for so long
as any shares of Series A Preferred Stock or Series B Preferred Stock are
outstanding, we will not take any action to approve or otherwise facilitate any
merger, consolidation or change of control, unless provisions have been made for
the holders of Series A Preferred Stock and Series B Preferred Stock to receive
from the acquiror an amount in cash equal to the respective aggregate
liquidation preferences of the Series A Preferred Stock and Series B Preferred
Stock. The Series A liquidation preference is equal to the greater of (i)
$10,000,000 (plus any accrued and unpaid dividends) and (ii) the amount that the
holder of the share would receive if it were to convert into shares of Common
Stock immediately prior to liquidation. The Series B liquidation preference is
equal to the greater of (i) $30,000,000 (plus any accrued and unpaid dividends)
and (ii) the amount that the holder of the share would receive if it were to
convert into shares of Common Stock immediately prior to liquidation.
The Holders Of Our Common Stock May Be Adversely Affected By The Rights Of
Holders Of Preferred Stock That May Be Issued In The Future. Our certificate of
incorporation and by-laws, as amended, contain certain provisions that may
delay, defer or prevent a takeover. Our Board of Directors has the authority to
issue up to 15,500,000 additional shares of preferred stock, and to determine
the price, rights, preferences and restrictions, including voting rights, of
those shares, without any further vote or action by the stockholders.
Accordingly, our Board of Directors is empowered, without approval of the
holders of Common Stock, to issue preferred stock, for any reason and at any
time, with such rates of dividends, redemption provisions, liquidation
preferences, voting rights, conversion privileges and other characteristics as
they may deem necessary. The rights of holders of Common Stock will be subject
to, and may be adversely affected by, the rights of holders of any preferred
stock that may be issued in the future.
Item 2. Properties
We lease approximately 26,000 square feet of office space in New York City. The
property is in good operating condition. The lease expires in 2010. Our total
lease payments for the current space during 2001 were approximately $407,000.
Item 3. Legal Proceedings
We currently, and from time to time, are involved in litigation incidental to
the conduct of our business. However we are not party to any lawsuit or
proceeding which in the opinion of management is likely to have a material
adverse effect on us.
Item 4. Submission Of Matters To A Vote Of Security Holders
None.
16
PART II
Item 5. Market For Common Equity And Related Stockholder Matters
Market Information
The Company's common stock, par value $.01 per share ("Common Stock"), is quoted
on The Nasdaq SmallCap Market and the Boston Stock Exchange. The following table
sets forth the high and low closing sale prices for the Common Stock for the
periods indicated, as reported by the Nasdaq SmallCap Market:
Fiscal 2001 High Low
----------- ----- -----
First Quarter $2.41 $0.50
Second Quarter $1.82 $0.93
Third Quarter $1.09 $0.51
Fourth Quarter $2.65 $0.62
Fiscal 2000 High Low
----------- ------ -----
First Quarter $15.98 $7.50
Second Quarter $ 9.50 $1.78
Third Quarter $ 4.75 $1.84
Fourth Quarter $ 2.94 $0.44
Holders
As of March 15, 2002, there were approximately 106 holders of record of the
Common Stock. We believe that there were more than 5,000 beneficial holders of
the Common Stock as of such date.
Dividends
We have never declared or paid cash dividends on our Common Stock. We currently
intend to retain any future earnings to finance future growth and, therefore, do
not anticipate paying any cash dividends in the foreseeable future.
Recent Sale Of Unregistered Securities
In exchange for the Soros Standby Agreement (but not as a substitute for
additional consideration that Soros would receive if and when any financing is
made pursuant to the Soros Standby Agreement) we issued to Soros a warrant to
purchase 100,000 shares of our Common Stock at an exercise price of $1.68 per
share, exercisable at any time until March 27, 2007. See, "Recent Developments."
In exchange for Soros' agreement to maintain the Soros Guarantee until August
15, 2003, we issued to Soros a warrant to purchase 60,000 shares of our Common
Stock at an exercise price of $1.66 per share, exercisable at any time until
March 30, 2007. See, "Recent Developments."
Each such sale was exempt from registration under the Securities Act of 1933, as
amended (the "Act"), pursuant to Section 4(2) of the Act, as it was a
transaction not involving a public offering.
17
Item 6. Selected Financial Data
The following selected consolidated financial data should be read in conjunction
with the consolidated financial statements and the notes thereto and the
information contained in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations". Historical results are not
necessarily indicative of future results. All data in thousands except share
data:
Year Ended December 31,
-----------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Statement of Operations Data:
Net sales $22,950 $17,512 $5,109 $ 243 $ -
Cost of sales 15,954 14,018 4,554 297 -
------- ------- ------ ------ ------
Gross profit (loss) 6,996 3,494 555 (54) -
Selling, marketing and fulfillment expenses 13,765 18,797 10,794 1,118 -
General and administrative expenses 5,098 5,296 3,450 1,166 819
Internet business start up costs - - - 332 -
------- ------- ------ ------ ------
Total operating expenses 18,863 24,093 14,244 2,616 819
Operating loss from continuing operations (11,867) (20,599) (13,689) (2,670) (819)
Interest (expense)/other income (13,139) (510) 430 142 123
Loss from continuing operations (25,006) (21,109) (13,257) (2,478) (469)
Net loss (25,006) (21,109) (13,194) (3,656) (381)
Basic and diluted (loss) per share: $(3.41) $(4.45) $(2.82) $(1.32) $(0.18)
Continuing Operations $(3.41) $(4.45) $(2.83) $(0.89) $(0.22)
Basic and diluted weighted average shares
outstanding available to common stockholders 8,185,065 4,924,906 4,802,249 2,770,869 2,149,315
Balance Sheet Data:
As of December 31,
2001 2000 1999 1998
---- ---- ---- ----
Cash $ 5,419 $ 5,350 $ 7,934 $2,830
Inventories, net 6,388 7,294 7,020 429
Other current assets 1,726 1,704 1,080 624
Total assets 14,881 15,868 17,109 7,212
Current liabilities 6,297 6,131 6,523 756
Short-term convertible notes payable, net - 19,698 - -
Note Payable to shareholder 182 - - -
Redeemable preferred stock - 11,088 10,286 -
Shareholders' equity (deficit) 8,402 (21,049) 300 6,392
18
Item 7. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
This discussion and analysis of our financial condition and results of
operations contains forward-looking statements that involve risks and
uncertainties. We have based these forward-looking statements on our current
expectations and projections of future events. However, our actual results could
differ materially from those discussed herein as a result of the risks that we
face, including but not limited to those risks stated in "Risk Factors," or
faulty assumptions on our part. In addition, the following discussion should be
read in conjunction with the audited consolidated financial statements and the
related notes thereto included elsewhere in this report.
Overview
Bluefly, Inc. is a leading Internet retailer of designer fashions and home
accessories at outlet store prices. We sell over 400 brands of designer apparel,
accessories and home products at discounts up to 75% off retail prices. We were
incorporated in 1991 under the laws of the state of New York as Pivot
Corporation. In 1994, we changed our name to Pivot Rules, Inc. We had our
initial public offering in May of 1997. In June 1998, we discontinued our golf
sportswear line to devote our time and resources to building Bluefly.com, a Web
site to sell end of season and excess inventory of apparel and accessories. We
launched the Web site in September 1998 and changed our name to Bluefly, Inc. in
October 1998. In February 2001, we changed our state of incorporation from New
York to Delaware.
We have grown rapidly since launching our Web site in September 1998. Our net
sales increased over 31% to $22,950,000 for the year ended December 31, 2001
from $17,512,000 for the year ended December 31, 2000. In the fourth quarter of
2001, our net sales increased by approximately 37% to $7,906,000 from $5,761,000
in the fourth quarter of 2000. In addition, our net loss for the fourth quarter
of 2001 decreased to $1,379,000 from $5,360,000 in the fourth quarter of 2000.
This decrease was due to an increase in gross profit and a decrease in both
selling, marketing and fulfillment expenses and general and administrative
expenses as a percentage of revenue.
We have incurred net losses of $25,006,000, for the year ended December 31, 2001
as compared to $21,109,000 for the year ended December 31, 2000. This increase
in net loss is primarily the result of a one-time, non-cash charge of
$13,007,000 related to the conversion of debt and redeemable preferred equity
into permanent equity. At December 31, 2001 we had an accumulated deficit of
$63,968,000. The net losses and accumulated deficit resulted primarily from the
costs associated with developing and marketing our Site and building our
infrastructure. In order to expand our business, we intend to invest in sales,
marketing, merchandising, operations, information systems, site development and
additional personnel to support these activities. We therefore expect to
continue to incur substantial operating losses at least until the fourth quarter
of 2002. Although we expect to be profitable in the fourth quarter of 2002, we
anticipate losses in the first two quarters of 2003 and perhaps beyond. Although
we have experienced revenue growth in recent years, this growth may not be
sustainable and therefore should not be considered indicative of future
performance.
Significant Accounting Policies
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the reporting periods. The
most significant estimates and assumptions relate to the adequacy of the
allowances for returns and recoverability of inventories. Actual amounts could
differ significantly from these estimates.
Revenue Recognition
Gross sales consists primarily of revenue from product sales and shipping and
handling revenue on our Web site, and is net of promotional discounts. Revenue
is recognized when goods are received by our customers, which occurs only after
credit card authorization. Net sales represent gross sales, less provisions for
returns, credit card chargebacks, and adjustments for uncollected sales taxes.
19
Provision for Returns and Doubtful Accounts
We generally permit returns for any reason within 90 days of the sale.
Accordingly, we establish a reserve for estimated future returns and bad debt at
the time of shipment based primarily on historical data. However, our future
return and bad debt rates could differ significantly from historical patterns,
which would adversely affect our operating results.
Inventory Valuation
Inventories, which consist of finished goods, are stated at the lower of cost or
market value. Cost is determined by the first-in, first-out ("FIFO") method. We
review our inventory levels in order to identify slow-moving merchandise and use
markdowns to clear merchandise. Markdowns may be used if inventory exceeds
customer demand for reasons of style, changes in customer preference or lack of
consumer acceptance of certain items, or if it is determined that the inventory
in stock will not sell at its currently marked price. Such markdowns may have an
adverse impact on earnings, depending on the extent of the markdowns and amount
of inventory affected.
Results Of Operations
The following table sets forth our statement of operations data, for the years
ended December 31st. All data in thousands except as indicated below:
2001 2000 1999
---- ---- ----
As a % of As a % of As a % of
Net Sales Net Sales Net Sales
Net sales $ 22,950 100.0 % $ 17,512 100.0 % $ 5,109 100.0 %
Cost of sales 15,954 69.5% 14,018 80.0 % 4,554 89.1%
------ ------ -----
Gross profit 6,996 30.5% 3,494 20.0 % 555 10.9%
Selling, marketing and fulfillment expenses 13,765 59.9% 18,797 107.3% 10,794 211.3%
General and administrative expenses 5,098 22.2% 5,296 30.2% 3,450 67.5%
----- ----- -----
Total operating expenses 18,863 82.1% 24,093 137.5% 14,244 278.8%
Operating loss from continuing operations (11,867) (51.7)% (20,599) (117.6)% (13,689) (267.9)%
Interest (expense) other income (13,139) (57.3)% (510) (2.9)% 432 8.4%
-------- ----- -----
Loss from continuing operations (25,006) (108.9)% (21,109) (120.5)% (13,257) (259.4)%
Income from discontinued operations - - - - 63 1.2%
-------- ------- -------
Net loss $(25,006) (108.9)% $(21,109) (120.5)% $(13,194) (258.3)%
We also measure and evaluate ourselves against certain other key operational
metrics. The following table sets forth our actual results based on these other
metrics for the years ended December 31st, as indicated below:
2001 2000 1999
---- ---- ----
Average Order Size (including shipping & handling) $143.71 $111.03 $97.38
Average Order Size Per New Customer (including shipping & handling) $127.41 $ 98.77 $88.84
Average Order Size Per Repeat Customer (including shipping & handling) $156.85 $128.67 $118.24
Registered Users 1,125,291 863,263 336,000
Registered Users Added During the Year 262,028 527,263 309,952
Total Customers 287,637 185,240 54,881
20
Customers Added during the Year 102,397 130,359 51,514
Revenue from Repeat Customers as a % of total Revenue 60% 48% 35%
Customer Acquisition Costs $39.32 $71.18 $131.75
We define a "repeat customer" as a person who has bought more than once from us
during their lifetime. We calculate customer acquisition cost by dividing total
advertising expenditures (excluding staff related costs) during a given time
period by total new customers added during that period. All measures of the
number of customers are based on unique email addresses.
In June 2001, we announced a streamlined operating plan designed to aid us in
achieving profitability by the fourth quarter of 2002, improve efficiency and
reduce our need for additional capital. As part of the plan, we eliminated
approximately 32 jobs, or, approximately 34% of our workforce, as well as
reduced marketing and other operating expenses. In connection with the plan we
recorded a pre-tax charge of approximately $272,000. Of this amount,
approximately $145,000 is included in selling, marketing and fulfillment costs
and $127,000 is included in general and administrative expenses.
For The Year Ended December 31, 2001 Compared To The Year Ended December 31,
2000
Net sales: Gross sales for the year ended December 31, 2001, increased by 35% to
$33,833,000, compared to $25,006,000, for the year ended December 31, 2000. For
the year ended December 31, 2001, we recorded a provision for returns and credit
card chargebacks and other discounts of $10,883,000, or approximately 32% of
gross sales. For the year ended December 31, 2000, the provision for returns and
credit card chargebacks and other discounts was $7,494,000 or approximately 30%
of gross sales. The increase in the provision as a percentage of gross sales, is
related primarily to an increase in the return rate. The increase in average
order size is related to our change in product mix, which is now focused on
higher priced goods. Accordingly, we believe that there is a direct relationship
between the increase in the average order size and the increase in return rate.
After the necessary provisions for returns, credit card chargebacks and
adjustments for uncollected sales taxes, our net sales for the year ended
December 31, 2001 were $22,950,000. This represents an increase of over 31%
compared to the year ended December 31, 2000, in which net sales totaled
$17,512,000. The increase in net sales is primarily the result of increases in
average order size and sales to repeat customers. We believe that both of these
measures increased as a result of our strategy to focus more of our marketing
efforts on existing customers. Although the number of new customers acquired in
2001 decreased by approximately 21%, we believe that this was a result of a
significant reduction of marketing expenses, and that the effect on net sales
was more than offset by the increases in average order size and sales to repeat
customers.
Cost of sales: Cost of sales consists of the cost of product sold to customers,
in-bound and out-bound shipping costs, inventory reserves, commissions and
packing materials. Cost of sales for the year ended December 31, 2001 totaled
$15,954,000, resulting in gross margin of approximately 30.5%. Cost of sales for
the year ended December 31, 2000 totaled $14,018,000, resulting in gross margin
of 20.0%. Gross profit increased by 100%, to $6,996,000 in 2001 compared to
$3,494,000 in 2000. The increase in gross margin resulted primarily from
improved product margins.
Selling, marketing and fulfillment expenses: Selling, marketing and fulfillment
expenses decreased by approximately 27% in 2001 compared to 2000. Selling,
marketing and fulfillment expenses were comprised of the following:
Year Ended Year Ended Percentage Difference
---------- ---------- ---------------------
December 31, 2001 December 31, 2000 increase (decrease)
----------------- ----------------- -------------------
Marketing $4,858,000 $10,178,000 (52%)
Operating 3,939,000 4,050,000 (3%)
Technology 3,733,000 3,455,000 8%
Creative Services 1,235,000 1,114,000 11%
--------- ---------
$ 13,765,000 $ 18,797,000 (27%)
Marketing expenses include expenses related to online and print advertising,
direct mail campaigns as well as staff related costs. The decrease in marketing
expenses of 52% is largely related to a shift in our customer acquisition
strategy. Consistent with
21
our streamlined operating plan announced in June 2001, we significantly reduced
our advertising expenditures and focused more on email and direct mail programs.
Primarily as a result of this shift, we were able to decrease our customer
acquisition costs for the year ended December 31, 2001 by approximately 45% to
$39.32 per customer from $71.18 per customer for the year ended December 31,
2000.
Operating expenses include all costs related to inventory management,
fulfillment, customer service, and credit card processing. Operating expenses
decreased in 2001 by approximately 3% compared to 2000. Although variable costs
associated with the increased sales volume (picking and packing orders,
processing returns and credit card fees) increased on an absolute basis, these
amounts were more than offset by a decrease in the costs that were incurred in
2000 as a result of our need to maintain two fulfillment centers during the
months of August and September when we were transitioning our operations to a
new third party provider.
Technology expenses consist primarily of Web site hosting and staff related
costs. For the year ended December 31, 2001 technology expenses increased
slightly, with decreased Web site hosting costs being offset by severance
payments made to several members of our technology staff whose jobs were
eliminated in June 2001.
Creative Services expenses include expenses related to our photo studio, image
processing, and Web site design. In 2001, this amount increased by approximately
11% primarily due to the increase in the number of styles of products processed.
As a percentage of net sales, our selling, marketing and fulfillment expenses,
decreased to 59.9% in 2001 from 107.3% in 2000. The decrease resulted primarily
from a more targeted marketing strategy aimed at our existing customer base and
improved efficiencies in the order fulfillment process resulting from our
transition to a new third party provider in August and September 2000.
General and administrative expenses: General and administrative expenses include
merchandising, finance and administrative salaries and related expenses,
insurance costs, accounting and legal fees, depreciation and other office
related expenses. General and administrative expenses for the year ended
December 31, 2001 decreased by 4% to $5,098,000 as compared to $5,296,000 for
the year ended December 31, 2000. The decrease in general and administrative
expenses was largely the result of jobs that were eliminated in connection with
the Company's June 2001 streamlined operating plan, and their related benefits.
This decrease was partially offset by severance payments paid to these
individuals. The number of employees categorized as general and administrative
for the year ended December 31, 2001 was 23, compared to 28 for the year ended
December 31, 2000.
As a percentage of net sales, general and administrative expenses decreased to
22.2% in 2001 from 30.2% in 2000.
Loss from operations: Operating loss decreased by 42% in 2001 to $11,867,000
from $20,599,000 in 2000 as a result of the increase in gross margin and
decreases, as a percentage of net sales, in selling, marketing and fulfillment
expenses and general and administrative expenses.
Interest expense and other income, net: Interest expense for the year ended
December 31, 2001 totaled $13,379,000. This amount consists principally of
approximately $13,007,000 of non-cash, one-time charges that were incurred in
connection with the conversion of our notes payable and redeemable equity into
permanent equity. This amount also includes interest expense of $175,000,
related to the interest on the notes payable that were issued during fiscal 2000
and converted in fiscal 2001. For the year ended December 31, 2000 interest
expense totaled $676,000, and related to the interest on the notes payable that
were issued during fiscal 2000.
Interest income for the year ended December 31, 2001 increased to $240,000 from
$166,000 for the year ended December 31, 2000, which represents interest earned
on our cash balance.
For The Year Ended December 31, 2000 Compared To The Year Ended December 31,
1999
Net sales: Gross sales for the year ended December 31, 2000 increased by
approximately 254% to $25,006,000, compared to $7,073,000, for the year ended
December 31, 1999. For the year ended December 31, 2000, we recorded a provision
for returns and credit card chargebacks and other discounts of $7,494,000, or
approximately 30% of gross sales. For the year ended December 31,
22
1999, the provision for returns and credit card chargebacks and other discounts
was $1,964,000, or approximately 27.8% of gross sales. The increase in the
provision is related to an increase in the return rate.
After the necessary provisions for returns, credit card chargebacks and
adjustments for uncollected sales taxes, our net sales for the year ended
December 31, 2000 were $17,512,000. This represents an increase of over 242%
compared to net sales for the year ended December 31, 1999, in which net sales
totaled $5,109,000.
Cost of sales: Cost of sales for the year ended December 31, 2000 totaled
$14,018,000, resulting in gross margin of approximately 20%. Cost of sales for
the year ended December 31, 1999 were $4,554,000, resulting in gross margin of
10.9%. We believe that the increase in gross margin resulted primarily from our
limiting the amount of free shipping that we offered our customers during fiscal
2000 as compared to 1999, and from improved product margins.
Selling, marketing and fulfillment expenses: Selling, marketing and fulfillment
expenses increased by approximately 74% in 2000 compared to 1999. Selling,
marketing and fulfillment expenses were comprised of the following:
Year Ended Year Ended Percentage Difference
---------- ---------- ---------------------
December 31, 2000 December 31, 1999 increase (decrease)
----------------- ----------------- -------------------
Marketing $10,178,000 $7,406,000 37%
Operating 4,050,000 1,380,000 193%
Technology 3,455,000 1,399,000 147%
Creative Services 1,114,000 609,000 83%
--------- --------
$ 18,797,000 $ 10,794,000 74%
The increase in marketing expenses of 37% was largely related to an increase in
online and print advertising targeted to increase our customer base. As a result
of this shift, we were able to increase the number of customers that we acquired
to 130,359 in 2000 from 51,514 in 1999. Accordingly, our customer acquisition
costs for the year ended December 31, 2000 decreased by approximately 46% to
$71.18 per customer from $131.75 per customer for the year ended December 31,
1999.
Operating expenses increased in 2000 by approximately 193% compared to 1999. The
increased fulfillment costs were largely attributable to the increased sales
volume and our need to maintain two fulfillment centers during the months of
August and September when we were transitioning our operations.
For the year ended December 31, 2000, technology expenses increased by 147% over
the previous year. The increase in Web site hosting costs resulted from our
efforts to improve the speed of our Web site and effectively handle growth in
traffic to the Web site.
For the year ended December 31, 2000, creative services expenses include
expenses related to our photo studio, image processing, and Site design. In
2000, this amount increased by approximately 83% primarily due to an increase in
headcount.
As a percentage of net sales, our selling, marketing and fulfillment expenses,
decreased from 211.3% in 1999 to 107.3% in 2000.
General and administrative expenses: General and administrative expenses include
merchandising, finance and administrative salaries and related expenses,
insurance costs, accounting and legal fees, depreciation and other office
related expenses. General and administrative expenses for the year ended
December 31, 2000 were $5,296,000 as compared to $3,450,000 for the year ended
December 31, 1999. The increase in general and administrative expenses was
largely the result of an increase in the number of our employees, and their
related benefits as well as increased professional fees. In addition, in July
2000 we increased our office space by leasing an additional floor. We increased
the number of our employees across all departments. The number of employees
categorized as general and administrative for the year ended December 31, 2000
was 28, compared to 18 for the year ended December 31, 1999.
23
As a percentage of net sales, general and administrative expenses decreased from
67.5% in 1999 to 30.2% in 2000.
Interest expense and other income, net: Interest expense and other income, net,
for the year ended December 31, 2000 totaled $510,000. This amount consisted of
interest expense of $676,000, related to the interest on the notes payable that
were issued during fiscal 2000. It is presented net of interest income of
$166,000, which represents interest earned on our cash balances. For the year
ended December 31, 1999, interest income totaled $430,000 and related primarily
to the interest earned on the cash balance during the year.
Liquidity And Capital Resources
General
At December 31, 2001, the Company had approximately $5.4 million, of liquid
assets, entirely in the form of cash and cash equivalents, and working capital
of approximately $7.2 million. In addition, as of December 31, 2001, the Company
had approximately $2.2 million of borrowings committed under the Loan Facility,
leaving approximately $1.6 million of availability. In March 2002, we amended
the Loan Facility. As of March 22, 2002, the maximum amount available under the
Loan Facility was approximately $2.5 million, of which $2.2 was outstanding as
of such date. See, "Liquidity and Capital Resources - Loan Facility."
We fund our operations through cash on hand, operating cash flow and the Loan
Facility. In addition, during 2001, we converted $20 million of debt owed to
Soros into Series B Preferred Stock and sold an additional $10 million of Common
Stock to Soros and certain public shareholders. See "Certain Relationships and
Related Transactions."
Operating cash flow is affected by revenue and gross margin levels, as well as
return rates, and any deterioration in our performance on these financial
measures would have a negative impact on our liquidity. Total availability under
the Loan Facility is based upon our inventory levels and dependent, among other
things, on the Company having at least $1.5 million of tangible net worth and
$3.5 million of working capital. In addition, both availability under the Loan
Facility and our operating cash flows are affected by the payment terms that we
receive from suppliers and service providers, and the extent to which suppliers
require us to request Rosenthal to provide credit support under the Loan
Facility. We believe that our suppliers' decision-making with respect to payment
terms and/or the type of credit support requested is largely driven by their
perception of our credit rating, which is affected by information reported in
the industry and financial press and elsewhere as to our financial strength.
Accordingly, negative perceptions as to our financial strength could have a
negative impact on our liquidity.
Loan Facility
Pursuant to the Rosenthal Financing Agreement, as amended, Rosenthal provides us
with certain credit accommodations, including loans and advances,
factor-to-factor guarantees, letters of credit in favor of suppliers or factors
and purchases of payables owed to our suppliers. The maximum amount available
under the Loan Facility is an amount equal to the amount of Soros Guarantee plus
the lowest of (x) $1 million, (y) 20% of the book value of our inventory and (z)
the full liquidation value of our inventory. However, the maximum availability
under the Loan Facility can never exceed $10 million. Under the Loan Facility,
we are required to have at least $1,500,000 of tangible net worth and $3,500,000
of working capital. Interest accrues monthly on the average daily amount
outstanding under the Loan Facility during the preceding month at a per annum
rate equal to the prime rate plus 1%. As of December 31, 2001, maximum
availability under the Loan Facility was approximately $3.8 million, of which
$2.2 million was outstanding. As of March 22, 2002, maximum availability under
the Loan Facility was approximately $2.5 million, of which $2.2 million was
outstanding as of such date.
We also pay Rosenthal (a) an annual facility fee equal to a certain percentage
of the maximum inventory facility available under the Loan Facility and (b)
certain fees to open letters of credit and guarantees in an amount equal to a
certain percentage of the face amount of the letter of credit or guarantee plus,
a certain percentage of the face amount of such letters of credit or guarantees
for each thirty (30) days or a portion thereof that such letters of credit or
guarantees are open.
In consideration for the Loan Facility, among other things, we granted to
Rosenthal a first priority lien on substantially all of our assets, including
control of all of our cash accounts upon an event of default and certain of our
cash accounts in the event that
24
the total amount of monies loaned to us under the Loan Facility exceeds 90% of
the maximum amount available under the Loan Facility for more than 10 days. We
also issued to Rosenthal a warrant to purchase 50,000 shares of our Common Stock
at an exercise price of $2.34 exercisable, as amended, for six years from the
date of issuance.
In connection with the Loan Facility, we entered into a Reimbursement Agreement
with Soros pursuant to which Soros issued a standby letter of credit at closing
in the amount of $2.5 million in favor of Rosenthal to guarantee a portion of
the Company's obligations under the Rosenthal Financing Agreement, we agreed to
reimburse Soros for any amounts it pays to Rosenthal pursuant to such guarantee
and we granted Soros a subordinated lien on substantially all of our assets,
including our cash balances, in order to secure our reimbursement obligations.
In connection with the recent amendment of the Rosenthal Financing Agreement,
the face amount of the standby letter of credit issued by Soros was reduced from
$2.5 to $1.5 million, Soros' obligation to issue at our request another standby
letter of credit for up to an additional $1.5 million was terminated and Soros
agreed to maintain the $1.5 million standby letter of credit until August 15,
2003. In consideration for the issuance of the original $2.5 million standby
letter of credit, we issued to Soros a warrant to purchase 100,000 shares of our
Common Stock at an exercise price equal to $0.88, exercisable at any time prior
to September 15, 2011. In consideration for Soros' agreement to maintain the
$1.5 million standby letter of credit until August 15, 2003, we issued to Soros
a warrant to purchase 60,000 shares of our Common Stock at an exercise price
equal to $1.66 per share(the 20 day trailing average of the closing price of our
Common Stock on the date of issuance), exercisable at any time prior to March
30, 2007.
Subject to certain conditions, if we default on any of our obligations under the
Rosenthal Financing Agreement, Rosenthal has the right to draw upon the Soros
Guarantee to satisfy any such obligations. If and when Rosenthal draws on the
Soros Guarantee, pursuant to the terms of the Reimbursement Agreement, we would
have the obligation to, among other things, reimburse Soros for any amounts
drawn under the Soros Guarantee plus interest accrued thereon. In addition, to
the extent that Rosenthal draws on the Soros Guarantee during the continuance of
a default under the Rosenthal Financing Agreement or at any time that the total
amount outstanding under the Loan Facility exceeds 90% of the Soros Guarantee,
we will be required to issue to Soros a warrant (each a "Contingent Warrant") to
purchase a number of shares of Common Stock equal to the quotient of (a) any
amounts drawn under the Soros Guarantee and (b) 75% of the average of the
closing price of our Common Stock on the ten days preceding the date of issuance
of such warrant. Each Contingent Warrant will be exercisable for ten years from
the date of issuance at an exercise price equal to 75% of the average closing
price of our Common Stock on the ten days preceding the ten days after the date
of issuance.
Under the Rosenthal Financing Agreement, Soros has the right to purchase all of
our obligations from Rosenthal at any time during the term of the Rosenthal
Financing Agreement. With respect to such Buyout Option, Soros has the right to
request that Rosenthal make a draw under the Soros Guarantee as consideration to
Soros for the purchase of such obligations.
Standby Commitment
On March 27, 2002, we entered into the Standby Commitment Agreement with Soros.
Under the Soros Standby Agreement, Soros has agreed to provide us with up to
four million dollars ($4,000,000) of additional financing on a standby basis at
any time prior to January 1, 2003; provided, however, that we may draw down on
the Standby Commitment Amount only at such time that our total cash balances are
less than $1,000,000. Such financing can be made in one or more tranches as
determined by the members of our Board of Directors who are not Soros designees,
and any and all financings made shall be on terms that are consistent with those
in the market at the time the draw is made for similar investments by investors
similar to Soros in companies similar to us. Subject to certain limitations the
Standby Commitment Amount shall be reduced on a dollar-for-dollar basis by the
gross cash proceeds received by the Company or any of its subsidiaries from the
issuance any equity or convertible securities after March 27, 2002. In exchange
for this commitment, but not as a substitute for additional consideration that
Soros would receive if and when any financing is made pursuant to the Soros
Standby Agreement, we issued to Soros a warrant to purchase 100,000 shares of
our Common Stock at an exercise price of $1.68 per share (the 20 day trailing
average of the closing sale price of our Common Stock on the date of issuance),
exercisable at any time until March 27, 2007. In connection with the issuance of
this warrant, Soros agreed that the issuance of this warrant shall not trigger
the anti-dilution provision of Section 5.8.6 of our Certificate of
Incorporation. See, "Risk Factors - "Certain Events Could Result in Significant
Dilution of Your Ownership of our Common Stock."
Commitments And Long Term Obligations
As of December 31, 2001, we had the following commitments and long term
obligations:
25
2002 2003 2004 2005 2006 Thereafter Total
Marketing and Advertising $ 612,000 -- -- -- -- -- $ 612,000
Operating Leases $1,132,000 486,000 437,000 443,000 449,000 1,267,000 $4,214,000
Employment Contracts $ 998,000 495,000 28,000 -- -- -- $1,521,000
Note payable to shareholder $ -- -- -- 182,000 -- -- $ 182,000
---------- ------- ------- ------- ------- --------- ----------
Grand total $2,742,000 981,000 465,000 625,000 449,000 1,267,000 $6,529,000
In March of 2002, we moved our web hosting services to a major Internet service
provider to host Bluefly.com and provide certain hardware and software as well
as year-round 24-hour systems support. Under this new agreement we are committed
to pay $68,500, $82,200, $82,200 and $13,700 for fiscal years 2002, 2003, 2004
and 2005, respectively.
On March 12, 2002, we entered into a Software License and Service Agreement with
Blue Martini. Beginning in March 2002, with the assistance of consultants from
Blue Martini, we plan to develop an upgraded version of our Web site based on
Blue Martini Software. Under this agreement we are committed to pay $295,000
during fiscal 2002. Once launched, we expect that the new Web site will provide
us with better tools to create and manage on-site marketing promotions, more
robust analytical tools to measure the performance of on-site promotions,
greater site stability, and a more efficient platform from which to scale our
technology infrastructure should any future growth in our business dictate such
a need. We expect to launch the new Web site during the third quarter of 2002.
Of course, there can be no assurance that the new Web site will be launched when
scheduled, that such expectations will prove to be correct or that they will
have a positive effect on our business. See, "Risk Factor - The Development Of A
New Web Site May Place A Significant Strain On Our Management And Certain Key
Personnel."
We believe that in order to grow the business, we will need to make additional
marketing and advertising commitments in the future. In addition, we expect to
hire and train additional employees for the operations and development of
Bluefly.com. However, our marketing budget and our ability to hire such
employees is subject to a number of factors, including our results of operations
as well as the amount of additional capital that we raise.
In order to continue to expand our product offerings, we intend to expand our
relationships with suppliers of end-of-season and excess name brand apparel and
fashion accessories. We expect that our suppliers will continue to include
designers and retail stores that sell excess inventory as well as third-party
end-of-season apparel aggregators. To achieve our goal of offering a wide
selection of top name brand designer clothing and fashion accessories, we may
acquire certain goods on consignment and may explore leasing or partnering
select departments with strategic partners and distributors. Due to our limited
working capital, a number of our suppliers have limited our payment terms and,
in some cases, have required us to pay for merchandise in advance of delivery.
See, "Risk Factors - We Do Not Have Long Term Contracts With Our Vendors And
Therefore The Availability Of Merchandise Is At Risk."
We anticipate that the proceeds from the Rosenthal Financing Agreement and the
Standby Commitment Agreement together with existing resources and cash generated
from operations, should be sufficient to satisfy our cash requirements through
the end of fiscal 2002. However, we may seek additional debt and/or equity
financing in order to maximize the growth of our business. There can be no
assurance that any additional financing or other sources of capital will be
available to us upon acceptable terms, or at all. The inability to obtain
additional financing, if needed, would have a material adverse effect on our
business, financial condition and results of operations. See, "Risk Factors - We
are Making a Substantial Investment in our Business and May Need to Raise
Additional Funds" and "Certain Events Could Result in Significant Dilution of
Your Ownership of our Common Stock."
Recent Accounting Pronouncements
Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission (the "Commission"), requires all companies to
include a discussion of critical accounting policies or methods used in the
preparation of financial statements. Note 2 of the notes to the consolidated
financial statements includes a summary of the significant accounting policies
and methods used in the preparation of our consolidated financial statements.
For a brief discussion of the more significant accounting policies and methods
used by us, please see, "Significant Accounting Policies."
26
In addition, Financial Reporting Release No. 61 was recently released by the
Commission, and requires all companies to include a discussion addressing, among
other things, liquidity, off balance sheet arrangements, contractual obligations
and commercial commitments. For a discussion of these issues, please read
"Liquidity and Capital Resources."
In October 2001, the Financial Accounting Standards Board (FASB) issued
Statement No. 144 ("SFAS No. 144"), "Accounting for the Impairment or Disposal
Of Long-Lived Assets." This statement supersedes FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of" and certain provisions of APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business (as previously
defined in that Opinion). The provisions of SFAS No. 144 are effective for
fiscal years beginning after December 15, 2001. We do not anticipate that the
adoption of SFAS No. 144 will have a material impact on our consolidated
financial statements.
In June 2001, the FASB issued Statement No. 143 ("SFAS No. 143"), "Accounting
for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. SFAS No. 143 shall
be effective for financial statements issued for fiscal years beginning after
June 15, 2002. Earlier application is encouraged. Initial application of this
Statement shall be as of the beginning of an entity's fiscal year. We do not
anticipate that the adoption of SFAS No. 143 will have a material impact on our
consolidated financial statements.
In July 2001, the FASB issued SFAS No. 142 ("SFAS No. 142"), "Goodwill and Other
Intangible Assets". Under SFAS No. 142, goodwill and indefinite lived intangible
assets will no longer be amortized, but rather will be tested for impairment
within six months of adoption and at least annually thereafter effective for
years beginning after December 15, 2001. In addition, the amortization period of
intangible assets with finite lives will no longer be limited. We do not
anticipate that the adoption of SFAS No. 142 will have a material impact on our
consolidated financial statements.
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141 ("SFAS No. 141"),"Business Combinations". SFAS No. 141 requires all business
combinations initiated after June 30, 2001 be accounted for under the purchase
method. In addition, SFAS No. 141 establishes criteria for the recognition and
measurement of intangible assets separately from goodwill. SFAS No. 141 may
require the Company to reclassify the carrying amounts of certain intangible
assets into or out of goodwill, based upon certain criteria. We do not
anticipate that the adoption of SFAS No. 141 will have a material impact on our
consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We have assessed our vulnerability to certain market risks, including interest
rate risk associated with financial instruments included in cash and cash
equivalents and our notes payable. Due to the short-term nature of these
investments we have determined that the risks associated with interest rate
fluctuations related to these financial instruments do not pose a material risk
to us.
27
Item 8. Financial Statements
(a) Index to the Financial Statements
Report of Independent Accountants F-2
Consolidated Balance Sheets as of December 31, 2001 and 2000 F-3
Consolidated Statements of Operations for the three years
ended December 31, 2001, 2000 and 1999 F-4
Consolidated Statements of Changes in Shareholders' Equity (Deficit)
and Redeemable Preferred Stock for the three years
ended December 31, 2001, 2000 and 1999 F-5
Consolidated Statements of Cash Flows for the three years
ended December 31, 2001, 2000 and 1999 F-6
Notes to Consolidated Financial Statements F-8
Report of Independent Accountants
To the Board of Directors and Shareholders of Bluefly, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Bluefly, Inc. and its subsidiary at December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, N.Y.
March 27, 2002
F-2
Bluefly, Inc.
Consolidated Balance Sheets
As of December 31, 2001 and 2000
Dollars Rounded to the Nearest Thousand
------------------------------------------------------------------------------------------------------------------
2001 2000
Assets
Current assets:
Cash and cash equivalents $ 5,419,000 $ 5,350,000
Inventories, net 6,388,000 7,294,000
Accounts receivable 1,252,000 767,000
Prepaid expenses and other current assets 474,000 937,000
------------ ------------
Total current assets 13,533,000 14,348,000
Property and equipment, net 1,155,000 1,326,000
Other assets 193,000 194,000
------------ ------------
Total assets $ 14,881,000 $ 15,868,000
============ ============
Liabilities and Shareholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 3,338,000 $ 3,593,000
Accrued expenses and other current liabilities 2,268,000 2,395,000
Deferred revenue 691,000 143,000
Convertible notes payable, net of unamortized discount -- 19,698,000
------------ ------------
Total current liabilities 6,297,000 25,829,000
------------ ------------
Note payable to shareholder 182,000 --
Redeemable Convertible Series A Preferred Stock - $.01 par value; 2,000,000
shares authorized, 0 and 500,000 shares issued and outstanding
as of December 31, 2001 and December 31, 2000 -- 11,088,000
(liquidation preference: $20 per share plus accrued dividends)
Commitments and contingencies (Note 7)
Shareholders' equity (deficit):
Series A Preferred Stock - $.01 par value; 500,000 shares authorized and
500,000 and 0 shares issued and outstanding as of December 31, 2001, and
2000, respectively (liquidation preference: $10 million plus accrued
dividends) 5,000 --
Series B Preferred Stock - $.01 par value; 9,000,000 shares authorized
and 8,910,782 and 0 shares issued and outstanding as of December 31, 2001,
and 2000, respectively (liquidation preference: $30 million plus accrued
dividends) 89,000 --
Common Stock - $.01 par value; 40,000,000 shares authorized, 9,205,331
and 4,924,906 shares issued and outstanding as of December 31, 2001
and 2000, respectively 92,000 49,000
Additional paid-in capital 72,184,000 17,242,000
Accumulated deficit (63,968,000) (38,340,000)
------------ ------------
Total shareholders' equity (deficit) 8,402,000 (21,049,000)
------------ ------------
Total liabilities and shareholders' equity (deficit) $ 14,881,000 $ 15,868,000
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
Consolidated Statements of Operations
For the years ended December 31, 2001, 2000 and 1999
Dollars Rounded to the Nearest Thousand
-----------------------------------------------------------------------------------------------------------------
2001 2000 1999
Net sales $ 22,950,000 $ 17,512,000 $ 5,109,000
Cost of sales 15,954,000 14,018,000 4,554,000
------------ ------------ ------------
Gross profit 6,996,000 3,494,000 555,000
Selling, marketing and fulfillment expenses 13,765,000 18,797,000 10,794,000
General and administrative expenses 5,098,000 5,296,000 3,450,000
------------ ------------ ------------
Total operating expenses 18,863,000 24,093,000 14,244,000
------------ ------------ ------------
Operating loss from continuing operations (11,867,000) (20,599,000) (13,689,000)
Interest (expense) and other income, net of interest income of
$240,000 and $166,000 in 2001 and 2000, and interest expense
of $0 in 1999 (13,139,000) (510,000) 430,000
------------ ------------ ------------
Loss from continuing operations before income taxes (25,006,000) (21,109,000) (13,259,000)
Income tax benefit -- -- 2,000
------------ ------------ ------------
Loss from continuing operations (25,006,000) (21,109,000) (13,257,000)
------------ ------------ ------------
Discontinued operations -
Income from operations, net of income tax provision of $0 -- -- 63,000
------------ ------------ ------------
Net loss $(25,006,000) $(21,109,000) $(13,194,000)
============ ============ ============
Preferred stock dividends (2,926,000) (802,000) (343,000)
------------ ------------ ------------
Net loss available to common shareholders $(27,932,000) $(21,911,000) $(13,537,000)
============ ============ ============
Basic and diluted (loss) income per common share:
Continuing operations $ (3.41) $ (4.45) $ (2.83)
Discontinued operations -- -- .01
------------ ------------ ------------
Basic and diluted loss per share $ (3.41) $ (4.45) $ (2.82)
============ ============ ============
Weighted average number of shares outstanding used in calculating
basic and diluted (loss) per common share 8,185,065 4,924,906 4,802,249
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
Bluefly, Inc.
Consolidated Statements of Changes in Shareholders' Equity (Deficit) and Redeemable Preferred Stock
For the years ended December 31, 2001, 2000 and 1999
Dollars Rounded to the Nearest Thousand
------------------------------------------------------------------------------------------------------------------------------------
Redeemable Series A Preferred Stock Series B Preferred Stock
Preferred Stock $.01 Par value $.01 Par value
---------------------- ------------------------ ------------------------
Number of Number of Number of
Shares Amount Shares Amount Shares Amount
Balance at January 1, 1999 - $ - - $ - - $ -
Issuance of Series A Preferred Stock
($20.00 per share) net of expenses of $57,000 500,000 9,943,000 - - - -
Accrued dividends on Series A Preferred Stock - 343,000 - - - -
Exercise of warrants and stock options - - - - - -
Issuance of stock options to consultants - - - - - -
Net loss - - - - - -
-------- ------------ ------- ------ --------- -------
Balance at December 31, 1999 500,000 10,286,000 - - - -
-------- ------------ ------- ------ --------- -------
Issuance of warrants in connection with
Convertible Notes - - - - - -
Issuance of warrants to supplier - - - - - -
Accrued dividends on Series A Preferred Stock - 802,000 - - - -
Net loss - - - - -
-------- ------------ ------- ------ --------- -------
Balance at December 31, 2000 500,000 11,088,000 - - - -
-------- ------------ ------- ------ --------- -------
Conversion of Redeemable Preferred Stock to
Preferred Stock Series A (500,000) (11,088,000) 500,000 5,000 - -
Conversion of debt to Preferred Stock Series B - - - - 8,910,782 89,000
Sale of common stock in connection with Rights
Offering ($2.34 per share) net of $350,000
of expenses - - - - - -
Issuance of warrants to lender - - - - - -
Issuance of warrants in exchange for services - - - - - -
Issuance of warrants to investor - - - - - -
Net loss - - - - -
-------- ------------ ------- ------ --------- -------
Balance at December 31, 2001 - $ - 500,000 $5,000 8,910,782 $89,000
-------- ------------ ------- ------ --------- -------
Common Stock
$.01 Par Value
------------------- Total
Number of Additional Accumulated Shareholders'
Shares Amount Paid-in Capital Deficit Equity (Deficit)
Balance at January 1, 1999 3,433,255 $34,000 $ 10,395,000 $ (4,037,000) $ 6,392,000
Issuance of Series A Preferred Stock ($20.00 per share)
net of expenses of $57,000 - - - - -
Accrued dividends on Series A Preferred Stock - - (343,000) - (343,000)
Exercise of warrants and stock options 1,491,651 15,000 7,381,000 - 7,396,000
Issuance of stock options to consultants - - 49,000 - 49,000
Net loss - - - (13,194,000) (13,194,000)
--------- ------- ------------ ------------ ------------
Balance at December 31, 1999 4,924,906 49,000 17,482,000 (17,231,000) 300,000
--------- ------- ------------ ------------ ------------
Issuance of warrants in connection with Convertible Notes - - 467,000 - 467,000
Issuance of warrants to supplier - - 95,000 - 95,000
Accrued dividends on Series A Preferred Stock - - (802,000) - (802,000)
Net loss - - - (21,109,000) (21,109,000)
--------- ------- ------------ ------------ ------------
Balance at December 31, 2000 4,924,906 49,000 17,242,000 (38,340,000) (21,049,000)
--------- ------- ------------ ------------ ------------
Conversion of Redeemable Preferred Stock to
Preferred Stock Series A - - 18,852,000 (622,000) 18,235,000
Conversion of debt to Preferred Stock Series B - - 26,318,000 - 26,407,000
Sale of common stock in connection with Rights Offering
($2.34 per share) net of $350,000 of expenses 4,280,425 43,000 9,622,000 - 9,665,000
Issuance of warrants to lender - - 45,000 - 45,000
Issuance of warrants in exchange for services - - 31,000 - 31,000
Issuance of warrants to investor - - 74,000 - 74,000
Net loss - - - (25,006,000) (25,006,000)
--------- ------- ------------ ------------ ------------
Balance at December 31, 2001 9,205,331 $92,000 $ 72,184,000 $(63,968,000) $ 8,402,000
--------- ------- ------------ ------------ ------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
Consolidated Statements of Cash Flows
For the years ended December 31, 2001, 2000 and 1999
Dollars Rounded to the Nearest Thousand
------------------------------------------------------------------------------------------------------------------
2001 2000 1999
Cash flows from operating activities:
Loss from continuing operations $(25,006,000) $(21,109,000) $(13,257,000)
Adjustments to reconcile loss from continuing operations
to net cash used in operating activities:
Depreciation and amortization 719,000 766,000 130,000
Issuance of warrants for services rendered 31,000 - -
Beneficial conversion - interest expense 13,007,000 - -
Provision for returns 296,000 265,000 820,000
Common stock issued for services - - 7,000
Deferred income taxes - - 50,000
Non cash compensation - - 49,000
Changes in operating assets and liabilities:
(Increase) decrease in:
Inventories 906,000 (274,000) (6,591,000)
Accounts receivable (393,000) (480,000) (353,000)
Other current assets 252,000 (53,000) (365,000)
Prepaid expenses 84,000 (90,000) 211,000
Other assets (18,000) (75,000) (23,000)
(Decrease) increase in:
Accounts payable 597,000 (857,000) 3,846,000
Accrued expenses (423,000) 55,000 1,101,000
Deferred revenue 548,000 144,000 -
Deferred tax liability - - (64,000)
------------ ------------ ------------
Net cash used in operating
activities - continuing operations (9,400,000) (21,708,000) (14,439,000)
------------ ------------ ------------
Income from discontinued operations - - 63,000
Adjustments to reconcile income from discontinued operations
to net cash provided by (used in) operating activities:
Changes in operating assets and liabilities:
(Increase) decrease in:
Inventories - - 187,000
Increase (decrease) in:
Income taxes receivable - - 195,000
------------ ------------ ------------
Net cash provided by operating
activities - discontinued operations - - 445,000
------------ ------------ ------------
Net cash used in operating activities (9,400,000) (21,708,000) (13,994,000)
------------ ------------ ------------
Cash flows from investing activities - continuing operations:
Purchase of property and equipment (378,000) (876,000) (670,000)
Funds deposited with factor - - 2,264,000
------------ ------------ ------------
Net cash provided by (used in) investing
activities - continuing operations (378,000) (876,000) 1,594,000
------------ ------------ ------------
Net cash provided by (used in) investing activities (378,000) (876,000) 1,594,000
------------ ------------ ------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
Consolidated Statements of Cash Flows (continued)
For the years ended December 31, 2001, 2000 and 1999
Dollars Rounded to the Nearest Thousand
----------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
Cash flows from financing activities - continuing operations:
Net proceeds from rights offering $ 9,665,000 $ - $ -
Net proceeds from note payable to shareholder 182,000 - -
Net proceeds from issuance of Preferred Stock - - 9,943,000
Net proceeds from warrant redemption and unit purchase options - - 7,130,000
Net proceeds from convertible notes payable - 20,000,000 260,000
----------- ------------ -----------
Net cash provided by financing activities -
continuing operations 9,847,000 20,000,000 17,333,000
----------- ------------ -----------
Cash flows from financing activities - discontinued operations:
Net change in due to/from factor - - 171,000
----------- ------------ -----------
Net cash provided by (used in) financing
activities - discontinued operations - - 171,000
----------- ------------ -----------
Net cash provided by financing activities 9,847,000 20,000,000 17,504,000
----------- ------------ -----------
Net increase (decrease) in cash and cash equivalents 69,000 (2,584,000) 5,104,000
Cash and cash equivalents - beginning of year 5,350,000 7,934,000 2,830,000
----------- ------------ -----------
Cash and cash equivalents - end of year $ 5,419,000 $ 5,350,000 $ 7,934,000
=========== ============ ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 14,000 $ - $ -
=========== ============ ===========
Income taxes $ - $ 25,000 $ 17,000
=========== ============ ===========
Non-cash investing and financing activites:
Issuance of warrants to shareholder $ 74,000 $ 467,000 $ -
=========== ============ ===========
Warrant issued to factor $ 45,000 $ - $ -
=========== ============ ===========
Beneficial conversion charge on conversion of debt to equity $20,851,000 $ - $ -
=========== ============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
Bluefly, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
--------------------------------------------------------------------------------
1. The Company
The Company is a leading Internet retailer of designer fashion at
outlet store prices. The Company's Web store ("Bluefly.com" or "Web
Site"), which launched in September 1998, sells over 400 brands of
designer apparel, accessories and home products at discounts that
typically range between 30% and 75% off comparable retail prices.
The Company has sustained net losses and negative cash flows from
operations since the formation of Bluefly.com. The Company's ability to
meet its obligations in the ordinary course of business is dependent
upon its ability to establish profitable operations or raise additional
financing through public or private debt or equity financing, or other
sources of financing to fund operations. Management believes that its
current funds, together with the Soros Standby Agreement, the Loan
Facility (both defined below) and cash generated from operations will
be sufficient to enable the Company to meet its planned expenditures
through December 31, 2002. The Company may seek additional equity or
debt financings to maximize the growth of its business or if
anticipated operating results are not achieved. If such financings are
not available on terms acceptable to the Company, the Company will
delay or reduce its expenditures in order to prolong the availability
of sufficient cash flow to satisfy its obligations while additional
funding is sought.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary. All significant intercompany
balances and transactions have been eliminated in consolidation.
Revenue Recognition
The Company recognizes revenue in accordance with both Staff Accounting
Bulletin ("SAB") No. 101 and Financial Accounting Standards Board
("FASB") Task Force's Emerging Issues Task Force No. 00-10, "Accounting
for Shipping and Handling Fees and Costs" ("EITF No. 00-10"). Revenue
is recognized when goods are received by the customer, which occurs
after credit card authorization. Net sales include product revenue and
revenue received for shipping and handling, less reductions for
estimated returns, uncollectible accounts and sales discounts.
Deferred revenue, which consists primarily of goods shipped to
customers but not yet received and customer credits, totaled
approximately $691,000 and $143,000 as of December 31, 2001 and 2000,
respectively.
Risks and Uncertainties
The Company has a limited operating history and its prospects are
subject to the risks, expenses and uncertainties frequently encountered
by companies in the new and rapidly evolving markets for Internet
products and services. These risks and uncertainties include, but are
not limited to, the following: the competitive nature of the business
and the potential for competitors with greater resources to enter such
business; the Company's limited operating history and need for
additional financing; consumer acceptance of the Internet as a medium
for purchasing apparel; rapid technological change of online commerce
and the potential for security risks; governmental regulation and legal
uncertainties, as well as other risks and uncertainties. In the event
that the Company does not successfully implement its business plan,
certain assets may not be recoverable.
F-8
Bluefly, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
--------------------------------------------------------------------------------
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Significant estimates and
assumptions include inventory valuation and reserves for returns and
allowance for doubtful accounts. Actual results could differ from those
estimates.
Cash and Cash Equivalents
The Company considers all short-term marketable securities having an
original maturity of three months or less to be cash equivalents.
Provisions for Returns and Doubtful Accounts
The Company generally permits returns for any reason within 90 days of
the sale. Accordingly, the Company establishes a reserve for estimated
future returns and bad debt at the time of shipment based primarily on
historical data. The Company performs credit card authorizations and
checks the verifications of its customers prior to shipment of
merchandise.
Inventories
Inventories, which consist of finished goods, are stated at the lower
of cost or market. Cost is determined by the first-in, first-out
("FIFO") method. The Company reviews its inventory levels in order to
identify slow-moving merchandise and uses markdowns to clear
merchandise.
Property and Equipment
Property and equipment are stated at cost. Equipment and software are
depreciated on a straight-line basis over two to seven years. Leasehold
improvements are amortized over the shorter of their estimated useful
lives or the term of the lease. Maintenance and repairs are expensed as
incurred.
Long-Lived Assets
The Company's policy is to evaluate long-lived assets and certain
identifiable intangibles for possible impairment whenever events or
changes in circumstances indicate that the carrying amount of such
assets may not be recoverable. This evaluation is based on a number of
factors, including expectations for operating income and undiscounted
cash flows that will result from the use of such assets. The Company
has not identified any such impairment of assets.
Income Taxes
The Company recognizes deferred tax assets and liabilities on the
differences between the financial statement and tax bases of assets and
liabilities using enacted statutory tax rates in effect for the years
in which the differences are expected to reverse. The effect on
deferred taxes of a change in tax rates is realized in income in the
period that includes the enactment date. In addition, valuation
allowances are established when it is more likely than not that
deferred tax assets will not be realized.
Stock Based Compensation
The Company applies Statement of Financial Accounting Standards No.
("SFAS") 123 "Accounting for Stock Based Compensation," and FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving
Stock Compensation" ("FIN 44") in accounting for its stock based
compensation plan. In accordance with SFAS No. 123, the Company applies
Accounting Principles Board ("APB") Opinion No. 25 and related
Interpretations for expense recognition. In connection with stock
option grants to employees, no compensation expense has been recorded
in fiscal years 2001,
F-9
Bluefly, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
--------------------------------------------------------------------------------
2000 and 1999, because the exercise price of employee stock options
equals or exceeds the market price of the underlying stock on the date
of grant.
Net Loss Per Share
The Company calculated net loss per share in accordance with SFAS No.
128, "Earnings Per Share." Basic earnings (loss) per share excludes
dilution and is computed by dividing earnings (loss) available to
common shareholders by the weighted average number of common shares
outstanding for the period.
Diluted earnings (loss) per share is computed by dividing earnings
(loss) available to common shareholders by the weighted average number
of common shares outstanding for the period, adjusted to reflect
potentially dilutive securities. Due to the loss from continuing
operations, options, warrants and unit purchase options to purchase
4,978,703 shares of Common Stock and Preferred Stock convertible into
13,184,236 of Common Stock shares were not included in the computation
of diluted earnings per share because the result of the exercise of
such inclusion would be antidilutive.
Marketing Expenses
In addition to marketing salaries, marketing expenses consist primarily
of online advertising, print advertising, direct mail campaigns as well
as the related external production costs. The costs associated with
online and print advertising are expensed as incurred, while the costs
associated with direct mail campaigns are capitalized and charged to
expense over the expected future revenue stream, which is generally no
more than one month. Marketing expenses (excluding marketing salaries)
for the years ended December 31, 2001, 2000 and 1999 amounted to
approximately $4,026,000, $9,278,000 and $6,787,000, respectively.
Fulfillment
The Company utilizes a third party to perform all of its order
fulfillment including warehousing, administrative support, returns
processing and receiving labor. For the years ended December 31, 2001,
2000 and 1999, fulfillment expenses totaled $2,290,000, $2,286,000 and
$557,000, respectively. These amounts are included in selling,
marketing and fulfillment expenses in the statement of operations.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, including
cash and cash equivalents, other assets, accounts payable, accrued
liabilities, and notes payable approximate fair value due to their
short maturities.
Concentration
The Company acquired approximately 5.3% and 15.3%, respectively, for
the years ended December 31, 2001, and 2000 of its inventory from one
supplier.
Recent Accounting Pronouncements
In October 2001, FASB issued Statement No. 144 ("SFAS No. 144"),
"Accounting for the Impairment or Disposal of Long-Lived Assets." This
statement supersedes FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed
Of" and certain provisions of APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment
of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for the disposal of a segment of a business
(as previously defined in that Opinion). The provisions of SFAS No. 144
are effective for fiscal years beginning after December 15, 2001. The
F-10
Bluefly, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
--------------------------------------------------------------------------------
Company does not anticipate that the adoption of SFAS No. 144 will have
a material impact on the consolidated financial statements.
In June 2001, the FASB issued Statement No. 143 ("SFAS No. 143"),
"Accounting for Asset Retirement Obligations." SFAS No. 143 addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset
retirement costs. SFAS No. 143 shall be effective for financial
statements issued for fiscal years beginning after June 15, 2002.
Earlier application is encouraged. Initial application of this
Statement shall be as of the beginning of an entity's fiscal year. The
Company does not anticipate that the adoption of SFAS No. 143 will have
a material impact on the consolidated financial statements.
In July 2001, the FASB issued SFAS No. 142 ("SFAS No. 142"), "Goodwill
and Other Intangible Assets". Under SFAS No. 142, goodwill and
indefinitely lived intangible assets will no longer be amortized, but
rather will be tested for impairment within six months of adoption and
at least annually thereafter effective for years beginning after
December 15, 2001. In addition, the amortization period of intangible
assets with finite lives will no longer be limited. The Company does
not anticipate that the adoption of SFAS No. 142 will have a material
impact on the consolidated financial statements.
In June 2001, the FASB issued SFAS No. 141 ("SFAS No. 141"), "Business
Combinations". SFAS No. 141 requires all business combinations
initiated after June 30, 2001 be accounted for under the purchase
method. In addition, SFAS No. 141 establishes criteria for the
recognition and measurement of intangible assets separately from
goodwill. SFAS No. 141 may require the Company to reclassify the
carrying amounts of certain intangible assets into or out of goodwill,
based upon certain criteria. The Company does not anticipate that the
adoption of SFAS No. 141 will have a material impact on the
consolidated financial statements.
Reclassifications
Certain amounts in the consolidated financial statements of the prior
periods have been reclassified to conform to the current period
presentation for comparative purposes.
3. Property and Equipment
As of December 31, 2001 and 2000, property and equipment for continuing
operations consist of the following:
2001 2000
Leasehold improvements $ 535,000 $ 501,000
Office equipment 418,000 388,000
Computer equipment and software 1,566,000 1,254,000
---------- ----------
2,519,000 2,143,000
Less accumulated depreciation 1,364,000 817,000
---------- ----------
$1,155,000 $1,326,000
========== ==========
Depreciation and amortization of property and equipment was
approximately $547,000, $587,000 and $130,000, for the years ended
December 31, 2001, 2000 and 1999, respectively.
F-11
Bluefly, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
--------------------------------------------------------------------------------
4. Prepaid Expenses and Other Current Assets
As of December 31, 2001 and 2000, prepaid expenses and other current
assets consist of the following:
2001 2000
Deferred financing costs $ 50,000 $368,000
Prepaid expenses 219,000 303,000
Other current assets 205,000 172,000
Other receivables - 94,000
-------- --------
$474,000 $937,000
======== ========
5. Accrued Expenses and Other Current Liabilities
As of December 31, 2001 and 2000, accrued expenses and other current
liabilities consist of the following:
2001 2000
Provision for returns $1,430,000 $1,134,000
Accrued expenses 167,000 531,000
Salary and bonus accrual 599,000 374,000
Accrued media expenses 72,000 356,000
---------- ----------
$2,268,000 $2,395,000
========== ==========
6. Income Taxes
The components of the provision (benefit) for income taxes is comprised
of the following:
Continuing Operations
----------------------------------
2001 2000 1999
Current
Federal $ - $ - $(2,000)
State - - -
------- ------- -------
- - (2,000)
------- ------- -------
Deferred
Federal - - -
State - - -
------- ------- -------
- - -
------- ------- -------
$ - $ - $(2,000)
======= ======= =======
F-12
Bluefly, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
--------------------------------------------------------------------------------
Significant components of the Company's deferred tax assets and
liabilities are summarized as follows:
2001 2000
Deferred tax assets
Net operating losses $ 24,433,000 $ 14,224,000
Foreign tax credits - 13,000
Depreciation and amortization 381,000 292,000
Accounts receivable and inventory reserves 240,000 219,000
Accrued bonuses 196,000 46,000
Other 4,000 4,000
------------ ------------
25,254,000 14,798,000
Valuation Allowance (25,254,000) (14,798,000)
------------ ------------
Net deferred tax asset (liability) $ - $ -
============ ============
In addition, the Company has approximately $61,227,000 of net operating
loss carryforwards which have expiration dates through 2021. The
Company provided a full valuation allowance on the entire deferred tax
asset balance to reflect the uncertainty regarding the realizability of
these assets due to operating losses incurred since inception.
The Company's effective tax rate differs from the U.S. Federal
Statutory income tax rate of 35% as follows:
2001 2000 1999
Statutory federal income tax rate (35.00) % (34.00) % (34.00) %
State taxes, net of federal tax benefit (5.41) (5.24) (5.40)
Other 0.05 0.08 0.20
Valuation allowance on deferred tax asset 40.36 39.16 39.18
--------- --------- ---------
Effective tax rate - % - % (0.02) %
--------- --------- ---------
7. Commitments and Contingencies
Employment Contracts
The Company has entered into certain employment contracts, which expire
through December 31, 2004. As of December 31, 2001, the Company's
aggregate commitment for future base salary under these employment
contracts is:
2002 $ 998,000
2003 495,000
2004 28,000
----------
Total $1,521,000
==========
F-13
Bluefly, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
--------------------------------------------------------------------------------
Operating Leases
The Company leases equipment and space under various leases which
expire at various dates beginning in 2002 and running through 2010.
Rent expense aggregated approximately $407,000, $345,000 and $156,000
for the years ended December 31, 2001, 2000 and 1999, respectively. As
of December 31, 2001, future minimum payments, excluding utilities, are
as follows:
2002 $1,132,000
2003 486,000
2004 437,000
2005 443,000
2006 449,000
Thereafter 1,267,000
----------
Total $4,214,000
==========
In March of 2002, the Company moved its web hosting services to a major
Internet service provider to host Bluefly.com and provide certain
hardware and software as well as year-round 24-hour systems support.
Under this new agreement the Company is committed to pay $68,500,
$82,200, $82,200 and $13,700 for fiscal years 2002, 2003, 2004 and 2005
respectively.
Marketing and Technology Commitments
As of December 31, 2001, the Company has advertising and marketing
commitments in connection with its online relationships of
approximately $612,000 through December 31, 2002.
In March 2002, the Company entered into a software license and services
agreement with a third party to develop an upgraded version of its Web
Site. In connection with the agreement the Company has committed to
spend $295,000 through December 31, 2002.
Legal Proceedings
The Company is, from time to time, a party to routine litigation
arising in the normal course of its business. The Company believes that
none of these actions will have a material adverse effect on the
business, financial condition, operating results or cash flows of the
Company.
8. Shareholders' Equity (Deficit) and Redeemable Equity
Authorized Shares
In February 2001, the Company reincorporated in the state of Delaware,
increased the number of authorized shares of preferred stock, $.01 par
value per share, to 25,000,000 in the aggregate and increased the
number of authorized shares of Common Stock to 40,000,000 in the
aggregate. The preferred stock is designated as follows: 500,000 shares
of Series A Convertible Preferred Stock, (the "Series A Preferred
Stock"), 9,000,000 shares of Series B Convertible Preferred Stock (the
"Series B Preferred Stock") and 15,500,000 shares undesignated and
available for issuance. Prior to February 2001, the Company had been
incorporated in the state of New York and had authorized for issuance
2,000,000 shares of preferred stock, $.01 par value per share, and
15,000,000 shares of common stock, $.01 par value per share ("Common
Stock").
Series A Convertible Preferred Stock
On July 27, 1999, the Company entered into an investment agreement (the
"First Soros Investment Agreement") with an investor group led by
affiliates of Soros Private Equity Partners, LLC ("Soros") pursuant to
which the Company issued 500,000 shares of Series A Convertible
Preferred Stock (the "Original Series A Preferred Stock") for an
aggregate purchase price of $10 million. The Original
F-14
Bluefly, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
--------------------------------------------------------------------------------
Series A Preferred Stock was convertible into shares of Common Stock at
a rate of $10.50 per share, and bore a cumulative compounding dividend
of 8% per annum, payable upon conversion at the Company's option in
cash or in Common Stock. The Original Series A Preferred Stock had a
liquidation preference equal to its face value plus accrued dividends
and ranked senior to the Common Stock with respect to the payment of
distributions on liquidation, dissolution or winding up of the Company
and with respect to the payment of dividends.
Excluding shares of Common Stock issuable as payment of accrued and
unpaid dividends, the 500,000 shares of Original Series A Preferred
Stock were convertible into 952,381 shares of Common Stock, subject to
certain antidilution provisions. The holders of the Original Series A
Preferred Stock had the right to appoint a designee to the Company's
Board of Directors and the Company was prohibited from taking certain
actions without the approval of the holders of the majority of the
Original Series A Preferred Stock. In addition, holders of the Original
Series A Preferred Stock had registration rights with respect to the
Common Stock issuable upon conversion of the Original Series A
Preferred Stock and certain anti-dilution and pre-emptive rights with
respect to future issuances of capital stock by the Company.
As of December 31, 2000, the Original Series A Preferred Stock had been
characterized as an instrument subject to optional redemption upon a
change in control of the Company, and accordingly was classified as
redeemable equity and not included in shareholders' equity. Subsequent
to year end and pursuant to the Second Soros Investment Agreement (as
defined below), upon the effectiveness of the reincorporation of the
Company as a Delaware corporation, the terms of the Original Series A
Preferred Stock were amended to adjust the conversion price to $2.34
per share and to remove those provisions that prevented it from being
included in permanent equity (as amended the "Amended Series A
Preferred Stock") as of December 31, 2001.
Excluding shares of Common Stock that may be issued as payment of
accrued and unpaid dividends, the 500,000 shares of Amended Series A
Preferred Stock are convertible into 4,273,504 shares of Common Stock,
subject to certain antidilution provisions, and bear a cumulative
compounding dividend of 8% per annum, payable upon conversion at the
Company's option in cash or in Common Stock. Each share of Amended
Series A Preferred Stock has a liquidation preference equal to the
greater of (i) its face value plus accrued dividends ($11,945,000) or
(ii) the amount that the holder of such a share would receive if it
were to convert such a share into shares of Common Stock immediately
prior to liquidation, and ranks senior to the Common Stock with respect
to the payment of distributions on liquidation, dissolution or winding
up of the Company and with respect to the payment of dividends. The
holders of the Amended Series A Preferred Stock have the right to
appoint a designee to the Company's Board of Directors and the Company
is prohibited from taking certain actions without the approval of the
holders of the majority of the Amended Series A Preferred Stock. In
addition, holders of the Amended Series A Preferred Stock have
registration rights with respect to the Common Stock issuable upon
conversion of the Amended Series A Preferred Stock and certain
anti-dilution and pre-emptive rights with respect to future issuances
of capital stock by the Company.
Series B Convertible Preferred Stock
On November 13, 2000, the Company entered into a second investment
agreement with Soros (the "Second Soros Investment Agreement") pursuant
to which affiliates of Soros agreed to invest up to an additional $15
million in the Company, subject to certain conditions (the "Soros
Investment"). Under the terms of the Second Soros Investment Agreement,
in November 2000, Soros invested an additional $5 million in the form
of a promissory note (the "New Note"), convertible into Series B
Preferred Stock at a rate of $2.34 per share. On February 5, 2001, upon
the second closing under the Second Soros Investment Agreement, the
principal amount of, and the interest accrued and unpaid on,
F-15
Bluefly, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
--------------------------------------------------------------------------------
the Soros Notes (as defined below in the heading "Soros Warrants") and
the New Note, totaling approximately $20 million, were converted into
shares of Series B Preferred Stock at a rate of $2.34 per share.
Excluding shares of Common Stock that may be issued as payment of
accrued and unpaid dividends, the shares of Series B Preferred Stock
are convertible into shares of Common Stock on a one-to-one basis,
subject to certain antidilution provisions, and bear a cumulative
compounding dividend of 8% per annum, payable upon conversion at the
Company's option in cash or in Common Stock. Each share of Series B
Preferred Stock has a liquidation preference equal to the greater of
(i) its face value plus accrued dividends plus $10 million
($31,504,000) or (ii) the amount that the holder of such a share would
receive if it were to convert such a share into shares of Common Stock
immediately prior to liquidation, and ranks senior to the Common Stock
with respect to the payment of distributions on liquidation,
dissolution or winding up of the Company and with respect to the
payment of dividends. The holders of the Series B Preferred Stock have
the right to appoint a designee to the Company's Board of Directors and
the Company is prohibited from taking certain actions without the
approval of the holders of the majority of the Series B Preferred
Stock. In addition, holders of the Series B Preferred Stock have
certain pre-emptive rights with respect to future issuances of capital
stock by the Company, and have registration rights with respect to the
Common Stock issuable upon conversion of the Series B Preferred Stock.
Rights Offering
Pursuant to the Second Soros Investment Agreement, on February 7, 2001
the Company offered the public shareholders of the Company, as of
February 7, 2001, the right to purchase up to an aggregate of $20
million in Common Stock at $2.34 per share (the "Rights Offering"). The
Second Soros Investment Agreement provided for Soros to purchase the
difference between $20 million and the amount of Common Stock purchased
by the public shareholders in the Rights Offering, up to a total of $10
million, all at the rate of $2.34 per share (the "Standby Commitment").
The Rights Offering was completed on March 26, 2001. The public
shareholders subscribed for 6,921 shares in the Rights Offering for
aggregate proceeds of approximately $16,000. In accordance with the
Standby Commitment, Soros purchased 4,273,504 shares of Common Stock of
the Company for an aggregate amount of $10 million on March 28, 2001 at
a price of $2.34 per share. Immediately after the closing of the Rights
Offering, Soros beneficially owned approximately 78% of the outstanding
Common Stock.
The accompanying consolidated financial statements reflect the
conversion of the Amended Notes and the New Note into Series B
Preferred Stock at a price of $2.34 per share, after giving effect to
the remaining unamortized discount of $302,000 and the conversion of
accrued interest on both the Amended Notes and New Note of $851,000
through February 5, 2001 into shares of Series B Preferred Stock. The
Company recorded a beneficial conversion feature of approximately
$5,556,000 in connection with the conversion of the Amended Notes into
Series B Preferred Stock. This amount was credited to additional
paid-in capital and charged against interest expense in accordance with
Emerging Issues Task Force Issue No. 98-5 ("EITF No. 98-5"). In
addition, as a result of certain changes made to the terms of the
Certificate of Designation for the Series A Preferred Stock in
connection with the second closing of the agreement with Soros, the
Original Series A Preferred Stock was converted into permanent equity
and the conversion price was reduced from $10.50 to $2.34. This
resulted in the recording of approximately $7,771,000 to additional
paid-in capital. The corresponding charge to accumulated deficit
consisted of the following: $5,000,000 was classified as debt discount
on the New Note, and charged to interest expense, $2,149,000 was
classified as interest expense and $622,000 was assigned to dividends.
F-16
Bluefly, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
--------------------------------------------------------------------------------
Soros Warrants
In March 2000, the Company obtained a commitment from affiliates of
Soros to provide, at the Company's option, up to $15 million of
financing at any time during 2000 on terms reflecting market rates for
such financings at the time such financing is provided (the "Soros
Commitment"). During 2000, Soros provided the Company with the
aggregate principal amount of $15 million in convertible debt financing
pursuant to the Soros Commitment, in the form of notes that bore
interest at a rate of 8% per annum and were due in May 2001 (the "Soros
Notes"). On February 5, 2001, pursuant to the Second Soros Investment
Agreement, the Soros Notes were converted into Series B Preferred
Stock, as described above. In connection with the Soros Commitment and
the issuance of the Soros Notes, the Company granted Soros warrants
(the "Soros Warrants") pursuant to which Soros has the right to
purchase up to 375,000 shares of Common Stock at an exercise price
equal to $2.29 per share, exercisable at any time during the five years
following issuance. The Soros Warrants have been valued at $467,000
using the Black-Scholes option pricing model and, accordingly, the
Company has recorded the issuance of the warrants as a credit to
additional paid in capital and recognized a debt discount, which was
amortized over the life of the Notes.
Unit Purchase Options and Warrants
In May 1997, the Company sold to the underwriter of the Company's
Initial Public Offering ("IPO"), for an aggregate purchase price of
$100, 150,000 Unit Purchase Options ("UPO's"). Each UPO entitles the
holder thereof to purchase one Unit. The UPO's are exercisable
initially at a price of $8.00 per Unit during the four-year period
commencing on May 15, 1998. As of December 31, 2001, there were 11,500
UPO's outstanding.
In connection with the Company's IPO, the Company issued 1,500,000
units ("Units"), with each Unit consisting of one share of Common Stock
and one redeemable Common Stock purchase warrants ("Warrant"). These
Warrants entitled the holders to purchase one share of Common Stock at
$5.00 per share during the four-year period commencing May 15, 1998;
all Warrants became exercisable on such date. The Company had the right
to redeem the Warrants at any time after they became exercisable, at a
price of $.01 per Warrant, provided that the market price of the stock
exceeded $8.25 for a specific period of time. On December 21, 1998, the
Company provided notice of its election to redeem the Warrants. During
1999, 1,412,374 Warrants were exercised, resulting in proceeds of
$7,062,000. Substantially all of the Warrants included in the Units
were exercised prior to the redemption.
Stock Option Plan
The Company's Board of Directors has adopted two stock option plans,
one in July 2000 (the "2000 Plan") and the other in May 1997 (the "1997
Plan"). The Plans were adopted for the purpose of encouraging key
employees, consultants and directors who are not employees to acquire a
proprietary interest in the growth and performance of the Company.
Options are granted in terms not to exceed ten years and become
exercisable as specified when the option is granted. Vesting terms of
the options range from immediately to a ratable vesting period of four
years. The 2000 Plan has 1,500,000 shares authorized for issuance.
During 2001, the Company amended the 1997 Plan in order to increase the
maximum number of shares that may be granted under the Plan to
5,400,000.
F-17
Bluefly, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
--------------------------------------------------------------------------------
The following table summarizes the Company's stock option activity:
Number Weighted
of Average
Shares Exercise Price
Balance at January 1, 1999 259,975 3.27
==========
Options granted 958,050 11.90
Options canceled (40,000) 12.04
Options exercised (68,875) 4.12
----------
Balance at December 31, 1999 1,109,150 10.35
==========
Options granted 3,746,362 2.98
Options canceled (104,627) 7.21
Options exercised - -
==========
Balance at December 31, 2000 4,750,885 4.61
Options granted 321,750 1.72
Options canceled (729,432) 5.26
Options exercised - -
==========
Balance at December 31, 2001 4,343,203 4.28
Eligible for exercise at December 31, 1999 169,763 7.15
==========
Eligible for exercise at December 31, 2000 644,457 7.23
==========
Eligible for exercise at December 31, 2001 2,069,120 4.78
==========
The stock options are exercisable in different periods commencing in
1998 through 2011. Additional information with respect to the
outstanding options as of December 31, 2001, is as follows:
Options Outstanding Options Exercisable
------------------------------ -------------- ------------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Options Remaining Exercise Options Exercise
Prices Outstanding Contractual Life Price Exercisable Price
$0.86 - $2.94 2,601,928 8.65 Years $ 2.71 1,158,324 $ 2.77
$3.06 - $5.22 1,067,500 8.57 Years 3.16 502,043 3.25
$8.34 - $9.66 98,250 7.64 Years 9.08 62,930 9.09
$10.69 - $12.13 330,625 7.91 Years 11.05 176,557 11.04
$12.34 - $16.60 244,900 7.29 Years 14.81 169,266 14.98
---------- ----------
$0.63 - $16.60 4,343,203 8.48 Years $ 4.28 2,069,120 $ 4.78
F-18
Bluefly, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
--------------------------------------------------------------------------------
The Company does not recognize compensation expense for stock options
granted to employees and directors at or above fair market value, as
permitted by the accounting standards. The fair value of options
granted during 2001, 2000 and 1999 was approximately $448,000, $7.8
million and $8.6 million, respectively. The Company calculated the fair
value of each option grant on the date of the grant using the
Black-Scholes option pricing model as prescribed by SFAS No. 123.
The following assumptions were used in applying the model:
Year ended December 31,
---------------------------------------------
2001 2000 1999
Risk-free interest rates 4.42 - 5.27% 5.16 -6.81% 4.80-6.55%
Expected lives (in years) 6 6 6
Dividend yield 0% 0% 0%
Expected volitility 119% 80% 62%
Had compensation expense for the Plan been determined consistent with
the provisions of SFAS No. 123, the effect on the Company's basic and
diluted net loss per share would have been as follows:
Year ended December 31,
------------------------------------------------
2001 2000 1999
Basic and diluted net loss as reported $ 25,006,000 $ 21,109,000 $ 13,194,000
Basic and diluted net loss per share, as reported $ 3.41 $ 4.45 $ 2.82
Basic and diluted net loss, pro forma $ 25,074,000 $ 22,611,000 $ 14,009,000
Basic and diluted net loss per share, pro forma $ 3.42 $ 4.59 $ 2.92
The Company has issued warrants to purchase Common Stock to a
shareholder, a lender and other third parties in exchange for services
provided. As of December 31, 2001, there are 612,500 warrants issued.
These warrants expire beginning September 2005 through October 2010.
The exercise price of these warrants range from $0.88 - $9.08.
As of December 31, 2001, the Company has reserved an aggregate of
18,162,989 shares of Common Stock for the conversion of Preferred
Stock, the exercise of Stock Options, Warrants and UPO's.
9. Note payable to Shareholder
On December 15, 2001, the Company issued a promissory note in the
amount of $182,000 to Soros, in exchange for services provided during
the course of the year. The Note bears interest at 9% per annum and has
a maturity date of December 15, 2004.
10. Financing Agreement
On March 30, 2001, the Company entered into a Financing Agreement (the
"Financing Agreement") with Rosenthal & Rosenthal, Inc. ("Rosenthal")
pursuant to which Rosenthal provides the Company with certain credit
accommodations, including loans and advances, factor-to-factor
guarantees or letters of credit in favor of suppliers or factors or
purchases of payables owed to the Company's suppliers (the "Loan
Facility"). The maximum amount available under the Loan Facility is an
amount equal to the lower of (i) the Soros Guarantee (defined below)
plus the lower of (x) $2 million or (y) the lower of (1) 20% of the
book value of the Company's inventory or (2) the full liquidation value
of the Company's inventory or (ii) $10 million. The Company is required
to have at least $1.5 million of
F-19
Bluefly, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
--------------------------------------------------------------------------------
tangible net worth and $3.5 million of working capital. As of December
31, 2001, the Company had approximately $3.8 million available under
the Loan Facility. Of the total amount available under the Loan
Facility as of December 31, 2001, approximately $2.2 million has been
committed, leaving $1.6 million available against the Loan Facility.
The Company pays interest monthly on the average daily amount
outstanding under the Loan Facility during the preceding month at a per
annum rate equal to the prime rate plus 1% (at December 31, 2001-
5.75%). For the period ended December 31, 2001, interest expense and
fees totaled approximately $26,000.
In consideration for the Loan Facility, among other things, the Company
granted to Rosenthal a first priority lien (the "Rosenthal Lien") on
substantially all of its assets, including control of all of the
Company's cash accounts upon an event of default and certain of its
cash accounts in the event that the total amount of monies loaned the
Company under the Loan Facility exceeds 90% of the undrawn amount of
the Soros Guarantee for more than 10 days. The Company issued to
Rosenthal a warrant to purchase 50,000 shares of Common Stock at an
exercise price of $2.34, exercisable for five years. The Company valued
the warrant using the Black-Scholes option pricing model and credited
additional paid in capital for $45,000. This amount is being amortized
over the life of the Loan Facility.
In connection with the Loan Facility, the Company entered into a
Reimbursement Agreement with Soros pursuant to which Soros agreed to
issue a standby letter of credit at closing in the amount of $2.5
million in favor of Rosenthal to guarantee a portion of the Company's
obligations under the Financing Agreement. In addition, during the term
of the Financing Agreement, at the Company's request, Soros will issue
another Soros Guarantee for up to an additional $1.5 million. As used
herein, the term "Soros Guarantee" means the total face amount of all
standby letters of credit which Soros is maintaining in connection with
the Loan Facility. In consideration for the Soros Guarantee, the
Company agreed to reimburse Soros for any amounts it pays to Rosenthal
pursuant to the Soros Guarantee and granted to Soros a lien (the "Soros
Lien") subordinated to the Rosenthal Lien on substantially all of the
Company's assets, including its cash balances, in order to
collateralize its reimbursement obligations. In connection with the
Reimbursement Agreement, the Company issued to Soros a warrant (the
"Soros Upfront Warrant") to purchase 100,000 shares of Common Stock at
an exercise price equal to $0.88, exercisable for ten years beginning
on September 16, 2001. The Company accounted for the warrant in
accordance with Accounting Principles Board Opinion No. 14 ("APB No.
14") and credited additional paid in capital for approximately $74,000.
This amount is being amortized over the life of the Loan Facility.
Subject to certain conditions, if the Company defaults on any of its
obligations under the Financing Agreement, Rosenthal has the right to
draw upon the Soros Guarantee to satisfy any such obligations. If and
when Rosenthal draws on the Soros Guarantee, pursuant to the terms of
the Reimbursement Agreement, the Company would have the obligation to,
among other things, reimburse Soros for any amounts drawn under such
Soros Guarantee plus interest accrued thereon. In addition, to the
extent that Rosenthal draws on the Soros Guarantee during the
continuance of a default under the Financing Agreement or at any time
that the total amount outstanding under the Loan Facility exceeds 90%
of the Soros Guarantee, the Company will be required to issue to Soros
another warrant (each a "Contingent Warrant") to purchase a number of
shares of Common Stock equal to the quotient of (a) any amounts drawn
under the Soros Guarantee and (b) 75% of the average closing price of
Common Stock on the 10 days preceding the date of issuance of such
warrant. Each Contingent Warrant will be exercisable for ten years from
the date of issuance at an exercise price equal to 75% of the average
closing price of Common Stock on the ten days preceding the latter of
(a) ten days after the date of issuance and (b) September 15, 2001.
F-20
Bluefly, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
--------------------------------------------------------------------------------
Under the Financing Agreement, Soros has the right to purchase all of
the Company's obligations to Rosenthal under the Loan Facility from
Rosenthal (the "Buyout Option") at any time during the term of the
Financing Agreement. With respect to such Buyout Option, Soros has the
right to request that Rosenthal make a draw under the Soros Guarantee
as consideration for Soros' purchase of such obligations. The initial
term of the Financing Agreement ends on March 30, 2002. The Financing
Agreement provides for automatic one year renewals unless either party
provides at least 30 day prior notice of its decision not to renew.
11. Quarterly Results of Operations (Unaudited)
Amounts in thousands, except per share data
Quarter Ended
2001 March 31 June 30 September 30 December 31
---- -------- ------- ------------ -----------
Net Revenues $ 4,646 $ 5,285 $ 5,113 $ 7,906
==================================================
Gross Profit $ 1,283 $ 1,724 $ 1,459 $ 2,530
==================================================
Net Loss $ (17,031) $(4,168) $(2,428) $(1,379)
==================================================
Loss per
common share-basic $ (3.57) $ (0.52) $ (0.33) $ (0.22)
==================================================
Loss per
common share-diluted $ (3.57) $ (0.52) $ (0.33) $ (0.22)
==================================================
Quarter Ended
2000 March 31 June 30 September 30 December 31
---- -------- ------- ------------ -----------
Net Revenues $ 3,736 $ 4,560 $ 3,455 $ 5,761
==================================================
Gross Profit $ 668 $ 843 $ 560 $ 1,423
==================================================
Net Loss $ (5,667) $(5,301) $(4,781) $(5,360)
==================================================
Loss per
common share-basic $ (1.19) $ (1.12) $ (1.01) $ (1.13)
==================================================
Loss per
common share-diluted $ (1.19) $ (1.12) $ (1.01) $ (1.13)
==================================================
Quarter Ended
1999 March 31 June 30 September 30 December 31
---- -------- ------- ------------ -----------
Net Revenues $ 336 $ 795 $ 896 $ 3,082
==================================================
Gross Profit $ 51 $ 171 $ 126 $ 207
==================================================
Net Loss $ (1,172) $(2,984) $(3,349) $(5,689)
==================================================
(Loss) Earnings per
common share-basic:
Continued Operations $ (0.27) $ (0.61) $ (0.71) $ (1.20)
==================================================
Discontinued Operations 0.01
--------------------------------------------------
$ (0.26) $ (0.61) $ (0.71) $ (1.20)
==================================================
(Loss) Earnings per
common share-diluted:
Continued Operations $ (0.27) $ (0.61) $ (0.71) $ (1.20)
==================================================
Discontinued Operations 0.01
--------------------------------------------------
$ (0.26) $ (0.61) $ (0.71) $ (1.20)
==================================================
F-21
Bluefly, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
--------------------------------------------------------------------------------
12. Subsequent Events
In March 2002, the Company entered into a Standby Commitment Agreement
with Soros (the "Soros Standby Agreement"). Under the Soros Standby
Agreement, Soros has agreed to provide the Company with up to four
million dollars of additional financing (the "Standby Commitment
Amount") at any time prior to January 1, 2003; provided, however, that
the Company may draw down on the Standby Commitment Amount only at such
time that its total cash balances are less than $1,000,000. Such
financing can be made in one or more tranches as determined by the
members of the Board of Directors who are not Soros designees, and any
and all financings made shall be on terms that are consistent with
those in the market at the time the draw is made for similar
investments by investors similar to Soros in companies similar to
Bluefly. Subject to certain limitations the Standby Commitment Amount
shall be reduced on a dollar-for-dollar basis by the gross cash
proceeds received by the Company or any of its subsidiaries from the
issuance of any equity or convertible securities after March 27, 2002.
In exchange for this commitment, but not as a substitute for additional
consideration that Soros would receive if and when any financing is
made pursuant to the Soros Standby Agreement, the Company issued to
Soros a warrant to purchase 100,000 shares of Common Stock at an
exercise price of $1.68 per share (the 20 day trailing average of the
closing sale price of the Company's Common Stock on the date of
issuance), exercisable at any time until March 27, 2007. The Company
accounted for the warrant by crediting additional paid in capital for
approximately $157,000.
In March 2002, the Company amended its Financing Agreement with
Rosenthal. Under the terms of this amendment (the "Rosenthal
Amendment"), the Company extended the Rosenthal Financing Agreement
until March 30, 2003, reduced the annual fee it paid Rosenthal for the
Loan Facility, allowed for a decrease from $2.5 million to $1.5 million
in the face amount of the Soros Guarantee to help collateralize the
Loan Facility, and limited the maximum amount available under the Loan
Facility to an amount equal to the Soros Guarantee plus the lowest of
(x) $1 million, (y) 20% of the book value of its inventory, and (z) the
full liquidation value of its inventory. In addition, pursuant to the
Rosenthal Amendment, the Company adjusted the threshold amount that
entitles Rosenthal to take control of certain of its cash accounts for
a period of time to 90% of the maximum amount available under the Loan
Facility instead of 90% of the Soros Guarantee as had been provided
previously. As of March 22, 2002, the maximum amount available under
the Loan Facility was approximately $2.5 million, of which $2.2 million
was outstanding as of such date.
As partial consideration for the Rosenthal Amendment, the Company
extended the termination date of the warrant it issued to Rosenthal on
March 30, 2001 to purchase 50,000 shares of its Common Stock at an
exercise price of $2.34 per share from March 30, 2006 to March 30,
2007. The Company revalued the warrant as of the new measurement date,
using the Black-Scholes option pricing model and credited additional
paid in capital for $80,000. This amount is being amortized over the
life of the Loan Facility.
In March 2002, in connection with the Rosenthal Amendment, the Company
amended the Reimbursement Agreement pursuant to which Soros agreed to
guarantee a portion of the Loan Facility to reduce the total amount of
standby letters of credit that Soros is obligated to issue to
collateralize the Loan Facility to $1.5 million from $4 million. The
Company is obligated to reimburse Soros for any amounts Soros pays to
Rosenthal pursuant to the Reimbursement Agreement. The Company's
obligation to Rosenthal is collateralized by a lien on substantially
all of its assets and the Company has granted Soros a subordinated lien
on substantially all of its assets, including its cash balances, in
order to collateralize its reimbursement obligations. In exchange for
Soros' agreement to maintain the Soros Guarantee until August 15, 2003,
the Company issued to Soros a warrant to purchase 60,000 shares of its
Common Stock at an exercise price of $1.66 per share (the 20 day
trailing average of the closing sale price of the Company's Common
Stock on the date of issuance), exercisable at any time until March 30,
2007. The Company will value the warrant using the Black-Scholes option
pricing model and credit additional paid in capital.
F-22
Item 9. Changes in and disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16 (a) of the Exchange Act
The executive officers and directors of the Company, their ages and their
positions are as follows:
Name Age Position
---- --- ---------
E. Kenneth Seiff 37 Chairman of the Board of Directors,
Chief Executive Officer,
President and Treasurer
Patrick C. Barry 39 Chief Financial Officer and Chief
Operating Officer
Jonathan B. Morris 34 Executive Vice President and Secretary
Robert G. Stevens 48 Executive Vice President and Director
Josephine Esquivel 47 Director
Mark H. Goldstein 40 Director*
Martin Miller 70 Director
Neal Moszkowski 36 Director
David Wassong 31 Director
Lorne Weil 55 Director
* Resigned in February 2002 to focus energies on other activities.
E. Kenneth Seiff, the founder of the Company, has served as the Company's
Chairman of the Board, Chief Executive Officer and Treasurer since its inception
in April 1991. He became President of the Company in October 1996.
Patrick C. Barry has served as an Executive Vice President of the Company from
July 1998 to September 2000 and as Chief Financial Officer of the Company since
August 1998. In September 2000, Mr. Barry assumed the role of the Chief
Operating Officer. From June 1996 to July 1998, Mr. Barry served as the Chief
Financial Officer and the Vice President of Operations of Audible, Inc., an
Internet commerce and content provider. From March 1995 to June 1996, Mr. Barry
was the Chief Financial Officer of Warner Music Enterprises, a direct marketing
subsidiary of Time Warner, Inc. From July 1993 to March 1995, Mr. Barry served
as Controller of Book-of-the-Month Club, a direct marketing subsidiary of Time
Warner, Inc.
Jonathan B. Morris has served as an Executive Vice President and Secretary of
the Company since June 1998. From November 1995 to June 1998, Mr. Morris was an
attorney with Brown, Raysmann, Millstein, Felder & Steiner LLP, a New York based
law firm which specializes in Internet and technology law. From September 1993
to November 1995, Mr. Morris was an attorney with Mudge, Rose, Guthrie,
Alexander & Ferdon.
Robert G. Stevens has served as a director of the Company since December 1996
and as an Executive Vice President of the Company since December 1999. From
December 1994 to December 1999, Mr. Stevens was a Vice President of Mercer
Management Consulting, Inc. ("Mercer"), a management consulting firm. From
November 1992 to December 1994, Mr. Stevens was a Principal at Mercer.
Josephine Esquivel was appointed as a director of the Company in June of 2001.
Ms. Esquivel was a senior apparel, textiles,
28
footwear and luxury goods equity analyst with Morgan Stanley Dean Witter from
February 1995 until April 2001. From June 1987 to February 1995, Ms. Esquivel
was a Senior Vice President at Lehman Brothers, and from August 1983 to June
1987, she was a Business Manager for the textile Company J.P. Stevens & Co.
Mark H. Goldstein served as a director of the Company from December 1999 to
February 2002. He is currently an Entrepreneur in Residence at New Enterprise
Associates (NEA). From August 1999 until January 2000, Mr. Goldstein served as
an Internet Executive at Softbank Holdings ("Softbank"), a venture capital fund
that specializes in investments in Internet companies, and from December 1999
until June 2001, he served as the Chief Executive Officer of Bluelight.com, a
joint venture of K-Mart and Softbank. From September 1997 to July 1999, Mr.
Goldstein served as the Chief Executive Officer of Impulse Buy Network, a
developer of direct marketing applications for the Internet that was acquired by
Inktomi Corporation in April 1999. From September 1995 to March 1997, Mr.
Goldstein served as Executive Vice President of Firefly Networks, a software
development subsidiary of Microsoft Corporation. In February 2002, Mr. Goldstein
resigned from his position as a Director of the Company to focus his energies on
other activities.
Martin Miller has served as a director of the Company since July 1991. Since
October 1997, Mr. Miller has been a partner in the Belvedere Fund, L.P., a fund
of hedge funds. From September 1986 to October 1997, Mr. Miller was President
and a director of Baxter International, Inc., a New York based apparel
wholesaler. From January 1990 to April 1996, Mr. Miller was Chairman of Ocean
Apparel, Inc., a Florida based sportswear firm.
Neal Moszkowski has served as a director of the Company since August 1999 and is
the Series A Preferred Stock designee. Mr. Moszkowski has been a partner of
Soros Private Equity Partners LLC ("Soros Private Equity") since August 1998.
Prior to joining Soros Private Equity, Mr. Moszkowski was an Executive Director
of Goldman Sachs International and a Vice President of Goldman Sachs & Co., an
investment banking firm, in its Principal Investment Area. He joined Goldman
Sachs & Co. in August 1993. Mr. Moszkowski is also a Director of Integra Life
Sciences Holdings, Inc., a medical products company, Medicalogic/Medscape, Inc.,
a medical data, information and technology company and Jet Blue Airways
Corporation.
David Wassong was appointed as a director of the Company in February 2001 and is
the Series B Preferred Stock designee. Mr. Wassong has been a partner of Soros
Private Equity since June 1998. Prior to joining Soros Private Equity, from July
1997 to June 1998, Mr. Wassong was Vice President, and previously Associate, at
Lauder Gaspar Ventures, LLC, a media, entertainment and
telecommunications-focused venture capital fund. From September 1995 to June
1997, Mr. Wassong attended the Wharton School, The University of Pennsylvania,
and received his Masters in Business Management. Mr. Wassong is also a director
of iExplore, inc., NUSIGN Industries, Meteor Mobile Communications, IntraLinks,
Inc., IRSA Telecomunicaciones, N.V. and Europlex Cinemas.
Lorne Weil was appointed as a director of the Company, effective as of February
1, 2001. Mr Weil has served as Chief Executive Officer of Autotote Corporation,
a supplier of computerized gaming systems and related equipment, since April
1992 and as President of that Company since August 1997. Mr. Weil was President
of Lorne Weil, Inc., a firm providing strategic planning and corporate
development services to high technology industries, from 1979 to November 1992.
Mr. Weil is currently a director of Autotote Corporation, Fruit of the Loom,
Inc., General Growth Properties, Inc. and XESystems Inc., a subsidiary of Xerox
Corporation.
The Board of Directors has established an Audit Committee ("Audit Committee")
comprised of Martin Miller, Lorne Weil and Josephine Esquivel. The Audit
Committee is responsible for recommending to the Board of Directors the
appointment of the Company's outside auditors, examining the results of audits,
reviewing internal accounting controls and reviewing related party transactions.
The Board of Directors has also established an Option Plan/Compensation
Committee ("Option Plan/Compensation Committee") consisting of Lorne Weil, Neal
Moszkowski and Martin Miller. The Option Plan/Compensation Committee administers
the Company's 1997 Stock Option Plan (the "1997 Plan") and the Company's 2000
Stock Option Plan (the "2000 Plan" and together with the 1997 Plan the "Plans"),
establishes the compensation levels for executive officers and key personnel and
oversees the Company's bonus plans.
In October 2001, the Board of Directors also established a Technology Committee
(the "Technology Committee") to approve any
29
plan, agreement, instrument or document it deems necessary, appropriate or
desirable to reduce the Company's technology expenses while preserving the
reliability and performance of the Company's technology infrastructure. The
Technology Committee consists of Neal Moszkowski and David Wassong.
The Company's executive officers are appointed annually by, and serve at the
discretion of, the Board of Directors. Each director holds office as a director
of the Company until the next annual meeting of the Company or until his
successor has been duly elected and qualified. There are no family relationships
among any of the executive officers or directors of the Company.
The Company maintains a "key person" life insurance policy in the amount of $1.2
million on the life of Mr. Seiff.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), requires the Corporation's directors and executive officers and persons
who beneficially own more than ten percent of the Common Stock (collectively,
the "Reporting Persons") to file with the Commission initial reports of
beneficial ownership and reports of changes in beneficial ownership of the
Common Stock. Reporting Persons are required to furnish the Corporation with
copies of all such reports. To the Corporation's knowledge, based solely on a
review of copies of such reports furnished to the Corporation, the Corporation
believes that during the 2001 fiscal year all Reporting Persons complied with
all applicable Section 16(a) reporting requirements.
Item 11. Executive Compensation
Compensation of Directors
The Company's independent, outside non-employee directors are paid a cash
stipend of $500 for each board or committee meeting attended in person and are
reimbursed for expenses incurred on behalf of the Company. Each non-employee
director receives an option to purchase 3,750 shares of Common Stock under the
1997 Plan at the time that such director is appointed and an annual grant of an
option to purchase 3,750 shares of Common Stock under the 1997 Plan.
As compensation for his service as Chairman of the Option Plan/Compensation
Committee, Mr. Weil was granted, upon the commencement of his service as a
director, an option to purchase 50,000 shares of Common Stock Under the 1997
Plan.
Compensation of Executive Officers
The following table sets forth information concerning the compensation paid by
the Company during the fiscal years ended December 31, 2001, 2000 and 1999 to
the Company's Chief Executive Officer and the three other executive officers of
the Company who received a total compensation from the Company in excess of
$100,000 in the year 2001 (the "Named Executive Officers").
Long Term
Annual Compensation Compensation
------------------------------------------- ------------
Securities
Other Annual Underlying
Name and Principal Position Year Salary Bonus Compensation Options
--------------------------- ---- ------ ----- ------------ -------
E. Kenneth Seiff 2001 $267,308 $ 50,000 $ 1,000 --
Chief Executive Officer, President 2000 $250,367 $ 25,000 $ 1,000 980,000(1)(3)
and Treasurer 1999 $206,519 $ 25,491 $ 1,000 100,000(1)(4)
Patrick C. Barry 2001 $249,039(5) $ -- $ 590 --
Chief Financial Officer and Chief 2000 $200,433(5) $ -- $ 590 489,912(2)(3)
Operating Officer 1999 $150,958 $ 25,491 $ 590 99,900(2)(4)
Jonathan B. Morris 2001 $249,039(5) $ -- $ 330 --
30
Executive Vice President 2000 $200,433(5) $ -- $ 330 490,000(2)(3)
1999 $150,958 $ 25,491 $ 330 100,000(2)(4)
Robert G. Stevens 2001 $249,039(5) $ -- $ -- --
Executive Vice President 2000 $168,000 $ -- $ -- 490,000(2)(3)
1999 $ -- $ -- $ -- 105,750(2)
(1) Options granted at an exercise price equal to 110% of the fair market
value on the date of grant.
(2) Options granted at an exercise price equal to 100% of the fair market
value on the date of grant.
(3) Represents options granted during fiscal year 2000 for services performed
in fiscal 2000.
(4) Represents options granted in January 1999 for the 1998 fiscal year and
options granted in December 1999 for the 1999 fiscal year.
(5) Includes amounts paid pursuant to retroactive salary adjustments.
Employment Agreements
The Company has entered into employment agreements with each of the Named
Executive Officers. Each such employment agreement provides for a base salary,
subject to increase by the Board of Directors, and an annual bonus to be
determined by the Board of Directors. Mr. Seiff's employment agreement provides
that, at the discretion of the Board of Directors, all or part of such bonus may
be paid through the issuance to Mr. Seiff of capital stock of the Company,
provided that at the request of Mr. Seiff, a portion of such bonus sufficient to
pay any income taxes arising from such bonus will be paid in cash rather than in
capital stock of the Company. Mr. Seiff's base salary under his employment
agreement is $275,000, and the base salaries of Messrs. Barry, Morris, and
Stevens under their respective employment agreements are currently $225,000. Mr.
Seiff's employment agreement expires in January 2003, Mr. Barry's employment
agreement expires in July 2002, Mr. Morris' employment agreement expires in July
2002, and Mr. Stevens' employment agreement expires in January 2003. Each such
employment agreement obligates the Company to make certain severance payments in
connection with a termination of such Named Executive Officer's employment,
other than for cause, not exceeding five months' salary, except as set forth
below. In the case of Mr. Seiff, the Company would be obligated to pay Mr. Seiff
an amount equal to the total amount due to him during the remaining term of the
contract. Mr. Seiff's employment agreement also provides for the immediate
vesting of any stock options held by him in the event that certain events
classified as a "Change In Control" occur.
Options Grants in Last Fiscal Year
During the fiscal year ended December 31, 2001 there were no grants of stock
options under the Plans to the Named Executives Officers.
The Company does not currently grant stock appreciation rights.
Option Holdings
The following table sets forth information with respect to the Named Executive
Officers concerning the number and value of unexercised options held at
December 31, 2001. None of the Named Executive Officers exercised any
outstanding options during the fiscal year ended December 31, 2001.
Securities Underlying Unexercised Value of Unexercised In-the-Money
Options at December 31, 2001 (#) Options at December 31, 2001 ($)
------------------------------ -------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
E. Kenneth Seiff 510,924 594,076 $ 0 $ 0
Patrick C. Barry 303,424 341,488 $ 0 $ 0
Jonathan B. Morris 293,966 351,034 $ 0 $ 0
Robert G. Stevens 273,050 330,200 $ 0 $ 0
31
Item 12. Security Ownership of Certain Beneficial Owners and Management
Common Stock
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock of the Company as of March 15, 2002,
for (i) each person who is known by the Company to own beneficially more than 5%
of the Common Stock, (ii) each of the Company's directors, (iii) the Named
Executive Officers, and (iv) all directors and executive officers as a group.
Number of Shares
Name (1) Beneficially Owned Percentage (2)
-------- ------------------ --------------
E. Kenneth Seiff 1,155,354(3)(4) 11.72%
Josephine Esquivel - *
Mark H. Goldstein 11,250(5) *
Martin Miller 23,750(6)(7) *
Neal Moszkowski (8) 11,250(9) *
David Wassong (8) 3,750(10) *
Lorne Weil 50,000(11) *
Robert G. Stevens 379,790(12) 3.98%
Patrick C. Barry 413,526(13) 4.30%
Jonathan B. Morris 448,608(14) 4.66%
Quantum Industrial Partners LDC 17,012,793(15)(18) 77.05%
George Soros 17,569,542(16)(18) 78.08%
All directors and executive officers as a group (10 persons) 2,497,278(17) 22.43%
----------------
*Less than 1%.
(1) Except as otherwise indicated, the address of each of the individuals
listed is c/o Bluefly, Inc., 42 West 39th Street, New York, New York
10018.
(2) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect
to securities. Shares of Common Stock issuable upon the exercise of
options or warrants currently exercisable or exercisable within 60 days
are deemed outstanding for computing the percentage ownership of the
person holding such options or warrants but are not deemed outstanding for
computing the percentage ownership of any other person.
(3) Includes 3,000 shares of Common Stock held by Nicole Seiff, the wife of E.
Kenneth Seiff, as to which Mr. Seiff disclaims beneficial ownership.
(4) Includes 650,197 shares of Common Stock issuable upon exercise of options
granted under the Plan.
(5) Includes 11,250 shares of Common Stock issuable upon exercise of options
granted under the Plan. In February 2002, Mr. Goldstein resigned from his
position as a Director of the Company to focus his energies on other
activities.
(6) Includes 20,750 shares of Common Stock issuable upon exercise of options
granted under the Plan.
(7) Includes 3,000 shares of Common Stock held by Madge Miller, the wife of
Martin Miller, as to which Mr. Miller disclaims beneficial ownership.
(8) Messrs. Moszkowski and Wassong's address is c/o Soros Private Equity
Partners LLC, 888 Seventh Avenue, New York, New York 10106. Messrs.
Moszkowski and Wassong are the designees of the holders of the Series A
and B Preferred Stock, respectively. Messrs. Moszkowski and Wassong
disclaim beneficial ownership of the shares of Common Stock beneficially
owned by George Soros and QIP and none of such shares are included in the
table above as being beneficially owned by them.
(9) Includes 11,250 shares of Common Stock issuable upon exercise of options
granted under the Plan.
(10) Includes 3,750 shares of Common Stock issuable upon exercise of options
granted under the Plan.
(11) Includes 50,000 shares of Common Stock issuable upon exercise of options
granted under the Plan.
32
(12) Includes 346,851 shares of Common Stock issuable upon exercise of options
granted under the Plan.
(13) Includes 408,526 shares of Common Stock issuable upon exercise of options
granted under the Plan.
(14) Includes 425,745 shares of Common Stock issuable upon exercise of options
granted under the Plan.
(15) Represents: 3,806,923 shares of Common Stock issuable upon conversion of
445,410 shares Series A Preferred Stock; 8,607,843 shares of Common Stock
issuable upon conversions of 8,607,843 shares of Series B Preferred Stock;
4,138,084 shares of Common Stock; 459,943 shares of Common Stock issuable
upon exercise of options and warrants; (collectively, the "QIP Shares")
held in the name of Quantum Industrial Partners LDC ("QIP"). Excludes
warrants issued pursuant to the Soros Standby Agreement, and the amended
Reimbursement Agreement in March 2002. QIP is a Cayman Islands limited
duration company with its principal address at Kaya Flamboyan 9,
Willemstad, Curacao, Netherlands Antilles. QIH Management Investor L.P., a
Delaware limited partnership ("QIHMI"), is a minority shareholder of QIP
and is vested with investment discretion with respect to portfolio assets
held for the account of QIP. The sole general partner of QIHMI is QIH
Management, Inc., a Delaware corporation ("QIH Management"). George Soros,
"Mr. Soros" the sole shareholder of QIH Management, has entered into an
agreement with Soros Fund Management LLC, a Delaware limited liability
company ("SFM LLC"), pursuant to which Mr. Soros has agreed to use his
best efforts to cause QIH Management to act at the direction of SFM LLC.
Mr. Soros, as Chairman of SFM LLC, may be deemed to have sole voting power
and sole investment power with respect to the QIP Shares. Accordingly,
each of QIHMI, QIH Management, SFM LLC and Mr. Soros may be deemed to be
the beneficial owners of the QIP Shares. Each has their principal office
at 888 Seventh Avenue, 33rd Floor, New York, New York 10106. The foregoing
information was derived, in part, from certain publicly available reports,
statements and schedules filed with the Commission.
(16) Represents 281,571 shares of Common Stock issuable on conversion of
281,571 shares of Series B Preferred Stock; 124,700 shares of Common Stock
issuable on conversion of 14,590 shares of Series A Preferred Stock;
135,420 shares of Common Stock; 15,057 shares of Common Stock issuable
upon exercise of warrants; (the "SFMDI Shares") held in the name of SFM
Domestic Investments LLC, a Delaware limited liability company ("SFMDI"),
and the QIP Shares referenced in Note 15 above. Excludes warrants issued
pursuant to the Soros Standby Agreement, and the amended Reimbursement
Agreement in March 2002. As sole managing member of SFMDI, Mr. Soros may
also be deemed the beneficial owner of the SFMDI Shares. The principal
address of SFMDI is at 888 Seventh Avenue, 33rd Floor, New York, New York
10106. The foregoing information was derived, in part, from certain
publicly available reports, statements and schedules filed with the
Commission.
(17) Includes 1,928,319 shares of Common Stock issuable upon exercise of
options granted under the Plan.
(18) See, "Risk Factors - Soros Owns a Majority of Our Stock" and "Change of
Control Covenant and Liquidation Preference of Series A Preferred Stock
And Series B Preferred Stock."
Series A Preferred Stock
The following table sets forth certain information with respect to the
beneficial ownership of the Series A Preferred Stock of the Company as of March
15, 2002, for (i) each person who is known by the Company to own beneficially
more than 5% of the Series A Preferred Stock of the Company, (ii) each of the
Company's directors, (iii) the Named Executive Officers, and (iv) all directors
and executive officers as a group.
Number of Shares
Name (1) Beneficially Owned Percentage (2)
-------- ------------------ --------------
E. Kenneth Seiff - -
Josephine Esquivel - -
Mark H. Goldstein - -
Martin Miller - -
Neal Moszkowski (3) - -
David Wassong (3) - -
Lorne Weil - -
Robert G. Stevens - -
33
Number of Shares
Name (1) Beneficially Owned Percentage (2)
-------- ------------------ --------------
Patrick C. Barry - -
Jonathan B. Morris - -
Quantum Industrial Partners LDC 445,410(4)(6) 89.1%
George Soros 460,000(5)(6) 92.0%
All directors and executive officers as a group (9 persons) - -
----------------
*Less than 1%.
(1) Except as otherwise indicated, the address of each of the individuals
listed is c/o Bluefly, Inc., 42 West 39th Street, New York, New York
10018.
(2) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect
to securities. Shares of Common Stock issuable upon the exercise of
options or warrants currently exercisable or exercisable within 60 days
are deemed outstanding for computing the percentage ownership of the
person holding such options or warrants but are not deemed outstanding for
computing the percentage ownership of any other person.
(3) Mr. Moszkowski's address is c/o Soros Private Equity Partners LLC, 888
Seventh Avenue, 33rd Floor, New York, New York 10106. Messrs. Moszkowski
and Wassong are the designees of the holders of the Series A and B
Preferred Stock. Messrs. Moszkowski and Wassong disclaim beneficial
ownership of the Series A Preferred Stock beneficially owned by George
Soros and QIP and none of such shares are included in the table above as
being beneficially owned by them.
(4) Represents the QIP Shares held in the name of QIP. QIP is a Cayman Islands
limited duration company with its principal address at Kaya Flamboyan 9,
Willemstad, Curcao, Netherlands Antilles. QIHMI is a minority shareholder
of QIP and is vested with investment discretion with respect to portfolio
assets held for the account of QIP. The sole general partner of QIHMI is
QIH Management. Mr. Soros, the sole shareholder of QIH Management, has
entered into an agreement with SFM LLC, pursuant to which Mr. Soros has
agreed to use his best efforts to cause QIH Management to act at the
direction of SFM LLC. Mr. Soros, as Chairman of SFM LLC, may be deemed to
have sole voting power and sole investment power with respect to the QIP
Shares. Accordingly, each of QIHMI, QIH Management, SFM LLC and Mr. Soros
may be deemed to be beneficial owners of the QIP Shares. Each has their
principal office at 888 Seventh Avenue, 33rd Floor, New York, New York
10106. The foregoing information was derived, in part, from certain
publicly available reports, statements and schedules filed with the
Commission.
(5) Represents both (i) the SFMDI Shares held in the name of SFMDI and (ii)
the QIP Shares referenced in Note 4 above. As sole managing member of
SFMDI, Mr. Soros also may be deemed the beneficial owner of the SFMDI
Shares. The principal office of SFMDI is at 888 Seventh Avenue, 33rd
Floor, New York, New York 10106.
(6) See "Risk Factors - "Soros Owns a Majority of Our Stock" and "Change of
Control Covenant and Liquidation Preference of Series A Preferred Stock
And Series B Preferred Stock."
Series B Preferred Stock
The following table sets forth certain information with respect to the
beneficial ownership of the Series B Preferred Stock of the Company as of March
15, 2002, for (i) each person who is known by the Company to own beneficially
more than 5% of the Series A Preferred Stock of the Company, (ii) each of the
Company's directors, (iii) the Named Executive Officers, and (iv) all directors
and executive officers as a group.
Number of Shares
Name (1) Beneficially Owned Percentage (2)
-------- ------------------ --------------
E. Kenneth Seiff - -
Josephine Esquivel - -
Mark H. Goldstein - -
34
Number of Shares
Name (1) Beneficially Owned Percentage (2)
-------- ------------------ --------------
Martin Miller - -
Neal Moszkowski (3) - -
David Wassong (3) - -
Lorne Weil - -
Robert G. Stevens - -
Patrick C. Barry - -
Jonathan B. Morris - -
Quantum Industrial Partners LDC 8,607,843(4)(6) 96.60%
George Soros 8,889,414(5)(6) 99.76%
All directors and executive officers as a group (9 persons) - -
----------------
*Less than 1%.
(1) Except as otherwise indicated, the address of each of the individuals
listed is c/o Bluefly, Inc., 42 West 39th Street, New York, New York
10018.
(2) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect
to securities. Shares of Common Stock issuable upon the exercise of
options or warrants currently exercisable or exercisable within 60 days
are deemed outstanding for computing the percentage ownership of the
person holding such options or warrants but are not deemed outstanding for
computing the percentage ownership of any other person.
(3) Mr. Moszkowski's address is c/o Soros Private Equity Partners LLC, 888
Seventh Avenue, 33rd Floor, New York, New York 10106. Messrs. Moszkowski
and Wassong are the designees of the holders of the Series A and B
Preferred Stock. Messrs. Moszkowski and Wassong disclaim beneficial
ownership of the shares of Series B Preferred Stock beneficially owned by
George Soros and QIP and none of such shares are included in the table
above as being beneficially owned by them.
(4) Represents the QIP Shares held in the name of QIP. QIP is a Cayman Islands
limited duration company with its principal address at Kaya Flamboyan 9,
Willemstad, Curcao, Netherlands Antilles. The sole general partner of QIP
is QIHMI, which is vested with investment discretion with respect to
portfolio assets held for the account of QIP. The sole general partner of
QIHMI is QIH Management. Mr. Soros, the sole shareholder of QIH
Management, has entered into an agreement with SFM LLC, pursuant to which
Mr. Soros has agreed to use his best efforts to cause QIH Management to
act at the direction of SFM LLC. Mr. Soros, as Chairman of SFM LLC, may be
deemed to have sole voting power and sole investment power with respect to
the QIP Shares. Accordingly, each of QIHMI, QIH Management, SFM LLC and
Mr. Soros may be deemed to be beneficial owners of the QIP Shares. Each
has their principal office at 888 Seventh Avenue, 33rd Floor, New York,
New York 10106. The foregoing information was derived, in part, from
certain publicly available reports, statements and schedules filed with
the Commission.
(5) Represents both (i) the SFMDI Shares held in the name of SFMDI and (ii)
the QIP Shares referenced in Note 4 above. As managing member of SFMDI,
Mr. Soros also may be deemed the beneficial owner of the SFMDI Shares. The
principal office of SFMDI is at 888 Seventh Avenue, 33rd Floor, New York,
New York 10106.
(6) See "Risk Factors - "Soros Owns a Majority of Our Stock" and "Change of
Control Covenant and Liquidation Preference of Series A Preferred Stock
And Series B Preferred Stock."
Item 13. Certain Relationships and Related Transactions
In March 2000, we obtained a commitment from Soros to provide, at our option, up
to $15 million of financing at any time during the year 2000 on terms reflecting
market rates for such financings at the time such financing was provided (the
"Soros Commitment"). As of December 31, 2000, Soros had provided us with the
aggregate principal amount of $15 million in convertible debt financing pursuant
to the Soros Commitment, in the form of notes that bore interest at the rate of
8% per
35
annum and were due in May 2001 (the "Soros Commitment Notes"). In connection
with the Soros Commitment and the Soros Commitment Notes, we granted Soros
warrants to purchase up to 375,000 shares of Common Stock at an exercise price
of $2.29 per share, exercisable at any time during the five years following
issuance (the "Soros Commitment Warrants"). The Soros Commitment Warrants have
been valued at $467,000, using the Black-Scholes option pricing model and,
accordingly, we recorded a credit to additional paid in capital and a debt
discount, that was amortized over the life of the debt.
In November 2000, we entered into additional agreements with Soros (the
"Additional Soros Financing"), pursuant to which Soros agreed to invest up to an
additional $15 million in us, subject to certain conditions. Under the terms of
the Additional Financing, (a) in November 2000, Soros invested an additional $5
million in the form of promissory notes (the "Additional Soros Notes"), (b) in
February 2001, following the receipt of shareholder approval of certain aspects
of the transaction, the Soros Commitment Notes and the Additional Soros Notes
converted into Series B Preferred Stock at the rate of $2.34 per share and the
conversion price of the Series A Preferred Stock was reduced to $2.34 per share,
(c) we offered to our public shareholders the right to purchase up to an
aggregate of $20 million of Common Stock at a price of $2.34 per share (the
"Rights Offering") and (d) Soros agreed to purchase a total dollar amount of
shares of Common Stock equal to the difference between $20 million and the
aggregate total dollar amount of shares of Common Stock purchased by public
shareholders in the Rights Offering, subject to a maximum $10 million commitment
on the part of Soros (the "Standby Commitment"). The Rights Offering expired in
March 2001. Public shareholders subscribed for 6,921 shares of Common Stock in
the Rights Offering for aggregate proceeds of $16,000, and, in accordance with
the Standby Commitment, Soros purchased an aggregate of 4,273,504 shares of
Common Stock for an aggregate of $10 million. See, "Risk Factors - Certain
Events Could Result In Significant Dilution Of Your Ownership Of Our Common
Stock" and "Soros Owns A Majority Of Our Stock."
In connection with the Loan Facility, on March 30, 2001, we entered into a
Reimbursement Agreement with Soros pursuant to which Soros agreed to issue a
standby letter of credit at closing in the amount of $2.5 million in favor of
Rosenthal to guarantee a portion of the Company's obligations under the
Rosenthal Financing Agreement. We agreed to reimburse Soros for any amounts it
pays to Rosenthal pursuant to such guarantee and we granted Soros a subordinated
lien on substantially all of our assets, including our cash balances, in order
to secure our reimbursement obligations. In addition, during the term of the
Rosenthal Financing Agreement, at our request, Soros would issue another standby
letter of credit for up to an additional $1.5 million. In consideration for the
Soros Guarantee, we issued to Soros a warrant to purchase 100,000 shares of our
Common Stock at an exercise price equal to $0.88, exercisable at any time prior
to September 15, 2011.
On March 22, 2002, we amended the Reimbursement Agreement with Soros by reducing
the total amount of standby letters of credit that Soros is obligated to issue
to secure the Loan Facility to $1.5 million from $4 million. In exchange for
Soros' agreement to maintain the Soros Guarantee until August 15, 2003, on March
22, 2002, we issued to Soros a warrant to purchase 60,000 shares of our Common
Stock at an exercise price of $1.66 per share at any time until March 30, 2007.
In connection with the issuance of this warrant, Soros agreed that the issuance
of this warrant shall not trigger the anti-dilution provision of Section 5.8.6
of our Certificate of Incorporation. See, "Recent Developments."
Subject to certain conditions, if we default on any of our obligations under the
Rosenthal Financing Agreement, Rosenthal has the right to draw upon the Soros
Guarantee to satisfy any such obligations. If and when Rosenthal draws on the
Soros Guarantee, pursuant to the terms of the Reimbursement Agreement, we would
have the obligation to, among other things, reimburse Soros for any amounts
drawn under such Soros Guarantee plus interest accrued thereon. In addition, to
the extent that Rosenthal draws on the Soros Guarantee during the continuance of
a default under the Rosenthal Financing Agreement or at any time that the total
amount outstanding under the Loan Facility exceeds 90% of the maximum amount
available under the Loan Facility, we will be required to issue to Soros a
Contingent Warrant to purchase a number of shares of Common Stock equal to the
quotient of (a) any amounts drawn under the Soros Guarantee and (b) 75% of the
average of the closing price of our Common Stock on the 10 days preceding the
date of issuance of such warrant. Each Contingent Warrant will be exercisable
for ten years from the date of issuance at an exercise price equal to 75% of the
average closing price of our Common Stock on the 10 days preceding 10 days after
the date of issuance. See, "Risk Factors - We Have Granted A Lien On
Substantially All Of Our Assets," and "Certain Events Could Result In
Significant Dilution Of Your Ownership Of Our Common Stock" and "Soros Owns A
Majority Of Our Stock."
In December 2001, Soros loaned us an aggregate of $182,000 in order to pay
certain legal expenses of its counsel that we were required to pay pursuant to
our various investment agreements with Soros. The loan, which is evidenced by
promissory notes,
36
bears interest at the rate of 9% per year and is payable in December 2004.
On March 27, 2002, we entered into the Soros Standby Commitment Agreement with
Soros. Under the Soros Standby Agreement, Soros has agreed to provide us with up
to four million dollars ($4,000,000) of additional financing on a standby basis
at any time prior to January 1, 2003; provided, however, that we may draw down
on the Standby Commitment Amount only at such time that our total cash balances
are less than $1,000,000. Such financing can be made in one or more tranches as
determined by the members of our Board of Directors who are not Soros designees,
and any and all financings made shall be on terms that are consistent with those
in the market at the time the draw is made for similar investments by investors
similar to Soros in companies similar to us. Subject to certain limitations the
Standby Commitment Amount shall be reduced on a dollar-for-dollar basis by the
gross cash proceeds received by the Company or any of its subsidiaries from the
issuance any equity or convertible securities after March 27, 2002. In exchange
for this commitment, but not as a substitute for additional consideration that
Soros would receive if and when any financing is made pursuant to the Soros
Standby Agreement, we issued to Soros a warrant to purchase 100,000 shares of
our Common Stock at an exercise price of $1.68 per share at any time until March
27, 2002. In connection with the issuance of this warrant, Soros agreed that the
issuance of this warrant shall not trigger the anti-dilution provision of
Section 5.8.6 of our Certificate of Incorporation. See, "Risk Factors - Certain
Events Could Result in Significant Dilution of Your Ownership of our Common
Stock."
We believe that each of the transactions described above was on terms fair to us
and our stockholders, and at least as favorable to us as those available from
unaffiliated third parties.
Item 14. Exhibits and Reports on Form 8-K
The following is a list of exhibits filed as part of this Annual Report on Form
10-K:
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1(h) Certificate of Incorporation of the Company.
3.2(h) By-Laws of the Company.
10.1(d) Employment Agreement by and between the Company and E.
Kenneth Seiff, dated December 29, 1999.
10.2(d) Amended and Restated 1997 Stock Option Plan.
10.3(a) Lease Agreement by and between the Company and John R.
Perlman, et al., dated as of May 5, 1997.
10.4(b) Employment Agreement, dated as of July 13, 1998, by and
between the Company and Patrick Barry.
10.5(b) Employment Agreement, dated as of June 15, 1998, by and
between the Company and Jonathan Morris.
10.6(d) Employment Agreement, dated as of November 3, 1999, by and
between the Company and Robert G. Stevens.
10.7(c) Investment Agreement among the Company, Quantum Industrial
Partners LDC, SFM Domestic Investments LLC and Pilot Capital
Corp., dated July 27, 1999.
10.8(c) Lease by and between the Company and Adams & Co. Real Estate,
Inc., dated March 22, 1999.
10.9(g) Trademark Purchase Agreement, dated as of September 14, 1998,
by and between the Company and Klear Knit Sales Inc.
10.10(d) Note and Warrant Purchase Agreement, dated as of March 28,
2000, by and among the Company, Quantum Industrial Partners
LDC and SFM Domestic Investments LLC.
10.11(e) Lease by and between the Company and Adams & Co. Real Estate,
Inc., dated May 4, 2000.
10.12(e) Note and Warrant Purchase Agreement, dated as of May 16, 2000,
by and among the Company, Quantum Industrial Partners LDC and
SFM Domestic Investments LLC.
10.13(e) Note and Warrant Purchase Agreement, dated as of June 28,
2000, by and among the Company, Quantum Industrial Partners
LDC and SFM Domestic Investments LLC.
37
10.14(f) Bluefly, Inc. 2000 Stock Option Plan.
+10.15(f) Service Agreement by and between the Company and Distribution
Associates, Inc., dated July 27, 2000.
10.16(f) Note and Warrant Purchase Agreement, dated as of August 21,
2000, by and among the Company, Quantum Industrial Partners
LDC and SFM Domestic Investments LLC.
10.17(f) Note and Warrant Purchase Agreement, dated as of October 2,
2000, by and among the Company, Quantum Industrial Partners
LDC and SFM Domestic Investments LLC.
10.18(f) Investment Agreement, dated November 13, 2000, by and among
the Company, Bluefly Merger Sub, Inc., Quantum Industrial
Partners LDC and SFM Domestic Investments LLC.
10.19(h) Financing Agreement, dated March 30, 2001, between the Company
and Rosenthal & Rosenthal, Inc.
10.20(h) Reimbursement Agreement, dated March 30, 2001, between the
Company, Quantum Industrial Partners LDC and SFM Domestic
Investment LLC.
10.21(h) Warrant, dated March 30, 2001, issued to Rosenthal &
Rosenthal, Inc.
10.22(h) Warrant, dated March 30, 2001, issued to Quantum Industrial
Partners LDC.
10.23(h) Warrant, dated March 30, 2001, issued to SFM Domestic
Investments LLC.
10.24(i) Promissory Note dated April 27, 2001 by and between the
Company and E. Kenneth Seiff dated April 27, 2001.
10.25 Demand Promissory Note, dated as of December 15, 2001, issued
to Quantum Industrial Partners LDC.
10.26 Demand Promissory Note, dated as of December 15, 2001, issued
to SFM Domestic Investments LLC.
10.27 EBusiness Hosting Agreement, dated January 9, 2002 between the
Company and International Business Machines Corporation.
10.28 Standby Commitment Agreement, dated March 27, 2002, by and
among the Company, Quantum Industrial Partners LDC and SFM
Domestic Investments LLC.
+10.29 Software License and Services Agreement, dated March 12, 2002,
by and among the Company and Blue Martini Software, Inc.
10.30 Amendment No. 1 to Financing Agreement, dated April 30, 2001,
between the Company and Rosenthal & Rosenthal, Inc.
10.31 Amendment No. 2 to Financing Agreement, dated February 14,
2002 between the Company and Rosenthal & Rosenthal, Inc.
10.32 Amendment No. 3 to Financing Agreement, dated March 22, 2002,
between the Company and Rosenthal & Rosenthal, Inc.
10.33 Amendment No. 1 to Reimbursment Agreement, dated March 22,
2002, between the Company and Quantum Industrial Partners LDC.
10.34 Amendment to warrant dated March 22, 2002, issued to Rosenthal
& Rosenthal, Inc.
10.35 Warrant No. 1 dated March 27, 2002, issued to Quantum
Industrial Partners LDC.
10.36 Warrant No. 2 dated March 27, 2002, issued to SFM Domestic
Investments LLC.
10.37 Warrant No. 3 dated March 30, 2002, issued to Quantum
Industrial Partners LDC.
10.38 Warrant No. 4 dated March 30, 2002, issued to SFM Domestic
Investments LLC.
21.1 Subsidiaries of the Registrant.
(a) Incorporated by reference to the Company's Quarterly report filed on
Form 10-QSB for the quarterly period ended March 31, 1997.
38
(b) Incorporated by reference to the Company's Quarterly report filed on
Form 10-QSB for the quarterly period ended September 30, 1998.
(c) Incorporated by reference to the Company's Quarterly report filed on
Form 10-QSB for the quarterly period ended June 30, 1999.
(d) Incorporated by reference to the Company's Annual report filed on Form
10-KSB for the year ended December 31, 1999.
(e) Incorporated by reference to the Company's Quarterly report filed on
Form 10-Q for the quarterly period ended June 30, 2000.
(f) Incorporated by reference to the Company's Quarterly report filed on
Form 10-Q for the quarterly period ended September 30, 2000.
(g) Incorporated by reference to the Company's report filed on Form 8-K,
dated September 15, 1998.
(h) Incorporated by reference to the Company's Annual report filed on Form
10-K for the year ended December 31, 2000.
(i) Incorporated by reference to the Company's Quarterly report filed on
Form 10-Q for the quarterly period ended March 31, 2001.
+ Confidential treatment has been requested as to certain portions of this
Exhibit. Such portions have been redacted.
(d) Reports on Form 8-K.
None.
39
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
BLUEFLY, INC.
By: /s/ E. Kenneth Seiff
----------------------------
E. Kenneth Seiff
Chief Executive Officer and President
March 27, 2002
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
--------- ----- ----
/s/ E. Kenneth Seiff
----------------------------------
E. Kenneth Seiff Chairman of the Board of Directors, Chief March 27, 2002
Executive Officer, President,
and Treasurer (Principal Executive Officer)
/s/ Patrick C. Barry
----------------------------------
Patrick C. Barry Chief Financial Officer and Chief Operating March 27, 2002
Officer (Principal Accounting Officer)
/s/ Josephine R. Esquivel
----------------------------------
Josephine R. Esquivel Director March 27, 2002
/s/ Martin Miller
----------------------------------
Martin Miller Director March 27 ,2002
/s/ Robert G. Stevens
----------------------------------
Robert G. Stevens Director March 27, 2002
/s/ Neal Moszkowski
----------------------------------
Neal Moszkowski Director March 27, 2002
/s/ David Wassong
----------------------------------
David Wassong Director March 27, 2002
/s/ Lorne Weil
----------------------------------
Lorne Weil Director March 27, 2002
40