Filed Pursuant to Rule 424(b)(3)
Registration No. 333-111957
PROSPECTUS
3,766,510 SHARES OF COMMON STOCK
BLUEFLY, INC.
This prospectus relates to the resale of up to 3,766,510 shares of our
common stock by the selling stockholders listed in this Prospectus under the
section "Selling Stockholders."
The prices at which the selling stockholders may sell the shares will be
determined by the prevailing market price for the shares or in negotiated
transactions. We will not receive any of the proceeds from the sale of the
shares by the selling stockholders.
Our common stock is quoted on the Nasdaq SmallCap Market under the
symbol "BFLY," and on the Boston Stock Exchange under the symbol "BFL." On March
30, 2004, the last sale price of our common stock was $3.31 per share.
THE SHARES OFFERED IN THIS PROSPECTUS INVOLVE A HIGH DEGREE OF RISK. YOU
SHOULD CAREFULLY CONSIDER THE RISK FACTORS COMMENCING ON PAGE 3 IN DETERMINING
WHETHER TO PURCHASE THE SHARES.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS APRIL 1, 2004
TABLE OF CONTENTS
WHERE YOU CAN FIND MORE INFORMATION.....................................1
DOCUMENTS INCORPORATED BY REFERENCE.....................................1
THE COMPANY.............................................................2
RECENT DEVELOPMENTS.....................................................2
RISK FACTORS............................................................3
FORWARD-LOOKING STATEMENTS.............................................11
USE OF PROCEEDS........................................................11
SELLING STOCKHOLDERS...................................................11
PLAN OF DISTRIBUTION...................................................14
EXPERTS................................................................16
LEGAL MATTERS..........................................................16
Our address is 42 West 39th Street, New York, New York 10018, and the
phone number of our executive offices is (212) 944-8000.
The terms "Company," "Bluefly," "Registrant," "we," "us," and "our" in
this prospectus refer to Bluefly, Inc. and its subsidiary.
We have not authorized any person to make a statement that differs from
what is in this prospectus. If any person does make a statement that differs
from what is in this prospectus, you should not rely on it. This prospectus is
not an offer to sell, nor is it seeking an offer to buy, these securities in any
state in which the offer or sale is not permitted. The information in this
prospectus is complete and accurate as of its date, but the information may
change after that date.
No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in or
incorporated by reference in this prospectus. If given or made, such information
or representations must not be relied upon as having been authorized by us or
the selling stockholders. This prospectus does not constitute an offer to sell,
or a solicitation of an offer to sell, or a solicitation of an offer to buy,
such securities by anyone in any jurisdiction where, or to any person to whom,
it is unlawful to make such offer or solicitation. Neither the delivery of this
prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that there has been no change in our affairs since the date as
of which information is given in this prospectus.
Until May 11, 2004 (40 days after the commencement of this offering),
all dealers that buy, sell or trade shares of our common stock, whether or not
participating in this offering, may be required to deliver a prospectus. This
delivery requirement is in addition to the obligation of dealers to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
WHERE YOU CAN FIND MORE INFORMATION
Because we are subject to the informational requirements of the Exchange
Act, we file reports, proxy statements and other information with the Securities
and Exchange Commission (SEC). You may read and copy these reports, proxy
statements and other information at the public reference facilities maintained
by the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. You may
also obtain copies of those materials at prescribed rates from the public
reference section of the SEC at 450 Fifth Street, Washington, D.C. 20549. The
public may obtain information on the operation of the public reference room by
calling the SEC at (800) SEC-0330. In addition, we are required to file
electronic versions of those materials with the SEC through the SEC's EDGAR
system. The SEC maintains a web site at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC. We have filed with the SEC a
registration statement on Form S-3 under the Securities Act with respect to the
securities offered with this prospectus. This prospectus does not contain all of
the information in the registration statement, parts of which we have omitted,
as allowed under the rules and regulations of the SEC. You should refer to the
registration statement for further information with respect to us and our
securities. Statements contained in this prospectus as to the contents of any
contract or other document are not necessarily complete (although they include a
description of the terms thereof that the Company believes are material to such
statement) and, in each instance, we refer you to the copy of each contract or
document filed as an exhibit to the registration statement. Copies of the
registration statement, including exhibits, may be inspected without charge at
the SEC's principal office in Washington, D.C., and you may obtain copies from
this office upon payment of the fees prescribed by the SEC. We will furnish
without charge to each person to whom a copy of this prospectus is delivered,
upon written or oral request, a copy of the information that has been
incorporated by reference into this prospectus (except exhibits, unless they are
specifically incorporated by reference into this prospectus). You should direct
any requests for copies to: Bluefly, Inc., 42 West 39th Street, New York, New
York 10018, Attention: General Counsel, Telephone: (212) 944-8000.
DOCUMENTS INCORPORATED BY REFERENCE
The SEC allows us to incorporate by reference certain of our
publicly-filed documents into this prospectus, which means that information
included in these documents is considered part of this prospectus. We
incorporate by reference in this prospectus the information contained in the
following documents:
. our Amended Annual Report on Form 10-K for the year ended December
31, 2003, filed with the SEC on March 29, 2004;
. our Annual Report on Form 10-K for the year ended December 31, 2003,
filed with the SEC on March 4, 2004;
. our Proxy Statement dated July 2, 2003, filed with the SEC on July
2, 2003 in connection with our Annual Meeting of Stockholders held
on August 1, 2003;
. our Current Report on Form 8-K, filed with the SEC on January 13,
2004;
. our Current Report on Form 8-K, filed with the SEC on
January 16, 2004;
. the description of our common stock in our registration statement on
Form 8-A filed with the SEC on April 22, 1997, including any
amendments or reports filed for the purpose of updating such
description; and
. all documents that we subsequently file with the SEC under Sections
13(a), 13(c), 14 or 15 of the Exchange Act until all of the
securities that may be offered with this prospectus are sold.
We will furnish without charge to you, on written or oral request, a
copy of any or all of the documents incorporated by reference, other than the
exhibits to those documents. You may obtain copies of those documents from us,
free of cost, by contacting us at the address or telephone number provided in
"Where You Can Find More Information" immediately above.
Information that we file later with the SEC and that is incorporated by
reference in this prospectus will automatically update information contained in
this prospectus or that was previously incorporated by reference into this
prospectus.
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THE COMPANY
We are a leading Internet retailer of designer fashion and home
accessories at discount prices. We sell over 350 brands of designer apparel,
accessories and home products at discounts up to 75% off retail value. In the 12
months of calendar year 2003, we offered over 80,000 different types of items
for sale in categories such as men's, women's and accessories as well as house
and home accessories. Since its inception, www.bluefly.com has served over
500,000 customers and shipped to over 20 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 (the "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. We
launched our Web site 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 Web site. 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.
RECENT DEVELOPMENTS
On February 19 2004, we announced that we had achieved our first ever
quarterly net profit for the quarter ended December 31, 2003, generating
$111,000 of net income, as compared to a net loss of $1,660,000 for the quarter
ended December 31, 2002. Our net sales in the quarter ended December 31, 2003
were $13,993,000, a 42% increase in net sales from the $9,856,000 in net sales
we generated in the quarter ended December 31, 2002. Our net sales in the year
ended December 31, 2003 were $37,928,000, a 24% increase in net sales from the
$30,606,000 we generated in the year ended December 31, 2002. Our net loss for
the year ended December 31, 2003 was $6,369,000, a 1.7% decrease from our net
loss of $6,479,000 for the year ended December 31, 2002. On the same date, we
also announced that our net sales for the month of January 2004 increased by
approximately 23%, to approximately $3.8 million from approximately $3.1 million
for January 2003. 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 for the foreseeable future.
On January 21, 2004, we announced that we had signed a contract to open
a Bluefly storefront in the Apparel & Accessories store on Amazon.com.
On January 12, 2004, we completed a private placement (the "New
Financing") pursuant to which we raised $5,000,000 through the sale of 1,543,209
shares of our common stock and warrants to purchase an additional 385,801 shares
of our common stock at an exercise price of $3.96 per share. The proceeds of the
New Financing are expected to be used for general corporate purposes. The offer
and sale of the shares of our common stock issued in the New Financing, and the
shares of our common stock issuable upon the exercise of the warrants issued in
the New Financing, are covered by this Prospectus.
In January 2004, we also extended the maturity dates on the Convertible
Promissory Notes issued to Soros in July and October 2003 (the "Notes"). The
maturity dates of the Notes, which were originally January and April 2004,
respectively, were each extended until March 1, 2005. In February 2004, the
maturity date of the Notes was further extended until May 1, 2005.
On November 25, 2003, we announced that we had opened a brick and mortar
outlet store in New York City for the Holiday season.
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RISK FACTORS
Before you invest in our common stock, you should be aware of the risks
described below, which we believe to be the material risks involved with an
investment in our common stock. You should carefully consider these risk
factors, together with all of the other information included in this prospectus,
including the documents incorporated in this prospectus by reference, before you
decide whether to purchase shares of our common stock.
We Have A History Of Losses And Expect That Losses Will Continue In The
Future. As of December 31, 2003, we had an accumulated deficit of $92,336,000.
We incurred net losses of $6,369,000, $6,479,000 and $25,006,000 for the years
ended December 31, 2003, 2002 and 2001, 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 for the foreseeable future. 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. The environment for raising investment capital 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. In the event that we are
unable to obtain additional financing, if needed, we could be forced to decrease
expenses that we believe are necessary for us to realize on our long-term
prospects for growth and profitability and/or liquidate inventory in order to
generate cash. Moreover, any additional equity financing that we may raise could
result in significant dilution of the existing holders of common stock. See
"Certain Events Could Result In Significant Dilution Of Your Ownership Of Common
Stock."
Our Lenders Have Liens On Substantially All Of Our Assets And Could
Foreclose In The Event That We Default Under Our Loan Facility. Under the terms
of our loan facility (the "Loan Facility"), Rosenthal & Rosenthal, Inc.
("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. Pursuant
to the Loan Facility, we gave a first priority lien to Rosenthal on
substantially all of our assets, including our cash balances. In connection with
the Loan Facility, we entered into a reimbursement agreement with affiliates of
Soros Private Equity Partners, LLC that collectively own a majority of our
capital stock (collectively, "Soros"), pursuant to which Soros agreed to
guarantee a portion of the Loan Facility, (the "Soros Guarantee") we agreed to
reimburse Soros for any amounts it paid to our lender 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 default under the Loan Facility, Rosenthal and Soros would be entitled,
among other things, to foreclose on our assets in order to satisfy our
obligations under the loan facility and the reimbursement agreement. In
addition, to the extent that Soros is required to make any payments to Rosenthal
under its guarantee of our obligations under the Loan Facility, we would be
required to issue an additional warrant to Soros, which could result in a
significant dilution of your ownership of our common stock. See "Certain Events
Could Result In Significant Dilution Of Your Ownership Of Our Common Stock."
Our Ability To Comply With Our Financial Covenants and Pay Our
Indebtedness Under Our Loan Facility Is Dependent Upon Meeting Our Business
Plan. We are required to pay interest under our Loan Facility on a monthly
basis. In addition, we are required, under the facility, to maintain working
capital of at least $4 million and net tangible worth of at least $5 million as
of the end of each fiscal year. Assuming we meet our business plan, we will
satisfy these covenants. To a certain extent, however, our ability to meet our
business plan, is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our control and
therefore we cannot assure you that based on our business plan we will generate
sufficient cash flow from operations to enable us to pay our indebtedness under
the Loan Facility and maintain compliance with our net working capital covenant
throughout the term of the agreement or that we will be able to maintain
compliance with the net worth covenant. If we fall short of our business plan
and are unable to raise additional equity capital, we could default
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under our loan facility. In the event of a default under the Loan Facility,
Rosenthal and Soros would be entitled, among other things, to foreclose on our
assets (whether inside or outside a bankruptcy proceeding) in order to satisfy
our obligations under the Loan Facility and the reimbursement agreement. In
addition, a default under our Loan Facility could require us to issue an
additional warrant to Soros, which could result in a significant dilution of
your ownership of our common stock. See "Risk Factors - Our Lenders Have Liens
On Substantially All Of Our Assets And Could Foreclose In The Event That We
Default Under Our Loan Facility" and "- Certain Events Could Result In
Significant Dilution of Your Ownership of Our Common Stock."
Certain Events Could Result In Significant Dilution Of Your Ownership Of
Our Common Stock. Stockholders could be subject to significant dilution to the
extent that we raise additional equity financing, as a result of both the
issuance of additional equity securities, the potential conversion of the
convertible promissory notes described below and the anti-dilution provisions of
our Series B, C, D and E preferred stock described below, which provide for the
issuance of additional securities to the holders thereof, under certain
circumstances, to the extent that the preferred stock is converted at any time
after a sale of common stock at less than $0.76 per share.
Moreover, as of February 19, 2004, there were outstanding options to
purchase 9,102,557 shares of our common stock issued under our 1997 and 2000
Stock Option Plans, warrants to purchase 981,644 shares of our common stock
issued to Soros, and additional warrants and options to purchase the 723,301
shares of our common stock offered pursuant to this prospectus. In addition, as
of such date, our outstanding preferred stock was convertible into an aggregate
of 43,323,430 shares of our common stock (plus any shares of our common stock
issued upon conversion in payment of any accrued and unpaid dividends). The
exercise of our outstanding options and warrants and/or the conversion of our
outstanding preferred stock would dilute the then existing stockholders'
percentage ownership of our common stock, and any sales in the public market of
our common stock underlying such securities, including pursuant to this
prospectus, could adversely affect prevailing market price of our common stock.
In the event that all of the securities described above were converted to common
stock, the holders of the common stock immediately prior to such conversion
would own approximately 21% of the outstanding common stock immediately after
such conversion, excluding the effect of accrued dividends on preferred stock.
As described above, our Series B, C, D and E Preferred Stock contain
anti-dilution provisions pursuant to which, subject to certain exceptions, in
the event that we issue or sell our common stock or new securities convertible
into our common stock in the future for less than $0.76 per share, the number of
shares of our common stock to be issued upon the conversion of such preferred
stock would be increased to a number equal to the face amount of such preferred
stock divided by the price at which such common stock or other new securities
are sold.
In addition, Soros owns $4 million of convertible promissory notes
issued by us that bear interest at the rate of 12% per annum and are
convertible, at Soros' option, into our equity securities sold in any subsequent
round of financing at a price that is equal to the lowest price per share
accepted by any investor (including Soros or any of its affiliates) in such
subsequent round of financing.
Moreover, if Rosenthal draws on the Soros Guarantee during the
continuance of a default under the Loan Facility, or if at any time the total
amount outstanding under the Loan Facility exceeds 90% of the undrawn amount of
the Soros Guarantee, we will be required to issue to Soros another warrant (each
a "Contingent Warrant") to purchase a number of shares of our 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.
Soros Owns A Majority Of Our Stock And Therefore Effectively Controls
Our Management And Policies. As of February 19, 2004, through its holdings of
our common stock, as well as our preferred stock, and warrants convertible into
our common stock, Soros beneficially owned, in the aggregate, approximately 85%
of our common stock. The holders of our preferred stock vote on an "as
converted" basis with the holders of our common stock. By virtue of its
ownership of our 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 20
possible votes on each matter voted upon by our Board of Directors. In addition,
we are required to obtain the approval of holders of our preferred stock prior
to taking certain actions. The holders
4
of our preferred stock have certain pre-emptive rights to participate in future
equity financings and certain anti-dilution rights that 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 our 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. In addition, Soros has demand registration rights with
respect to the shares of our common stock that it beneficially owns. Any
decision by Soros to exercise such registration rights and to sell a significant
amount of our shares in the public market could have an adverse effect on the
price of our common stock. See "Certain Events Could Result In Significant
Dilution of Your Ownership Of Common Stock."
If We Are Not Accurate In Forecasting Our Revenues, We May Be Unable To
Adjust Our Operating Plans In A Timely Manner. Because our business has not yet
reached a mature stage, it is 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 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. In addition any such
unexpected revenue shortfall could significantly affect our short-term cash flow
and our net worth, which could require us to seek additional financing and/or
cause a default under our credit facility. See "We Are Making A Substantial
Investment In Our Business And May Need To Raise Additional Funds" and "Our
Ability To Comply With Our Financial Covenants and Pay Our Indebtedness Under
Our Loan Facility Is Dependent Upon Meeting Our Business Plan."
Unexpected Changes In Fashion Trends Could Cause Us To Have Either
Excess or Insufficient Inventory. 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 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. In the first three quarters of 2003, the retail apparel
market experienced sluggish growth, requiring many retailers to significantly
reduce prices and discount merchandise. We lowered our prices during the first
quarter of 2003, in part, as the result of this sluggish growth, and maintained
lower pricing levels in the second and third quarters of 2003 in order to
generate cash from excess out-of-season inventory. While the fourth quarter of
2003 saw a slight improvement in the retail apparel market, any future decrease
in growth rates or 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 revenue, cash flow and results of
operations. Alternatively, any improvement, 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 "We Do Not Have Long Term Contracts
With The Majority Of Our Vendors And Therefore The Availability of Merchandise
Is At Risk."
We Purchase Product From Some Indirect Supply Sources, Which Increases
Our Risk of Litigation Involving The Sale Of Non-Authentic Or Damaged Goods. 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, which could result in potential
liability under applicable laws, regulations, agreements and orders. 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.
5
If Our Co-Location Facility Or Our Third Party Distribution Center
Fails, Our Business Could Be Interrupted For A Significant Period Of Time. Our
ability to receive and fulfill orders successfully and provide high-quality
customer service, largely depends on the efficient and uninterrupted operation
of our computer and communications hardware systems and fulfillment center.
Substantially all of our computer and communications hardware is located at a
single co-location facility in New Jersey. Our inventory is held, and our
customer orders are filled, at a third party distribution center located in
Virginia. These operations are vulnerable to damage or interruption from fire,
flood, power loss, telecommunications failure, terrorist attacks, acts of war,
break-ins, earthquake and similar events. We do not presently have redundant
systems in multiple locations or a formal disaster recovery plan. Accordingly, a
failure at one of these facilities could interrupt our business for a
significant period of time, and our business interruption insurance may be
insufficient to compensate us for losses that may occur. Any such interruption
would negatively impact our sales, results of operations and cash flows for the
period in which it occurred, and could have a long-term adverse effect on our
relationships with our customers and suppliers.
Security Breaches To Our Systems And Database Could Cause Interruptions
to Our Business And Impact Our Reputation With Customers, And We May Incur
Significant Expenses to Protect Against Such Breaches. A fundamental requirement
for online commerce and communications is the secure transmission of
confidential information over public networks. 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. A party who is able to circumvent our security measures
could misappropriate proprietary information or cause interruptions in our
operations. If any such compromise of our security were to occur, it could have
a material adverse effect on our reputation with customers, thereby affecting
our long-term growth prospects. In addition, 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.
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 "We Do Not Have Long Term Contracts With The Majority Of
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. 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. Any failure to implement such systems and
training, and to maintain such coordination, could affect our ability to plan
for, and react quickly to, changes in our business and, accordingly, could cause
an adverse impact on our cash flow and results of operations in the periods
during which such changes occur. In addition, as our workforce grows, our
experience to potential employment liability issues increases, and we will need
to continue to improve our human resources functions in order to protect against
such increased exposure. 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 cash flow
and results of operations during the period in which such failures occur and
could have a long-term effect on our reputation with our customers.
We Are Heavily Dependent On Third-Party Relationships, And Failures By A
Third Party Could Cause Interruptions To Our Business. We are heavily dependent
upon our relationships with our fulfillment
6
operations provider and Web hosting provider, delivery companies like UPS and
the United States Postal Service, and credit card processing companies such as
Paymentech and Cybersource 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 cash flow and
results of operations would be negatively impacted during such slowdown, and the
results of such slowdown could have a long-term negative effect on our
reputation with our customers. The failure of our fulfillment operations
provider, credit card processors or Web hosting provider to properly perform
their services for us could cause similar effects. 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,
we would have to expend additional resources to develop such capabilities
ourselves, which could have a material adverse impact on our short-term cash
flow and results of operations and our long-term prospects.
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 customers comes from a
variety of sources including:
. 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;
. less established companies, such as eLuxury, which are building
their brands online;
. internet sites such as Amazon.com and ebay.com;
. traditional direct marketers, such as L.L. Bean, Lands' End and J.
Crew;
. television direct marketers such as QVC; and
. 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:
. brand recognition;
. merchandise selection;
. price;
. convenience;
. customer service;
. order delivery performance;
. site features; and
. content.
7
There can be no assurance that we will be able to compete successfully
against competitors and future competitors, and competitive pressures faced by
us could force us to increase expenses and/or decrease our prices at some point
in the future.
We Do Not Have Long Term Contracts With The Majority Of Our Vendors And
Therefore The Availability Of Merchandise Is At Risk. We have few 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
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 ability
to satisfy our customer's needs, and therefore our long-term growth prospects,
would be materially adversely affected. See, "Brand Owners Could Establish
Procedures to Limit Our Ability to Purchase Products Indirectly."
We Need To Further Establish Brand Name Recognition. We believe that
further 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 long-term growth
prospects would be materially adversely affected.
There Can Be No Assurance That Our Technology Systems Will Be Able To
Handle Increased Traffic; Implementation of Changes to Web Site. 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. In addition,
in order to remain competitive, we must continue to enhance and improve the
responsiveness, functionality and features of Bluefly.com, which is particularly
challenging given the rapid rate at which new technologies, customer preferences
and expectations and industry standards and practices are evolving in the online
commerce industry. Accordingly, we redesign and enhance various functions on our
Web site on a regular basis, and we may experience instability and performance
issues as a result of these changes.
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 shopping via the Internet. If return rates are
higher than expected, our business, prospects, financial condition, cash flows
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. In particular, we rely upon their
strategic guidance, their relationships and credibility in the vendor and
financial communities and their ability
8
to recruit key operating personnel. We have entered into employment agreements
with each of our executive officers. The employment agreements with our CEO and
CFO/COO expire on June 30, 2005. The employment agreement with our President
expires on March 1, 2007. However, none of these employment agreements prohibit
the executive officer from terminating his or her employment with us in order to
pursue a more attractive opportunity and, to the extent that we do not
successfully implement our plans, other opportunities may appear more
attractive. The loss of the services of any of our executive officers could have
a material adverse effect on our credibility in the vendor communities and our
ability to recruit new key operating personnel.
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 prospects for long-term growth.
There Are Inherent Risks Involved In Expanding Our Operations. We may
choose to expand our operations by developing new Web sites, 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. For example, we have
historically expended significant internal resources in connection with the
redesign of our Web site and the implementation of our online strategic
alliances, and we expect to devote significant manpower to the launch of our
storefront on Amazon.com. Moreover, in the event that we expand upon our efforts
to open brick-and-mortar outlet stores, we will be required to devote
significant internal resources and capital to such efforts. 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 May Be Liable for Product Liability Claims. We sell products
manufactured by third parties, some of which may be defective. If any product
that we sell were to cause physical injury or injury to property, the injured
party or parties could bring claims against us as the retailer of the product.
Our insurance coverage may not be adequate to cover every claim that could be
asserted. If a successful claim were brought against us in excess of our
insurance coverage, it could have a material adverse effect on our cash flow and
on our reputation with customers. Unsuccessful claims could result in the
expenditure of funds and management time and could have a negative impact on our
business.
We Cannot Guarantee The Protection Of Our Intellectual Property. Our
intellectual property is critical to our success, and we rely on trademark,
copyright, domain names 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,
service marks and domain names in the United States and abroad. Effective
trademark, copyright and trade secret protection may not be available in every
country, and 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
9
Internet related industries is uncertain and still evolving. Moreover, even to
the extent that we are successful in defending our rights, we could incur
substantial costs in doing so.
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, the increase in
identity theft 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. Moreover, although we have developed systems and
processes that are designed to protect consumer information and prevent
fraudulent credit card transactions and other security breaches, failure to
mitigate such fraud or breaches could have a material adverse effect on our
business, prospects, financial condition and results of operations.
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 increase our cost of doing business and/or decrease the demand
for our products and services and increase our cost of doing business.
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 also increase our cost of doing business. In addition, if we were alleged
to have violated federal, state or foreign, civil or criminal law, we could face
material liability and damage to our reputation and, even if we successfully
defend any such claim, we could incur significant costs in connection with such
defense.
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, New Jersey 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, New Jersey 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 subject
us to material liabilities and, to the extent that we pass such costs on to our
customers, could decrease our sales.
Change Of Control Covenant And Liquidation Preference of Preferred
Stock. We have agreed with Soros, that for so long as any shares of our shares
of preferred stock held by it 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 such preferred stock to
receive from the acquirer an amount in cash equal to the respective aggregate
liquidation preferences of such preferred stock. The aggregate liquidation
preference of our preferred stock is equal to the greater of (i) approximately
$48,300,000 (plus any accrued and unpaid dividends) and (ii) the amount that the
holders of shares of our preferred stock would receive if they were to convert
such shares into shares of our 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 15,486,250 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 our 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
10
holders of our 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.
FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this prospectus and in
documents that we incorporate by reference into this prospectus. These
forward-looking statements are subject to risks and uncertainties. Actual
results may differ materially from those expressed in these forward-looking
statements.
Forward-looking statements include information concerning our possible
or assumed future results of operations as well as statements that include the
words "believe," "expect," "anticipate," "intend" or similar expressions. You
should understand that certain important factors, including those set forth in
"Risk Factors" below and elsewhere in this prospectus and the documents that we
incorporate by reference into this prospectus, could affect our future results
of operations and could cause those results to differ materially from those
expressed in our forward-looking statements. In connection with these forward-
looking statements, you should carefully review the risks set forth in this
prospectus and the documents we incorporate by reference into this prospectus.
USE OF PROCEEDS
The proceeds from the sale of the common stock offered pursuant to this
prospectus are solely for the account of the selling stockholders. Accordingly,
we will not receive any proceeds from the sale of the shares from the selling
stockholders. However we would receive the proceeds of any exercise of the
warrants held by these selling stockholders to the extent that such warrants are
exercised for cash. In the event that all such warrants were exercised for cash,
the aggregate proceeds received by us would be approximately $2,349,000. There
can be no assurance concerning the number or the timing of the exercise of such
warrants by the selling stockholders at this date. In addition, because certain
of the warrants contain provisions allowing for a cashless exercise under
certain circumstances, there can be no assurance that we would receive all such
proceeds even if all such warrants are exercised. Any proceeds realized from the
exercise of such warrants will be used for general working capital.
SELLING STOCKHOLDERS
This prospectus relates to the resale of up to 3,766,510 shares of our
common stock by the selling stockholders listed below. These shares include: (i)
1,543,209 shares that were sold by us at the price of $3.24 per share in a
private placement that closed on January 12, 2004, (ii) 385,801 shares that are
issuable upon the exercise of warrants that were issued in the same private
placement with an exercise price of $3.96 per share, (iii) 1,500,000 shares
issuable upon the conversion of outstanding shares of our Series A Preferred
Stock, (iv) 37,500 shares that are issuable upon the exercise of a stock option
granted in March 2001 with an exercise price of $1.34 per share, (v) 50,000
shares that are issuable upon the exercise of warrants granted in September 2000
with an exercise price of $3.72 per share and (vi) 250,000 shares that are
issuable upon exercise of warrants granted in December 2003 with an exercise
price of $2.34 per share.
The following table sets forth certain information known to us with
respect to the beneficial ownership of our common stock by the selling
stockholders, as of January 13, 2004. The following table assumes that the
selling stockholders sell all of their shares. We are unable to determine the
exact number of shares that will actually be sold.
We have agreed to indemnify the selling stockholders for certain
liabilities arising out of the registration statement of which this prospectus
is a part. In addition, we have agreed to indemnify the selling stockholders
that were investors in the New Financing for any and all liabilities, losses,
damages, claims, costs and expenses, interest, awards, judgments, penalties
(including without limitation, reasonable attorneys' fees and expenses) actually
suffered or incurred by them, arising out of or resulting from any breach of our
representations and warranties in the common stock and warrant purchase
agreement that we entered into with them in connection with the New Financing.
Notwithstanding the foregoing, we have no obligation to compensate any of such
selling stockholders for punitive damages and our liability to such selling
stockholders under such indemnification provision cannot exceed 125% of the
purchase price for the securities purchased in the New Financing (increased to
150% in January 2005), plus reasonable attorney's fees. In addition, we have had
the following relationships with certain of the selling stockholders during the
past three years: (a) we paid Enable Capital, LLC, an affiliate of Enable Growth
Partners, LP, a finders fee of $194,000 in consideration for its role in
introducing us to the participants in the New
11
Financing (in addition, we previously entered into an agreement with Enable
Capital, LLC, wherein Enable Capital, LLC was a non-exclusive placement agent
with respect to a prior transaction that was never consummated and for which, as
a result, no fees were paid); (b) Scott and James Ressler are principals of
Ashley Reed Trading, Inc. ("Ashley Reed") which has been one of our suppliers of
inventory for the past three years and received the warrants currently held by
the Resslers in return for an agreement to sell us up to $4 million of inventory
over the next three years at a 5% mark-up over Ashley Reed's cost; (c) The Wall
Street Group, Inc. provided investor relations services to us (including
assisting us in creating, developing and distributing investor relations
materials and arranging meetings between us and members of the investment
community) from March 2001 to September 2001 and received its stock option as
partial consideration for such services; and (d) Quantum Industrial Partners LDC
and SFM Domestic Investments LLC are part of the Soros group that owns a
majority of our capital stock, has the right to designate two members of our
Board of Directors and has entered into various financing arrangements with us
as described more fully in "Risk Factors." We believe that the terms of each of
the relationships described above were at least as favorable to us as what we
could have obtained from a third party who did not own any equity interest in
us.
Except as described above and in the documents incorporated by reference
into this prospectus, none of the selling shareholders listed in the table have
held any position or office or have had a material relationship with us or any
of our affiliates within the past three years, other than as described above,
elsewhere in this Prospectus or in the documents incorporated herein by
reference.
The percentage of shares beneficially owned is based on 14,471,375
shares outstanding at February 19, 2004 determined in accordance with Rule 13d-3
of the Exchange Act. Under such rule, beneficial ownership includes any shares
as to which the individual has sole or shared voting power or investment power
and also any shares which the individual has the right to acquire within sixty
days of such date through the exercise of any warrants or other right. Unless
otherwise indicated in the footnotes, each person has sole voting and investment
power (or shares such powers with his or her spouse) with respect to the shares
shown as beneficially owned.
SHARES BENEFICIALLY
NUMBER OF SHARES BENEFICIALLY OWNED AFTER OFFERING (ASSUMING
OWNED PRIOR TO THE OFFERING ALL SHARES BEING OFFERED ARE SOLD)
----------------------------- SHARES BEING ---------------------------------
NAME OF SELLING STOCKHOLDER NUMBER PERCENT OFFERED NUMBER PERCENT
------------------------------------------------ ------------ ----------- ------------ --------------- --------------
Longview Fund, LP (17)(28)....................... 385,802(1) 2.65% 385,802(1) -- --
Longview Equity Fund, LP (18)(28)................ 771,605(2) 5.28% 771,605(2) -- --
Longview International Equity Fund, LP (19)(28).. 347,222(3) 2.39% 347,222(3) -- --
Alpha Capital Aktiengesellscft(20)(28)........... 154,321(4) 1.06% 154,321(4) -- --
Gamma Opportunity Capital Partners, LP (21)(28).. 77,160(5) * 77,160(5) -- --
Enable Growth Partners, LP (21)(28).............. 57,870(6) * 57,870(6) -- --
Genesis Microcap Inc.(22)(28).................... 67,515(7) * 67,515(7) -- --
Barucha LLC (23)(28)............................. 28,935(8) * 28,935(8) -- --
J.M. Hull Associates, LP (24)(28)................ 38,580(9) * 38,580(9) -- --
The Wall Street Group, Inc.(25) ................. 37,500(10) * 37,500(10) -- --
Scott Ressler.................................... 150,000(11) 1.03% 150,000(11) -- --
James Ressler.................................... 150,000(12) 1.03% 150,000(12) -- --
Quantum Industrial Partners LDC (26)............. 48,188,318(13) 83.99% 1,452,472(14) 46,735,846 81.46%
SFM Domestic Investments LLC (27)................ 1,576,833(15) 9.93% 47,528(16) 1,529,305 9.63%
TOTAL....................................... 52,031,661 87.45% 3,766,510 48,265,151 82.12%
* Represents beneficial ownership of less than 1% of common stock.
1. Includes warrant to purchase 77,160 shares at a price of $3.96 per share.
2. Includes warrant to purchase 154,321 shares at a price of $3.96
per share.
3. Includes warrant to purchase 69,444 shares at a price of $3.96 per share.
4. Includes warrant to purchase 30,864 shares at a price of $3.96 per share.
5. Includes warrant to purchase 15,432 shares at a price of $3.96 per share.
6. Includes warrant to purchase 11,574 shares at a price of $3.96 per share.
12
7. Includes warrant to purchase 13,503 shares at a price of $3.96 per share.
8. Includes warrant to purchase 5,787 shares at a price of $3.96 per share.
9. Includes warrant to purchase 7,716 shares at a price of $3.96 per share.
10. Includes option to purchase 37,500 shares at a price of $1.34 per share.
11. Includes warrant to purchase 25,000 shares at a price of $3.72 per share
and warrant to purchase 125,000 shares at a price of $2.34 per share.
12. Includes warrant to purchase 25,000 shares at a price of $3.72 per share
and warrant to purchase 125,000 shares at a price of $2.34 per share.
13. Represents: 3,806,923 shares of our common stock issuable upon conversion
of 445,410 shares our Series A preferred stock; 26,503,095 shares of our
common stock issuable upon conversion of 8,607,843 shares of our Series B
preferred stock; 1,274,078 shares of our common stock issuable upon
conversion of 968.3 shares of our Series C preferred stock; 9,092,525
shares of our common stock issuable upon conversion of 6,910.319 shares
of our Series D preferred stock; 5,287,082 shares of our common stock;
1,274,078 shares of our common stock issuable upon conversion of 968.3
shares of our Series E preferred stock; and 950,537 shares of our common
stock issuable upon exercise of warrants.
14. Represents 1,452,472 shares of our common stock issuable upon conversion
of shares of our Series A Preferred Stock.
15. Represents: 124,701 shares of our common stock issuable upon conversion
of 14,590 shares of our Series A preferred stock; 866,942 shares of our
common stock issuable upon conversion of 281,571 shares of our Series B
preferred stock; 41,710 shares of our common stock issuable upon
conversion of 31.7 shares of our Series C preferred stock; 297,669 shares
of our common stock issuable upon conversion of 226.229 shares of our
Series D preferred stock; 172,995 shares of our common stock; 41,710
shares of our common stock issuable upon conversion of 31.7 shares of our
Series E preferred stock; and 31,107 shares of our common stock issuable
upon exercise of warrants.
16. Represents 47,528 shares of our common stock issuable upon conversion of
shares of our Series A Preferred Stock.
17. Peter T. Benz is the Chief Executive Officer of Viking Asset Management,
LLC, the general partner of Longview Fund, LP, and, accordingly, may be
deemed to have voting and dispositive power over securities held for the
account of the Longview Fund, LP.
18. Wayne H. Coleson is the Chief Executive Officer of Redwood Grove Capital
Management, LLC, the investment adviser of the Longview Equity Fund, LP,
and, accordingly, may be deemed to have voting and dispositive power over
securities held for the account of the Longview Equity Fund, LP.
19. Wayne H. Coleson is the Chief Executive Officer of Redwood Grove Capital
Management, LLC, the investment adviser of the Longview International
Equity Fund, LP, and, accordingly, may be deemed to have voting and
dispositive power over securities held for the account of the Longview
International Equity Fund, LP.
20. Konrad Ackerman is the sole shareholder and sole director of Alpha
Capital Aktiengesellscft and, accordingly, may be deemed to have voting
and dispositive power over securities held for the account of Alpha
Capital Aktiengesellscft.
21. Jonathan Knight is the President of Gamma Capital Advisors, Ltd., the
general partner of Gamma Opportunity Capital Partners, LP, and,
accordingly, may be deemed to have voting and dispositive power over
securities held for the account of Gamma Opportunity Capital Partners,
LP.
22. Larry Gibbins is a majority shareholder and director of Genesis Microcap
Inc. and, accordingly, may be deemed to have voting and dispositive power
over securities held for the account of Genesis Microcap Inc.
23. Ezira Birnbaum is a director of Barucha LLC and, accordingly, may be
deemed to have voting and dispositive power over securities held for the
account of Barucha LLC.
24. James Mitchell Hull is the general partner of J.M. Hull Associates, LP
and, accordingly, may be deemed to have voting and dispositive power over
securities held for the account of the J.M. Hull Associates, LP.
25. Donald Kirsch is the Chairman and President of The Wall Street Group,
Inc. and, accordingly, may be deemed to have voting and dispositive power
over securities held for the account of The Wall Street Group, Inc.
26. Quantum Industrial Partners LDC is an exempted limited duration company
formed under the laws of the Cayman Islands ("QIP"). QIH Management
Investor, L.P. ("QIHMI"), an investment advisory firm organized as a
Delaware limited partnership, is a minority shareholder of, 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 LLC,
a Delaware limited liability company ("QIH Management"). Soros Fund
Management LLC, a Delaware limited liability company ("SFM"), is the sole
managing member of QIH Management. George Soros is the
13
Chairman of SFM and, in such capacity, may be deemed to have voting and
dispositive power over securities held for the account of QIP.
27. SFM Domestic Investments LLC ("SFMD") is a Delaware limited liability
company. George Soros is the sole managing member of SFMD and, in such
capacity, may be deemed to have voting and dispositive power over
securities held for the account of SFMD.
28. Participant in the New Financing.
We assume that the selling stockholders will seek to sell all of the shares
offered under this prospectus, but we are unable to determine the exact number
of shares that will actually be sold or whether and to what extent any of the
selling stockholders will exercise any warrants or options that they may hold.
PLAN OF DISTRIBUTION
We are registering the resale of the shares of our common stock on
behalf of the selling stockholders'. As used in this prospectus, the term
selling stockholders includes pledgees, transferees or other
successors-in-interest selling shares received from the selling stockholders as
pledgors, borrowers or in connection with other non-sale-related transfers after
the date of this prospectus. This prospectus may also be used by transferees of
the selling stockholders, including broker-dealers or other transferees who
borrow or purchase the shares to settle or close out short sales of shares of
common stock. The selling stockholders will act independently of us in making
decisions with respect to the timing, manner, and size of each sale or non-sale
related transfer. We will not receive any of the proceeds of this offering.
However we would receive the proceeds of any exercise of the warrants held by
these selling stockholders to the extent that such warrants are exercised for
cash. In the event that all such warrants were exercised for cash, the aggregate
proceeds received by us would be approximately $2,349,000. There can be no
assurance concerning the number or the timing of the exercise of such warrants
by the selling stockholders at this date. In addition, because certain of the
warrants contain provisions allowing for a cashless exercise under certain
circumstances, there can be no assurance that we would receive all such proceeds
even if all such warrants are exercised.
This prospectus covers the selling stockholders resale of up to
3,766,510 shares of common stock.
The selling shareholders may sell shares of common stock from time to
time in one or more transactions:
. at fixed prices that may be changed;
. at market prices prevailing at the time of sale; or
. at prices related to such prevailing market prices or at negotiated
prices.
The selling shareholders may offer their shares of common stock in one
or more of the following transactions:
. on any national securities exchange or quotation service on which
the common stock may be listed or quoted at the time of sale,
including the Nasdaq SmallCap Market or the Boston Stock Exchange;
. in the over-the-counter market;
. in privately-negotiated transactions;
. through options;
. by pledge to secure debts and other obligations;
. by a combination of the above methods of sale; or
. to cover short sales made pursuant to this prospectus.
To the extent required, this prospectus may be amended or supplemented
from time to time to describe a specific plan of distribution. In effecting
sales, broker-dealers engaged by the selling stockholders may arrange for other
broker-dealers to participate in the resales.
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The selling stockholders may enter into hedging transactions with
broker-dealers in connection with distributions of the shares or otherwise. In
such transactions, broker-dealers or other financial institutions may engage in
short sales of the shares in the course of hedging the positions they assume
with selling stockholders. The selling stockholders may also sell shares short
and deliver the shares to close out such short positions. The selling
stockholders may also enter into option or other transactions with
broker-dealers, which require the delivery to the broker-dealer of the shares.
The broker-dealer may then resell or otherwise transfer such shares pursuant to
this prospectus. The selling stockholders may also pledge or loan the shares to
a broker-dealer. The broker-dealer may sell the shares so loaned, or upon a
default, the broker-dealer may sell the pledged shares pursuant to this
prospectus. In addition, any shares that qualify for sale pursuant to Rule 144
may be sold under Rule 144 rather than pursuant to this prospectus.
In effecting sales, broker-dealers or agents engaged by the selling
stockholders may arrange for other broker-dealers or agents to participate.
Broker-dealers or agents may receive compensation in the form of commissions,
discounts or concessions from selling stockholders. Broker-dealers or agents may
also receive compensation from the purchasers of the shares for whom they act as
agents or to whom they sell as principals, or both. We will pay all expenses
incident to the offering and sale of the shares to the public other than any
commissions and discounts of underwriters, dealers or agents and any transfer
taxes.
The selling stockholders and any underwriter, broker-dealer or agent who
participate in the distribution of such shares may be deemed to be underwriters
under the Securities Act of 1933, and any discount, commission or concession
received by such persons might be deemed to be an underwriting discount or
commission under the Securities Act of 1933.
In order to comply with the securities laws of certain states, the
shares may not be sold unless they have been registered or qualified for sale in
the applicable state or an exemption from the registration or qualification
requirement is available and is complied with. The selling stockholders have
advised the Company that they only intend to offer and sell the shares in the
states of New York, New Jersey, Florida and California. The Company intends to
make certain filings with the state of New York in order to permit the selling
stockholders to offer and sell the shares in the state of New York. In the
states of New Jersey and California, a registration or qualification is not
required if the sale of the shares is effected by or through a licensed-broker
dealer in such states pursuant to an unsolicited order or offer to buy. In the
state of Florida, a registration or qualification is not required if the sale of
the shares is effected by or through a licensed registered associated person of
a licensed broker dealer in Florida. The Company has not registered or
qualified, and does not currently intend to register or qualify, the offer and
sale of the shares in any other state. While there may be exemptions from such
registrations or qualifications in certain states, the shares should not be sold
in any other state without first verifying with the Company that such exemption
is available and whether such shares should be sold through registered or
licensed brokers or dealers.
We have advised the selling stockholders that the anti-manipulation
rules of Regulation M under the Exchange Act may apply to sales of shares in the
market and to the activities of the selling stockholders and their affiliates.
In addition, we will make copies of this prospectus available to the selling
stockholders and we have informed them of the need for delivery of copies of
this prospectus to purchasers at or prior to the time of any sale of the shares
offered hereby. The selling stockholders may indemnify any broker-dealer that
participates in transactions involving the sale of the shares against certain
liabilities, including liabilities arising under the Securities Act of 1933.
At the time a particular offer of shares is made, if required, a
prospectus supplement will be distributed that will set forth the number of
shares being offered and the terms of the offering, including the name of any
underwriter, dealer or agent, the purchase price paid by any underwriter, any
discount, commission and other item constituting compensation, any discount,
commission or concession allowed or reallowed or paid to any dealer, and the
proposed selling price to the public.
Enable Growth Partners, LP ("Enable"), one of the selling stockholders
is an affiliate of a broker-dealer. Enable has represented to us that it
purchased the securities to be resold pursuant to this prospectus in the
ordinary course of business and, at the time of the purchase of such securities,
had no agreements or understandings, directly or indirectly, with any person to
distribute such securities.
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EXPERTS
The consolidated financial statements as of December 31, 2003 and 2002
and for each of the three years in the period ended December 31, 2003
incorporated by reference in this prospectus have been so incorporated in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon by Swidler Berlin Shereff Friedman, LLP ("Swidler Berlin"), our counsel.
Jonathan P. Freedman, who became our General Counsel in February 2004, was
previously an associate attorney at Swidler Berlin and participated in the
preparation of its opinion.
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