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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, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from ______ to______
Commission File Number: 333-22895
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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 28, 2001, 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 March 28, 2001 based
upon the last sale price of such equity reported on the National Associated of
Securities Dealers Automated Quotation SmallCap Market was approximately
$11,950,000.
PART I
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ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Bluefly, Inc. is a leading Internet retailer of designer fashion brands at
discounted prices. We sell over 450 brands of designer apparel, fashion
accessories and home products at discounts that typically range between 25% and
75% off comparable retail prices. In the 12 months of calendar year 2000, we
offered over 55,000 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 185,000
customer accounts in 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 start-up 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 the Company's website. On February 2, 2001, we reincorporated in
Delaware through a merger with a wholly owned subsidiary, which was approved by
our shareholders at the annual meeting of our shareholders held on February 1,
2001. 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, subsidiaries and affiliates, unless the
context indicates otherwise.
RECENT DEVELOPMENTS
The New Soros Financing. On November 13, 2000, we entered into an investment
agreement (the "Investment Agreement") with Quantum Industrial Partners LDC
("Quantum") and SFM Domestic Investments LLC ("SFM"), both affiliates of Soros
Private Equity Partners LLC (collectively referred to herein with Quantum and
SFM as "Soros"), pursuant to which Soros agreed to convert $15 million of our
indebtedness to Soros into an equity interest in us and to make an additional
investment in us of $15 million, subject to certain conditions. The conversion
of the indebtedness and the additional investment by Soros are referred to as
the "Soros Investment". As part of the Soros Investment, we issued to Soros
shares of Common Stock and shares of a newly-designated Series B Convertible
Preferred Stock ("Series B Preferred Stock") of the Company. See also, "Market
for Common Equity and Related Stockholder Matters - Recent Sale Of Unregistered
Securities."
The Investment Agreement provides for the Soros Investment to be consummated in
three closings. At the first closing in November 2000, Soros purchased
subordinated convertible promissory notes (the "New Notes") in an aggregate
principal amount of $5 million from us and exchanged senior convertible
promissory notes of the Company in an aggregate principal amount of $15 million
for subordinated convertible promissory notes (the "Amended Notes" and together
with the New Notes, the "Notes"). At the second closing on February 5, 2001, the
principal amount of and all interest accrued on the Notes were converted into
shares of Series B Preferred Stock at a price of $2.34 per share. At the third
closing on March 28, 2001, Quantum and SFM paid the purchase price for 4,273,504
shares of Common Stock of the Company the aggregate amount of approximately $10
million pursuant to its Standby Commitment (defined below) related to the Rights
Offering (defined below). See also, "The Rights Offering".
The Rights Offering. On February 7, 2001, pursuant to the Investment Agreement,
we commenced an offering of rights (the "Rights Offering") to purchase up to
8,547,009 shares of Common Stock of the Company. In connection therewith, we
distributed to all holders of our Common Stock as of February 7, 2001 (the
"Record Date") 1.735 rights (the "Rights") for each share of Common Stock that
they owned as of that date. Each right entitled such shareholder to purchase one
share of Common Stock for a subscription price of $2.34 per share.
Under the Investment Agreement, Quantum and SFM had agreed to purchase a total
dollar amount of shares equal to the
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difference between $20 million and the aggregate total dollar amount of shares
purchased by our shareholders in the Rights Offering, provided that, in no event
would Quantum and SFM be required to purchase more than $10 million of Common
Stock in the aggregate (the "Standby Commitment"). The Rights Offering ended at
5 p.m., New York City time, 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, Quantum and
SFM 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 our outstanding Common Stock.
The Rosenthal Financing. On March 30, 2001, we entered into a Financing
Agreement (the "Financing Agreement") with Rosenthal & Rosenthal, Inc.
("Rosenthal") pursuant to which Rosenthal will provide to us certain credit
accommodations, including loans or advances, factor-to-factor guarantees or
letters of credit in favor of suppliers or factors or purchases of payables owed
to our 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 our inventory or (2) the full liquidation value of our
inventory or (ii) $10 million. Initial availability under the Loan Facility is
$3.5 million.
We also agreed to pay Rosenthal (a) an annual facility fee equal to 1% 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 1/2 of 1% of
the face amount of the letter of credit or guaranteee plus, 1/4 of 1% of the
face amount of such letters of credit or guarantees for each thirty (30) days on
a portion such letters of credit or guarantees are open. Rosenthal also agreed
to charge our suppliers a factoring fee not to exceed 2% of the gross invoiced
amount.
In consideration for the Loan Facility, among other things, we granted to
Rosenthal a first priority lien (the "Rosenthal 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 the total amount of
monies loaned to us under the Loan Facility exceeds 90% of the undrawn amount of
the Standby Letter of Credit (defined below) 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 for five years.
In connection with the Loan Facility, 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 Financing Agreement. In addition,
during the term of the Financing Agreement, at our request, Soros will issue
another Standby Letter of Credit for up to an additional $1.5 million. As used
herein, the term "Soros Guarantee" means the total face amount of all S tandby
Letters of Credit which Soros is maintaining in connection with the Loan
Facility and the term "Standby Letter of Credit" shall mean any standby letter
of credit issued by Soros in favor of Rosenthal in connection with the Loan
Facility.
In consideration for the Soros Guarantee, we granted to Soros a lien (the "Soros
Lien"), subordinated to the Rosenthal Lien, on substantially all of our assets,
and we issued to Soros a warrant (the "Soros Upfront Warrant") to purchase
100,000 shares of our Common Stock at an exercise price equal to the average
closing price of our Common Stock on the 10 days preceding September 15, 2001,
exercisable for ten years beginning on September 15, 2001.
Subject to certain conditions, if we default on any of our obligations under the
Financing Agreement, Rosenthal has the right to draw upon the Standby Letter of
Credit to satisfy any such obligations. If and when Rosenthal draws on the
Standby Letter of Credit, 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 Standby Letter of Credit plus interest accrued thereon.
In addition, to the extent that Rosenthal draws on the Standby Letter of Credit
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
Standby Letter of Credit, 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 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
the latter of (a) 10 days after the date of issuance and (b) September 15, 2001.
See also "Management's Discussion and Analysis of Financial Conditions and
Results of Operations Liquidity and Capital Resources".
Under the Financing Agreement, Soros has the right to purchase all of our
obligations 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 Standby Letter of Credit as
consideration to Soros for the purchase of such obligations.
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 and offering products in a friendly, convenient, upscale environment, 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 full price 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 typically offer good 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, tend to be "vertical brands" selling
but 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
intend 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, your
cost will be the few minutes it took to browse or search our Web Site." In this
regard, 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 350 top designer brands from which
we purchase inventory directly. We recognize that liquidating excess inventory
can be a
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"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 an enjoyable experience 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 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. 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. In addition, we are able to maintain
an upscale environment through the design of a single online storefront.
We believe 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.
THE ONLINE APPAREL MARKET
The dramatic growth of e-commerce has been widely reported and is expected to
continue. In September 2000, Forrester Research, Inc. ("Forrester") estimated
that online purchases by U.S. consumers will grow from approximately $44.8
billion in 2000 to $207 billion by 2004, representing a compound annual growth
rate of approximately 47%. International Data Corporation estimated that the
number of total online purchasers will grow from approximately 31 million in
1998 to 183 million in 2003, representing a compound annual growth rate of 43%.
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 Forrester, online apparel sales reached $5 billion in 2000 and are
expected to reach nearly $32 billion in 2004. 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.
In August 2000, Jupiter Media Metrix ("Jupiter") reported that the number of
women online in the U.S. surpassed that of men for the first time ever in the
first quarter of 2000, and that the online population of women as a whole is
growing more rapidly than the online population overall. Since women, according
to Jupiter, spend almost three times as much as men on the remote purchase of
apparel, the Company believes that the increasing number of women online is
likely to fuel the growth of online apparel sales. In addition, as the online
audience expands from technology savvy pioneers to include mainstream consumers,
demand for online goods and services should more closely mimic the general
population's demands, and categories such as apparel will likely benefit
disproportionately. In light of these factors, Jupiter projected that the
apparel category will be one of the fastest growing product categories online
through 2002. 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.
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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 is worth noting that, according to a 1997 report by the
Direct Marketing Association, apparel and accessories was the largest product
category sold via catalogs and represented approximately $16 billion, or 34%, of
the industry's $48 billion of consumer sales. 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 have implemented an aggressive advertising and marketing campaign to increase
awareness of our brand and acquire new customers. 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 strategic online relationships. We have
established strategic marketing alliances with many of the most visited Web
Sites and portals, including AOL, MSN, and Yahoo!.
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 450
top, 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 350 such designers. We believe that we have been
successful in opening up over 350 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.
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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 instantaneously and can price products
based on supply and demand.
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 create
lower inventory carrying costs.
WAREHOUSING AND FULFILLMENT
In October we moved all our inventory to a third party warehouse and fulfillment
center located in Virginia from one in Illinois. When we receive an order, the
information is transmitted to the fulfillment center which picks and packs the
items included in the order and ships it 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 2000, during our peak weeks of the holiday season, 98% of our orders
shipped within 24 hours.
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 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. During the
course of the year, we implemented a number of initiatives with our customers
that were designed to automate key areas of information and reduce customer
contacts while increasing satisfaction. During the past year, our customer
contact ratio has declined from over 1.0 contacts per order to about 0.4
contacts per order.
TECHNOLOGY
We have implemented a broad array of state-of-the-art technology 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.
We utilize a 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.
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 retailers such
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as The Gap, Nordstrom, and Macy's which are using the Internet to expand their
channels of distribution, and less established companies such as Ashford, 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, 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 such permits or licenses will be obtainable. 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, 2001, we had 77 full-time employees and 9 part-time employees.
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 GRANTED A LIEN ON SUBSTANTIALLY ALL OF OUR ASSETS. On March 30, 2001, we
entered into a Financing Agreement with Rosenthal pursuant to which Rosenthal
would provide us with certain credit accommodations, including loans or
advances, factor-to-factor guarantees or letters of credit in favor of suppliers
or factors or purchases of payables owed to our suppliers. Under the terms of
the Financing Agreement, we gave a first priority lien to Rosenthal on
substantially all of our assets, including our cash balances, and a subordinated
lien on the same assets to Soros in exchange for its agreement to guarantee a
portion of the Loan Facility. If we are unable to meet certain obligations under
the Financing Agreement, we will be in default under such agreement in which
event Rosenthal, or Soros to the extent that Soros purchases our obligations
from Rosenthal pursuant to the Buyout Option in the Financing Agreement, would
be entitled, among other things, to sell the assets on which it has a lien to
satisfy our obligations to Rosenthal or Soros, as the case may be. See also,
"Recent Developments - The Rosenthal Financing."
Our ability to make payments under the 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 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 pay our indebtedness under
the Financing Agreement.
WE ARE MAKING A SUBSTANTIAL INVESTMENT IN OUR BUSINESS AND MAY NEED TO RAISE
ADDITIONAL FUNDS. Our business is capital intensive and we may need additional
financing to effect our business plan. We anticipate, based on current plans and
assumptions relating to our operations, that the proceeds from prior financings,
including the proceeds of our recent offering, together with existing resources
and cash generated from operations, should be sufficient to satisfy our cash
requirements through the end of 2001. In March 2001, we entered into a Financing
Agreement for a secured inventory line of credit - See "Recent Developments -
The Rosenthal Financing." However, we intend to 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, when needed, would have a material
adverse effect on our business, financial condition and results of operations.
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 HAVE A HISTORY OF LOSSES AND EXPECT THAT LOSSES WILL CONTINUE IN THE FUTURE.
As of December 31, 2000, we had an accumulated deficit of $38,340,000. We
incurred net losses from continuing operations of $21,109,000 and $13,257,000
and $2,478,000 for the years ended December 31, 2000, 1999 and 1998,
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.
8
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 DEPENDENT ON 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 and generate bad publicity for us.
BRAND OWNERS COULD ESTABLISH PROCEDURES TO LIMIT OUR ABILITY TO PURCHASE
PRODUCTS INDIRECTLY. Brand owners have 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. We have grown from twelve
employees in January 1999 to 86 employees in March 2001. To be successful, we
must continue to implement management information 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 and inventory levels at the pace needed to
support customer demand could have a material adverse effect on our business,
financial condition and results of operations.
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. We began using a new fulfillment
operations provider in August 2000 and have a limited operating history with it.
The failure of our fulfillment operations provider, Web hosting provider or
delivery companies 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, 2000, there were outstanding options to
purchase 4,750,885 shares of common stock issued under our 1997 and 2000 Stock
Option Plans, warrants to purchase 375,000 shares issued to Soros, and
additional warrants and options to purchase an aggregate of 73,000 shares of
common stock. On March 30, 2001, in consideration for the Soros Guarantee, we
issued to Soros, among other things, a warrant to purchase 100,000 shares of our
Common Stock at an exercise price equal to the average closing price of our
Common Stock on the 10 days preceding September 15, 2001. In additionn, to the
extent that Rosenthal draws on the Standby Letter of Credit (i) during the
continuance of a default under the Financing Agreement, or (ii) at any time that
the total amount of outstanding Rosenthal Loans exceed 90% of the Standby Letter
of Credit or we will be required, among other things, in each such instance to
issue to Soros another Contingent Warrant exercisable at a discount to market.
See "Certain Transactions". As consideration for the Loan Facility, we issued to
Rosenthal a warrant to purchase 50,000 shares of our Common Stock at an exercise
price of $2.34, exercisable for five years. The exercise of our outstanding
options and warrants and in particular the exercise of any Contingent Warrant
would dilute the then existing shareholders' percentage ownership of our stock,
and any sales in the public market of common stock underlying such securities
could adversely affect prevailing market prices for the Common Stock.
The 500,000 shares of Series A Preferred Stock outstanding are convertible into
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). As of March 15, 2001, 8,910,782 shares of Series B Preferred
Stock are outstanding, which shares 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 contain antidilution provisions
which, subject to certain exceptions, would reduce the conversion price of the
Series B Preferred Stock to the price at which we issue or sell new securities
in the future, should those new securities be issued or sold for less than $2.34
per share.
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 The Gap, Nordstrom, Saks
Fifth Avenue and Macy's, which are using the Internet to expand their
channels of distribution;
o less established companies, such as Ashford, which are building their
brands online;
9
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
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. For the year ended December 31,
2000 and 1999 the Company acquired approximately 15.3% and 14.6%, respectively
of its inventory from one supplier. 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 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 business, prospects, financial
condition and results of operation would be materially, adversely affected. See
also, "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
10
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. 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; 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.
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 the
attractiveness of our merchandise 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
11
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.
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.
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 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 MARKET. 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,
financial condition and operating results.
WE MAY BE SUBJECT TO HIGHER RETURN RATES. We recognize that purchases of apparel
and fashion accessories over the
12
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 Internet experience and retain existing key personnel in the
future. The market for personnel with Internet experience 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, 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, including Bluefly.com,
which is not favorably received by consumer or trade customers could damage our
reputation.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS AND WE MAY BE
LIABLE FOR INFRINGING THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS. Third parties
may infringe or misappropriate our trademarks or other proprietary rights, which
could have a material adverse effect on our business, 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. 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. We are
pursuing registration service marks in the United States and abroad. Effective
trademark, copyright and trade secret protection may 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
13
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, operating results 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.
QUANTUM INDUSTRIAL PARTNERS LDC AND SFM DOMESTIC INVESTMENTS LLC OWN A MAJORITY
OF OUR STOCK. Quantum Industrial Partners LDC and SFM Domestic Investments LLC
beneficially own, in the aggregate, Preferred Stock and warrants convertible
into approximately 78% of our 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, Quantum Industrial Partners LDC and SFM
Domestic Investments LLC have 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, Quantum Industrial Partners LDC and SFM Domestic Investments LLC,
effectively control 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 shareholders, including any amendments to
our certificate of incorporation, a sale of all or substantially all of our
assets or a merger.
14
CHANGE OF CONTROL COVENANT AND LIQUIDATION PREFERENCE OF SERIES A PREFERRED
STOCK AND SERIES B PREFERRED STOCK. We have agreed with Quantum Industrial
Partners LDC and SFM Domestic Investments LLC, 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 their respective aggregate liquidation preference of the
Series A Preferred Stock and Series B Preferred Stock. The Series A liquidation
preference is $10,000,000 (plus any accrued and unpaid dividends) and the Series
B liquidation preference is at least $20,000,000 (plus any accrued and unpaid
dividends) and is increased by $10,000,000, the amount purchased by Quantum
Industrial Partners LDC and SFM Domestic Investments LLC, pursuant to their
participation in the Rights Offering.
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 shareholders.
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.
15
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 will be approximately $396,000.
ITEM 3. LEGAL PROCEEDINGS
On March 27, 2001, we were served with a summons and complaint filed on March
23, 2001 in the Superior Court of California (Alameda County). Michael DiPirro
v. Bluefly, Inc. and Does 1 through 1000 (distributors and manufacturers of lead
crystalware). Among other things, the complaint alleges that the defendants
knowingly and intentionally exposed individuals in California to lead by selling
lead crystalware in California without proper warnings in violation of
California's Safe Drinking Water and Toxic Enforcement Act of 1986 ("Proposition
65"). The plaintiff is seeking civil penalties of $2,500 per day per violation
and alleges that the defendants have been engaged in conduct which violates
Proposition 65 since April 1997.
We believe that we have valid and strong defenses to this claim and we do not
believe that the ultimate disposition of this claim will have a material adverse
effect on us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our annual meeting of shareholders for the year 2000 on February 1,
2001. At such meeting, we submitted the following proposals to a vote of our
shareholders:
1. the reincorporation of the Company from a New York corporation to a
Delaware corporation (the "Reincorporation");
2. the issuance of at least 8,547,009 shares of our newly-designated
Series B Convertible Preferred Stock and up to 4,273,504 shares of our
Common Stock to certain affiliates of Soros Private Equity Partners
LLC, and the change of control in the Company resulting therefrom (the
"Soros Issuance");
3. the election of three Class I directors, subject to the approval of the
Soros Issuance (the "Election");
4. amendments to our 1997 Stock Option Plan (as amended, the "Plan") to:
(i) increase the aggregate number of shares of Common Stock which may
be the subject of options granted under the Plan from 1,500,000 shares
to 5,400,000 shares and (ii) increase the number of shares as to which
any participant may be granted options in any fiscal year from 100,000
shares to one million shares (the "Plan Amendments"); and
5. ratification of appointment of PricewaterhouseCoopers LLP, as
independent accountants of the Company for the fiscal year ended
December 31, 2000, ("Appointment of Accountants")
Red Burns, Martin Miller and Robert G. Stevens were elected to serve as Class I
directors of the Company until our annual meeting of shareholders in 2003. Ms.
Burns resigned as a director of the Company effective as of February 5, 2001 in
order to allow the designee of the holders of the Company's newly-issued Series
B Convertible Preferred Stock to serve as a director. As a result of the
consummation of the Reincorporation, the board of directors of the Company is no
longer classified and, therefore, Messrs. Miller and Stevens will serve as
directors of the Company until the next annual meeting of the shareholders. The
votes for the election were tabulated as follows:
Nominee For Against
------- --- -------
Red Burns 5,688,881 96,135
Martin Miller 5,689,071 95,945
Robert G. Stevens 5,688,471 96,545
16
The Soros Issuance, the Plan Amendments and the Appointment of Accountants were
approved by the shareholders, having received a majority of the votes cast by
the shareholders entitled to vote at the meeting. The Reincorporation was
approved by the shareholders, having received two-thirds of the vote entitled to
be voted at the meeting. The votes for each of these proposals were tabulated as
follows:
Proposal For Against Abstained Unvoted
- -------- --- ------- --------- -------
Reincorporation 4,067,134 47,045 21,596 1,649,241
Soros Issuance 4,060,114 46,736 28,925 1,649,241
Plan Amendments 5,634,624 126,007 24,385 --
Appointment of Accountants 5,695,685 71,677 17,654 --
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 1999 HIGH LOW
----------- ---- ---
First Quarter $17.88 $8.69
Second Quarter $12.88 $7.50
Third Quarter $14.00 $8.00
Fourth Quarter $16.69 $8.50
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 28, 2001, there were approximately 84 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
On November 13, 2000, the Corporation entered into an Investment Agreement with
Quantum and SFM, affiliates of Soros Private Equity Partners LLC. The Investment
Agreement provides for Soros, on the terms and subject to the conditions set
forth in the Investment Agreement, to convert $15 million of the Corporation's
indebtedness into an equity interest in the Corporation and to make an
additional equity investment in the Corporation of up to $15 million (the
conversion of indebtedness and additional investment are referred to as the
"Soros Investment").
The Investment Agreement provides for the Soros Investment to be consummated at
three closings, the first of which occurred
17
simultaneously with the signing of the Investment Agreement on November 13,
2000. At the first closing, Soros purchased from the Company New Notes in the
aggregate principal amount of $5 million, for cash, and exchanged outstanding
senior convertible promissory notes in the aggregate principal amount of $15
million, which had been issued to Soros pursuant to the Note and Warrant
Purchase Agreement, dated as of March 28, 2000, by and between Soros and the
Company, for subordinated convertible promissory notes of equal principal
amount. The Notes were convertible into shares of Series B Preferred Stock at
the rate of $2.34 per share. The Amended Notes bore interest at the rate of 8%
per annum and the New Notes bore interest at the rate of 11% per annum, in each
case, subject to adjustment. The Notes were to mature on May 1, 2001 (the
"Maturity Date").
The principal amount of and all interest accrued on the Notes was automatically
converted at the second closing under the Investment Agreement into shares of
the Company's Series B Convertible Preferred Stock, par value $.01 per share, at
the rate of $2.34 per share.
Pursuant to the Investment Agreement, upon the effectiveness of the
Reincorporation, which occurred on February 2, 2001, the terms of the Company's
Series A Convertible Preferred Stock, par value $.01 per share, were amended to
reduce the conversion price thereof to $2.34 per share and to delete the
provision which had resulted in the Series A Preferred Stock being characterized
as an instrument subject to redemption at the option of the holder. In addition,
the terms of the Series A Preferred Stock were amended to give the director
nominated by the holders of Series A Preferred Stock seven votes on matters that
come before the Board of Directors. The director nominated by the holders of
Series B Stock is also entitled to seven votes on matters that come before the
Board of Directors.
On March 30, 2001, we entered into the Financing Agreement with Rosenthal. See
"Description of Business - Recent Developments - The Rosenthal Financing." In
connection therewith, we issued to Rosenthal a warrant to purchase 50,000 shares
of our Common Stock at an exercise price of 2.34 per share. The Rosenthal
Warrant is for a term of five years beginning March 30, 2001.
In addition, in connection with the Loan Facility, we entered into a
Reimbursement Agreement with Soros. See also, "Description of Business - Recent
Developments - The Rosenthal Financing." Under the Reimbursement Agreement, we
issued to Soros a warrant to purchase 100,000 shares of our Common Stock at an
exercise price equal to the average closing price of our Common Stock on the 10
days preceding September 15, 2001. The Soros Upfront Warrant is for a term of
ten years beginning March 30, 2001.
The issuances of the Series B Preferred Shares, the Rosenthal Warrant and the
Soros Warrant were 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. Soros represented its intention to
acquire the securities for investment only and not with a view to or for sale in
connection with any distribution thereof, and appropriate restrictive legends
were affixed to the certificates representing the shares issued in these
transactions. We made available to Soros written information about us in
accordance with Rule 502 of the Securities Act and advised Soros of the
limitations on resale of such securities. In addition, Soros was offered the
opportunity, prior to purchasing any securities, to ask questions of, and
receive answers from, the Company concerning the terms and conditions of the
transaction and to obtain additional relevant information about the Company. The
amendment of the terms of the Series A Preferred Stock was exempt from
registration under the Act, pursuant to Section 3(a) (9) of the Act, as the
amended Series A Preferred Stock was exchanged exclusively with holders of the
Company's Series A Preferred Stock and no commission or other renumeration was
paid or given directly or indirectly for soliciting such exchange.
18
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,
-----------------------
2000 1999 1998 1997
---- ---- ---- ----
Statement of Operations Data:
Net sales $ 17,512 $ 5,109 $ 243 $ --
Cost of sales 14,018 4,554 297 --
----------- ----------- ----------- -----------
Gross profit (Loss) 3,494 555 (54) --
Selling, marketing and fulfillment expenses 18,797 10,794 1,118 --
General and administrative expenses 5,296 3,450 1,166 819
Internet business start up costs -- -- 332
----------- ----------- ----------- -----------
Total operating expenses 24,093 14,244 2,616 819
Operating loss from continuing operations (20,599) (13,689) (2,670) (819)
Loss from continuing operations (21,109) (13,257) (2,478) (469)
Net loss (21,109) (13,194) (3,656) (381)
Basic and diluted (loss) income per share: $ (4.45) $ (2.82) $ (1.32) $ (.18)
Continuing Operations (4.45) (2.83) (.89) (.22)
Discontinued Operations -- .01 (.43) .04
Basic and diluted weighted average shares 4,924,906 4,802,249 2,770,869 2,149,315
outstanding available to common stockholders
Balance Sheet Data:
As of December 31,
------------------
2000 1999 1998
---- ---- ----
Cash $ 5,350 $ 7,934 $2,830
Inventories, net 7,294 7,020 429
Other current assets 1,704 1,080 624
Total Assets 15,868 17,109 7,212
Other current liabilities 6,131 6,523 756
Notes Payable, net 19,698 - -
Redeemable Preferred Stock 11,088 10,286 -
Shareholders' equity (deficit) (21,049) 300 6,392
19
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 financial statements and the related notes
thereto included elsewhere in this report.
OVERVIEW
Bluefly is a leading Internet retailer of designer fashion at discounted prices.
We sell over 450 brands of designer clothing, fashion accessories and home
products at discounts ranging from 25% to 75% off of 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
sportwear 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 derive revenue primarily from the sale of designer products on our Web Site.
Revenue is recognized when goods are received by our customers, which occurs
only after credit card authorization. We generally permit returns for any reason
within 90 days of the sale. Accordingly, we reserve for estimated future returns
and bad debt at the time of shipment based on historical data. However, our
future return and bad debt rates could differ significantly from historical
patterns.
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.
We have grown rapidly since launching our Web Site in September 1998. Our net
sales increased over 242% to $17,512,000 for the year ended December 31, 2000
from $5,109,000 for the year ended December 31, 1999. In the fourth quarter of
2000, our net revenues increased by approximately 87% to $5,761,000 from
$3,082,000 in the fourth quarter of 1999. In addition, our net loss for the
fourth quarter of 2000 decreased to $5,360,000, or $1.13 per share, from
$5,689,000, or $1.20 per share, in the fourth quarter of 1999. This decrease was
due to an increase in gross margin and a decrease in both selling, marketing and
fulfillment expense and general and administrative expenses as a percentage of
revenue.
In accordance with Emerging Issue Task Force Issue No. 00-10 we have included in
net revenue, revenues from shipping and handling. Out-bound shipping costs are
included in cost of goods sold. These amounts were previously offset against
each other and included in selling, marketing and fulfillment expenses in the
Statement of Operations. All prior periods have been reclassified to conform
with this presentation.
We have incurred net losses of $21,109,000, or $4.45 per share, for the year
ended December 31, 2000 as compared to $13,194,000, or $2.83 per share, for the
year ended December 31, 1999. This increase in net loss reflects increased (i)
marketing costs to attract new customers and build brand awareness (ii)
technology costs as a result of the continued expansion and upgrade of our Web
Site and associated systems to manage our growth in revenue and process customer
orders and payments and (iii) general and administrative expenses as a result of
increased headcount. In addition, this increase in net loss also reflects an
increase in our fulfillment expenses as a result of our move to a more robust
fulfillment center. These increases were partially offset by the increase in
gross margin for the year.
New customer acquisition cost for the year ended December 31, 2000 decreased by
nearly 46% to approximately $71 from approximately $132 for 1999. For the year
ended December 31, 2000, we acquired 130,359 new customers, up approximately
153% from the 51,514 new customers acquired in 1999.
Gross revenue per average monthly unique visitor (as measured by Jupiter)
increased by 170% to $4.59 for the year ended December 31, 2000 from $1.70 in
1999. The average order size (excluding shipping and handling revenue) grew by
approximately 11% to approximately $105 for the year ended December 31, 2000
from $94.60 for 1999.
The percentage of annual sales from repeat customers increased by approximately
33% to 48% for the year ended December 31,
20
2000 from 36% in 1999.
We have presented our financial statements in order to reflect the discontinued
operations in accordance with generally accepted accounting principles. Although
the start-up phase of Bluefly.com did not begin until April 1998 and the site
was not launched until September 8, 1998, in accordance with generally accepted
accounting principles, we reflected in continuing operations for 1998 (i)
general and administrative expenses, (ii) interest income, and (iii) related tax
provisions, all of which relate to on-going corporate activities. Accordingly,
net losses from continuing operations in 1998, attributable to those aspects of
the business which have continued were $197,000.
RESULTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31,
1999
NET SALES: Gross sales, which consists primarily of revenue from product sales
and shipping and handling revenue, (before any adjustment for reserves or
promotional discounts) totaled $25,006,000 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. The reserve
allowance takes into account our 90-day return policy and actual experience to
date, which may vary over time. 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 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, 2000 totaled
$14,018,000, resulting in gross margin of approximately 20.0%. 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 (now that out-bound shipping
costs are included in costs of good sold rather than as a part of selling
marketing and fulfillment expenses) resulted primarily from our limiting the
amount of free shipping that we offered our customers during fiscal 2000 and
from improved product margins.
SELLING, MARKETING AND FULFILLMENT EXPENSES: Selling, marketing and fulfillment
expenses consists of costs associated with online strategic marketing
relationships, print advertising, Web Site hosting, inventory management,
fulfillment costs, and customer service. Selling, marketing and fulfillment
expenses totaled $18,797,000 for the year ended December 31, 2000. Of the total
selling, marketing and fulfillment expenses for the year ended December 31,
2000, marketing expenses related to online and print advertising totaled
approximately $9,278,000, Web Site hosting costs totaled approximately
$2,218,000 and fulfillment costs totaled approximately $2,286,000. Selling,
marketing and fulfillment expenses for the year ended December 31, 1999 were
approximately $10,794,000. Of the total selling, marketing and fulfillment
expenses for year ended December 31, 1999, marketing expenses related to online
and print advertising totaled approximately $6,787,000, Web site hosting costs
totaled approximately $639,000; and fulfillment costs totaled approximately
$557,000.
The increased marketing expenses related to online and print advertising
resulted from our efforts to increase our customer base. 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. 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.
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 average number of people
we employed for the year ended December 31, 2000 was 89, compared to 75 for the
year ended December 31, 1999.
INTEREST EXPENSE AND OTHER INCOME, NET: Interest expense and other income, net,
for the year ended December 31, 2000 totaled $510,000. This amount represents
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 the cash balance. 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.
21
FOR THE YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31,
1998
NET SALES: Gross sales, which consists primarily of revenue from product sales
and shipping and handling revenue, (before any adjustment for reserves or
promotional discounts) totaled $7,073,000 for the year ended December 31, 1999.
We recorded a provision for returns and credit card chargebacks and other
discounts of $1,964,000, or approximately 27.8% of gross sales. The reserve
allowance takes into account our 90-day return policy and actual experience to
date, which may vary over time. After the necessary provisions for returns and
credit card chargebacks and adjustments for uncollected sales taxes, our net
sales for 1999 were $5,109,000. Bluefly.com was launched in September 1998. Net
sales for the period from launch to December 31, 1998 were $243,000.
COST OF SALES: Cost of sales consists of the cost of product sold to customers,
in-bound and out-bound shipping costs, inventory reserves and packing materials.
Cost of sales for the year ended December 31, 1999 totaled $4,554,000, resulting
in gross margin of 10.9%. Bluefly.com was launched in September 1998. Cost of
sales for the period from launch to December 31, 1998 were $297,000, resulting
in negative gross profit of $54,000. The negative gross profit in 1998 was the
result of inventory reserves arising from situations during the start-up phase
of Bluefly.com in which we pre-paid for merchandise and (i) received merchandise
from suppliers that did not meet our high standards of quality and/or (ii)
received less than the amount purchased.
SELLING, MARKETING AND FULFILLMENT EXPENSES: Selling, marketing and fulfillment
expenses consists of the costs associated with online strategic marketing
relationships, print and radio advertising, Web Site hosting, inventory
management, fulfillment and customer service. Selling, marketing and fulfillment
expenses for the year ended December 31, 1999 totaled $10,794,000. Selling,
marketing and fulfillment expenses for the period from launch to December
31,1998 were approximately $1,118,000.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses include
salaries and related expenses, recruiting fees, insurance costs, accounting and
legal fees, depreciation and other office related expenses. General and
administrative expenses for the year ended December 31, 1999 were $3,450,000
compared to $1,166,000 for 1998. The increase in general and administrative
expenses in 1999, as compared to 1998, was largely the result of an increase in
employees, fees paid to consultants and search firms and legal expenses. We
increased the number of our employees across all departments, growing from 12
employees as of December 31, 1998 to 75 as of December 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, the Company had approximately $5.3 million, of liquid
assets, entirely in the form of cash and cash equivalents. As of December 31,
2000, the Company had negative working capital of approximately $11.5 million.
This was primarily attributable to the approximately $20 million of convertible
notes payable being included in current liabilities. In February 2001, these
notes converted into equity. At March 28, 2001, we had approximately $11.5
million of cash and approximately $15.4 million of working capital.
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 is provided. 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 bear interest at a rate of 8% per annum and are due in
May 2001. Under the terms of the New Soros Financing, the Soros Notes converted
into preferred stock on February 5, 2001. In connection with the Soros
Commitment and Soros Notes, we granted 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, we have recorded a credit
to additional paid in capital and a debt discount, that is being amortized over
the life of the debt.
On November 13, 2000, we entered into the New Soros Financing pursuant to which
affiliates of Soros agreed to invest up to an additional $15 million in us,
subject to certain conditions. Under the terms of the agreement, in November
2000, Soros invested an additional $5 million in the form of a promissory note,
convertible into preferred stock at a rate of $2.34 per share. The agreement
required us to offer the public shareholders of the Company, as of February 7,
2001, the right to purchase up to an aggregate of $20 million of Common Stock at
$2.34 per share. If the public shareholders purchased less than $20 million of
Common Stock, Soros would purchase the difference between $20 million and the
amount purchased by the public shareholders, up to a total $10 million, all at
the rate of $2.34 per share. As part of the transaction, the Soros Notes, as
well as the New Note, converted into preferred stock at the rate of $2.34 per
share, and the conversion price of the
22
preferred stock previously issued to Soros and other investors was reduced to
$2.34 per share. All of the preferred stock earns dividends at the rate of 8%
per year, payable in cash or stock, at the Company's option, upon conversion.
The preferred stock issued pursuant to the New Soros Financing is convertible
into shares of Common Stock of the Company on a one-for-one basis, subject to
antidilution.
Pursuant to the New Soros Financing, Quantum and SFM had agreed to purchase a
total dollar amount of shares equal to the difference between $20 million and
the aggregate total dollar amount of shares purchased by our shareholders in the
Rights Offering, provided that, in no event would Quantum and SFM be required to
purchase more than $10 million of Common Stock in the aggregate. The Rights
Offering ended at 5 p.m., New York City time, on March 26, 2001. The public
shareholders subscribed to purchase 6,921 shares in the Rights Offering for
aggregate proceeds of $16,000. In accordance with the Standby Commitment,
Quantum and SFM purchased an aggregate of 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.
On March 30, 2001, we entered into a Financing Agreement with Rosenthal pursuant
to which Rosenthal will provide to us certain credit accommodations, including
loans or advances, factor-to-factor guarantees or letters of credit in favor of
suppliers or factors or purchases of payables owed to our suppliers. 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 our inventory or (2) the full liquidation
value of our inventory or (ii) $10 million. 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%. Initial availability
under the Loan Facility is $3.5 million.
We also agreed to pay Rosenthal (a) an annual facility equal to 1% 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 1/2 of 1% of
the face amount of the letter of credit or guarantee plus, 1/4 of 1% of the face
amount of such letters of credit or guarantees for each thirty (30) days or a
portion such letters of credit or guarantees are open.
In consideration of the Loan Facility, among other things, we granted to
Rosenthal a first priority lien (the "Rosenthal 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 the total amount of
monies loaned to use under the Loan Facility exceeds 90% of the undrawn amount
of the Standby Letter of Credit (defined below) 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 for five years.
In connection with the Loan Facility, 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 Financing Agreement. In addition,
during the term of the Financing Agreement, at our request, Soros will issue
another Standby Letter of Credit for up to an additional $1.5 million. In
consideration for the Soros Guarantee, we granted the Soros Lien subordinated to
the Rosenthal Lien on substantially all of our assets, and we issued to Soros a
warrant to purchase 100,000 shares of our Common Stock at an exercise price
equal to the average closing price of our Common Stock on the 10 days preceding
September 15, 2001, exercisable for ten years beginning on September 15, 2001.
Subject to certain conditions, if we default on any of our obligations under the
Financing Agreement, Rosenthal has the right to draw upon such Standby Letter of
Credit to satisfy any such obligations. If and when Rosenthal draws on the
Standby Letter of Credit, 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 Standby Letter of Credit plus interest accrued thereon.
In addition, to the extent that Rosenthal draws on the Standby Letter of Credit
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
Standby Letter of Credit, we will be required to issue to Soros a Contingent
Warrant to purchase the 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 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 the latter of
10 days after the date of issuance and September 15, 2001.
Under the Financing Agreement, Soros has the right to purchase all of our
obligations from Rosenthal 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 Standby Letter of Credit as consideration
to Soros for the purchase of such obligtions.
As of December 31, 2000, we had marketing and advertising commitments of
approximately $1.8 million through December 31, 2001. 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 our ability to raise
additional capital.
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 its suppliers have limited our payment terms and,
in some cases, have required us to pay for merchandise in advance of delivery.
See also, "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 New Soros Financing, the Rights
Offering and the Financing Agreement together with existing resources and cash
generated from operations, should be sufficient to satisfy our cash requirements
through the end of 2001. 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, when needed, would have a material adverse effect on our
business, financial condition and results of operations. See also, "Risk Factors
- - Limited Working Capital; Need for Additional Financing" and "-- Potential
Dilution."
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2000, the Financial Accounting Standard Board Task Force issued
Emerging Issues Task Force 00-10, "Accounting for Shipping and Handling Fees and
Costs" ("EITF 00-10"). EITF 00-10 addresses the issue with respect to income
statement classification of amounts billed to a customer for shipping and
handling. Prior periods have been reclassified to conform with EITF 00-10, and
the adoption of EITF 00-10 did not have a material effect on our financial
statements.
23
In March 2000, the Financial Accounting Standard Board ("FASB") issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation" ("FIN 44") which provides guidance for applying APB Opinion No.25.
FIN 44 applies prospectively to new awards, exchanges of awards in a business
combination, modifications to outstanding awards and changes in grantee status
on or after July 1, 2000. The adoption of FIN 44 did not have a material effect
on our financial statements.
In December 1999, the staff of the Securities and Exchange Commission of the
United States issued Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("SAB 101"). SAB 101 summarizes certain views of the staff
in applying generally accepted accounting principles to revenue recognition in
the financial statements. We adopted SAB 101 and the adoption did not have a
material effect on our revenue recognition policies.
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 convertible 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.
ITEM 8. FINANCIAL STATEMENTS
(a) Index to the Financial Statements
Report of Independent Accountants F-2
Independent Auditors' Report F-3
Consolidated Balance Sheets as of December 31, 2000 and 1999 F-4
Consolidated Statements of Operations for the three years
ended December 31, 2000, 1999 and 1998 F-5
Consolidated Statements of Changes in Shareholders' (Deficit)
Equity and Redeemable Preferred Stock for the three
years ended December 31, 2000, 1999 and 1998 F-6
Consolidated Statements of Cash Flows for the three years
ended December 31, 2000, 1999 and 1998 F-7
Notes to Consolidated Financial Statements F-9
24
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, 2000 and 1999, and the results
of their operations and their cash flows for each of the two years in the period
ended December 31, 2000 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 30, 2001
F-2
INDEPENDENT AUDITORS' REPORT
To the Shareholders of Bluefly, Inc.:
We have audited the accompanying consolidated statements of operations, changes
in shareholders' equity and cash flows of Bluefly, Inc. for the year ended
December 31, 1998. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of Bluefly, Inc.'s operations and
its cash flows for the year ended December 31, 1998 in conformity with
accounting principles generally accepted in the United States of America.
As more fully discussed in Notes 1 and 10 to the financial statements, on June
25, 1998, the Company's Board of Directors adopted a plan to discontinue its
golf sportswear division. Historical assets and operations of the golf
sportswear division have represented a substantial portion of the Company's
assets and results of operations.
M.R. Weiser&Co. LLP
March 26, 1999
New York, N.Y.
F-3
BLUEFLY, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2000 AND 1999
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- --------------------------------------------------------------------------------
2000 1999
ASSETS
Current assets:
Cash and cash equivalents $ 5,350,000 $ 7,934,000
Inventories, net 7,294,000 7,020,000
Prepaid expenses and other current assets 1,704,000 1,080,000
----------- -----------
Total current assets 14,348,000 16,034,000
Property and equipment, net 1,326,000 1,037,000
Other assets 194,000 38,000
----------- -----------
Total assets $15,868,000 $17,109,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable $ 3,593,000 $ 4,287,000
Accrued expenses and other current
liabilities 2,538,000 2,236,000
Convertible notes payable, net of
unamortized discount 19,698,000 --
----------- -----------
Total liabilities 25,829,000 6,523,000
----------- -----------
Commitments and contingencies (Note 7)
Redeemable Convertible Series A Preferred
Stock -- $.01 par value; 2,000,000 shares
authorized, 500,000 shares issued and
outstanding in 2000 and 1999, (liquidation
preference: $20 per share plus accrued
dividends) 11,088,000 10,286,000
Shareholders' (deficit) equity:
Common stock -- $.01 par value; 15,000,000
shares authorized, 4,924,906 shares issued
and outstanding in 2000 and 1999,
respectively 49,000 49,000
Additional paid-in capital 17,242,000 17,482,000
Accumulated deficit (38,340,000) (17,231,000)
----------- -----------
Total shareholders' (deficit) equity (21,049,000) 300,000
----------- -----------
Total liabilities and shareholders'
(deficit) equiy $15,868,000 $17,109,000
=========== ===========
The accompanying notes are an integral part
of these consolidated financial statements
F-4
BLUEFLY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- --------------------------------------------------------------------------------
2000 1999 1998
Net sales $ 17,512,000 $ 5,109,000 $ 243,000
Cost of sales 14,018,000 4,554,000 297,000
-------------- -------------- ------------
GROSS PROFIT (LOSS) 3,494,000 555,000 (54,000)
Selling, marketing and fulfillment expenses 18,797,000 10,794,000 1,118,000
General and administrative expenses 5,296,000 3,450,000 1,166,000
Internet business start up costs -- -- 332,000
-------------- -------------- ------------
TOTAL OPERATING EXPENSES 24,093,000 14,244,000 2,616,000
-------------- -------------- ------------
OPERATING LOSS FROM CONTINUING EXPENSES (20,599,000) (13,689,000) (2,670,000)
Interest (expense) and other income, net of interest
income of $166,000 in 2000, and interest expense
of $0 in 1999 and 1998 (510,000) 430,000 142,000
-------------- -------------- ------------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES (21,109,000) (13,259,000) (2,528,000)
Income tax benefit -- 2,000 50,000
-------------- -------------- ------------
LOSS FROM CONTINUING OPERATIONS (21,109,000) (13,257,000) (2,478,000)
Discontinued operations -- Note 10:
Income (loss) from operations, net of income tax
provision of $0, $0 and $105,000, respectively -- 63,000 (1,178,000)
-------------- -------------- ------------
NET LOSS $ (21,109,000) $ (13,194,000) $ (3,656,000)
============== ============== ============
Preferred stock dividends (802,000) (343,000) --
-------------- -------------- ------------
Net loss available to common shareholders $ (21,911,000) $ (13,537,000) $ (3,656,000)
============== ============== ============
Basic and diluted (loss) income per common share:
Continuing operations (4.45) (2.83) (.89)
Discontinued operations -- .01 (.43)
-------------- -------------- ------------
BASIC AND DILUTED LOSS PER SHARE $ (4.45) $ (2.82) $ (1.32)
============== ============== ============
Weighted average number of shares outstanding used
in calculating basic diluted income (loss) per
common share 4,924,906 4,802,249 2,770,869
-------------- -------------- ------------
The accompanying notes are an integral part of
these consolidated financial statements.
F-5
BLUEFLY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' (DEFICIT) EQUITY
AND REDEEMABLE PREFERRED STOCK
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- --------------------------------------------------------------------------------
REDEEMABLE COMMON STOCK,
PREFERRED STOCK $.01 PAR VALUE
--------------------- ---------------------
NUMBER OF NUMBER OF ADDITIONAL ACCUMULATED
SHARES AMOUNT SHARES AMOUNT PAID-IN CAPITAL DEFICIT TOTAL
Balance at January 1, 1998 - $ - 2,700,000 $ 27,000 $ 6,404,000 $ (381,000) $ 6,050,000
Issuance of common stock for services - - 24,755 - 49,000 - 49,000
Issuance of common stock for exercise of
warrants and unit purchase options - - 708,500 7,000 3,942,000 - 3,949,000
Net loss - - - - - (3,656,000) (3,656,000)
-------- ---------- ----------- ---------- ----------- -------------- ------------
Balance at December 31, 1998 - - 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 $57,000 500,000 9,943,000 - - - - -
Accrued dividends on Series A Preferred
Stock - 343,000 - - (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 500,000 10,286,000 4,924,906 49,000 17,482,000 (17,231,000) 300,000
-------- ---------- ----------- ---------- ----------- -------------- ------------
Issuance of warrants in connections 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) - (802,000)
Net loss - - - - - (21,109,000) (21,109,000)
-------- ---------- ----------- ---------- ----------- -------------- ------------
Balance at December 31, 2000 500,000 $11,088,000 4,924,906 $ 49,000 $17,242,000 $(38,340,000) $(21,049,000)
-------- ----------- ----------- ---------- ----------- -------------- ------------
The accompanying notes are an integral part of
these consolidated financial statements.
F-6
BLUEFLY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- --------------------------------------------------------------------------------
2000 1999 1998
Cash flows from operating activities:
Loss from continuing operations $ (21,109,000) $ (13,257,000) $ (2,478,000)
Adjustments to reconcile loss from continuing
operations to net cash used in operating
activities:
Loss on equipment disposition -- -- 7,000
Depreciation and amortization 766,000 130,000 84,000
Common stock issued for services -- 7,000 49,000
Deferred income taxes -- 50,000 5,000
Non cash compensation -- 49,000 --
Changes in operating assets and liabilities:
(Increase) decrease in:
Inventories (274,000) (6,591,000) (429,000)
Prepaid expenses and other current assets (624,000) (507,000) (399,000)
Other assets (75,000) (23,000) --
(Decrease) increase in:
Accounts payable, accrued expenses and
other current liabilities (392,000) 5,767,000 (381,000)
Deferred tax liability -- (64,000) --
-------------- ------------- -------------
NET CASH USED IN OPERATING ACTIVITES --
CONTINUING OPERATIONS (21,708,000) (14,439,000) (3,542,000)
-------------- ------------- -------------
Income/loss from discontinued operations -- 63,000 (1,178,000)
Adjustments to reconcile income from discontinued
operations to net cash provided by (used in)
operating activities:
Write-down of property and equipment -- -- 259,000
Write-down of prepaid expenses and other
current assets -- -- 101,000
Write-down of other assets -- -- 119,000
Depreciation and amortization -- -- 44,000
Deferred income taxes -- -- 94,000
Changes in operating assets and liabilities:
(Increase) decrease in:
Inventories -- 187,000 1,413,000
Non-factored receivables -- -- (136,000)
Prepaid expenses and other current assets -- -- 70,000
Increase (decrease) in
Income taxes receivable -- 195,000 7,000
-------------- -------------- -------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES -- DISCONTINUED OPERATIONS -- 445,000 793,000
-------------- -------------- -------------
NET CASH USED IN OPERATING ACTIVITIES (21,708,000) (13,994,000) (2,749,000)
============== ============== =============
Cash flows from investing activities -- continuing
operations:
Purchase of property and equipment (876,000) (670,000) (88,000)
Funds deposited with factor -- 2,264,000 (960,000)
Increase of funds deposited with factor -- -- 553,000
-------------- -------------- -------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES -- CONTINUING
OPERATIONS (876,000) 1,594,000 (495,000)
-------------- -------------- -------------
The accompanying notes are an integral part of
these consolidated financial statements.
F-7
BLUEFLY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
DOLLARS ROUNDED TO THE NEAREST THOUSANDS
- --------------------------------------------------------------------------------
2000 1999 1998
Cash flows from investing activities--discontinued
operations:
Purchase of property and equipment $ -- $ -- $(22,000)
Trademark costs -- -- (1,000)
-------- ------- ---------
NET CASH USED IN INVESTING ACTIVITIES --
DISCONTINUED OPERATIONS -- -- (23,000)
-------- ------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES (876,000) 1,594,000 (518,000)
=========== =========== ==========
Cash flows from financing activities -- continuing
operations:
Net proceeds from issuance of Preferred Stock 9,943,000 --
Net proceeds from warrant redemption and unit
purchase options 7,130,000 3,949,000
Net proceeds from convertible notes payable 20,000,000 260,000 --
---------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES --
CONTINUING OPERATIONS 20,000,000 17,333,000 3,949,000
=========== =========== ==========
Cash flows from financing activities --
discontinued operations:
Net change in due to/from factor -- 171,000 2,093,000
---------- ---------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES -- DISCONTINUED OPERATIONS -- 171,000 2,093,000
---------- ---------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 20,000,000 17,504,000 6,042,000
=========== =========== ==========
Net (decrease) increase in cash and cash
equivalents (2,584,000) 5,104,000 2,775,000
Cash and cash equivalents -- beginning of year 7,934,000 2,830,000 55,000
---------- ---------- ---------
CASH AND CASH EQUIVALENTS -- END OF YEAR $ 5,350,000 $ 7,934,000 $2,830,000
=========== =========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest -- -- $ 8,000
=========== =========== ==========
Income taxes $ 25,000 $ 17,000 $ 5,000
=========== =========== ==========
Non-cash transactions:
Issuance of warrants in connection with
convertible notes payable $ 467,000 $ -- $ --
=========== =========== ==========
Issuance of warrant to supplier $ 95,000 $ -- $ --
=========== =========== ==========
Exchange of goods for services provided $ -- $ 19,000 $ --
=========== =========== ==========
The accompanying notes are an integral part of
these consolidated financial statements
F-8
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- --------------------------------------------------------------------------------
1. THE COMPANY
The Company is an internet retailer of designer fashions and home
accessories at outlet store prices. The full service Web store
("Bluefly.com" or "Web Site") sells over 450 brands of designer
apparel, accessories and house and home products at discounts of up to
75%. Bluefly.com, which launched in September 1998, also offers
information on current fashion trends.
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 equity financing, collaborative or
other arrangements with corporate sources, or other sources of
financing to fund operations. As more fully described in Note 11,
subsequent to year end, the Company received gross proceeds of
approximately $10 million in connection with its offering, and entered
into a financing agreement with a lender. Management believes that its
current funds, the proceeds from the offering and the funds under
commitment from the financing agreement will be sufficient to enable
the Company to meet its planned expenditures through at least December
31, 2001. If anticipated operating results are not achieved, the
Company may obtain additional equity or debt financings. If such
financings are not available on terms acceptable to the Company, the
Company will delay or reduce its expenditures in order to meet its
obligations.
On June 25, 1998, the Company's Board of Directors voted to discontinue
the operations of its golf sportswear division and devote all of the
Company's energy and resources to building Bluefly.com. See Note 10.
Effective October 29, 1998, the Company's shareholders approved a
resolution to change the name of the Company from Pivot Rules, Inc. to
Bluefly, Inc.
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 on product sales when goods are received
by the customer. Net sales include product revenue and revenue received
for shipping and handling, less reductions for estimated returns,
uncollectible accounts and sales discounts. In November 2000, the
Financial Accounting Standards Board ("FASB") Task Force issued
Emerging Issue Task Force 00-10, "Accounting for Shipping and Handling
Fees and Costs" ("EITF 00-10"). EITF 00-10 addresses the issue as to
the income statement classification of amounts billed to a customer
for shipping and handling. The adoption of EITF 00-10 did not have a
material effect on the Company's financial statements. Prior to
December 31, 2000, the Company did not record proceeds received for
shipping and handling as sales, instead it presented these amounts net
of their related costs, as a component of selling, marketing and
fulfillment costs. Prior periods have been reclassified to conform
with current year presentation.
F-9
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- --------------------------------------------------------------------------------
In December 1999, the staff of the Securities and Exchange Commission
of the United States issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements". SAB 101 summarizes
certain views of the staff in applying generally accepted accounting
principles to revenue recognition in the financial statements. The
Company adopted SAB 101, and the adoption did not have a material
effect on the Company's revenue recognition.
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.
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 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.
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.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Equipment and software is
depreciated on a straight-line basis over three 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.
F-10
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- --------------------------------------------------------------------------------
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," in accounting
for its stock based compensation plan. In accordance with SFAS No. 123,
the Company applies Accounting Principles Board 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 2000, 1999 and 1998, because the exercise
price of employee stock options equals or exceeds the market price of
the underlying stock on the date of grant.
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving
Stock Compensation" ("FIN 44") which provides guidance for applying APB
Opinion No. 25. FIN 44 applies prospectively to new awards, exchanges
of awards in a business combination, modifications to outstanding
awards and changes in grantee status on or after July 1, 2000. The
adoption of FIN 44 did not have a material effect on the Company's
financial statements.
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
5,198,885 shares of Common Stock and Preferred Stock convertible into
952,381 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 of online
advertising, print advertising as well as the related production costs
and are expensed as incurred. Marketing expenses (excluding marketing
salaries) for the years ended December 31, 2000, 1999 and 1998 amounted
to approximately $9,278,000, $6,787,000 and $443,000, respectively.
F-11
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- --------------------------------------------------------------------------------
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, 2000,
1999 and 1998, fulfillment expenses totaled $2,286,000, $557,000 and
$54,000, respectively. These amounts are included in selling, marketing
and fulfillment expenses in the statement of operations.
START UP COSTS
In June 1998, the Company adopted Statement of Position ("SOP") 98-5
"Reporting on the Costs of Start-Up Activities." Startup activities
include (i) one-time activities relating to the introduction of a new
product or service, conducting business in a new territory, conducting
business with a new class of customer or commencing a new operation and
(ii) organization costs. Start-up activities are expensed as incurred.
For the year ended December 31, 1998, $332,000 of start up costs
relating to the formation of the Internet business were expensed as
incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, including
cash and cash equivalents, funds deposited with factor, other assets,
accounts payable, accrued liabilities, and convertible notes payable
approximate fair value due to their short maturities.
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, 2000 and 1999, property and equipment for continuing
operations consist of the following:
2000 1999
Leasehold improvements $ 501,000 $ 488,000
Office equipment 388,000 308,000
Computer equipment and software 1,254,000 471,000
----------- -----------
2,143,000 1,267,000
Less accumulated depreciation 817,000 230,000
----------- -----------
$ 1,326,000 $ 1,037,000
----------- -----------
Depreciation and amortization of property and equipment was
approximately $587,000, $130,000 and $84,000, for the years ended
December 31, 2000, 1999 and 1998, respectively.
F-12
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- --------------------------------------------------------------------------------
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
As of December 31, 2000 and 1999, prepaid expenses and other current
assets consist of the following:
2000 1999
Due from credit card companies $ 767,000 $ 350,000
Deferred offering costs 368,000 -
Prepaid expenses 303,000 213,000
Other current assets 172,000 453,000
Income taxes receivable - 34,000
Other receivables 94,000 30,000
----------- -----------
$ 1,704,000 $ 1,080,000
----------- -----------
5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
As of December 31, 2000 and 1999, accrued expenses and other current
liabilities consist of the following:
2000 1999
Provision for returns $ 1,134,000 $ 868,000
Accrued expenses 531,000 646,000
Salary and bonus accrual 374,000 315,000
Accrued media expenses 356,000 407,000
Deferred revenue 143,000 -
----------- -----------
$ 2,538,000 $ 2,236,000
----------- -----------
F-13
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- --------------------------------------------------------------------------------
6. INCOME TAXES
The components of the provision (benefit) for income taxes is comprised
of the following:
CONTINUING OPERATIONS
--------------------------------------
2000 1999 1998
Current
Federal $ - $ (2,000) $ (55,000)
State - - -
-------- --------- ---------
- (2,000) (55,000)
-------- --------- ---------
Deferred
Federal $ - - 3,000
State - - 2,000
-------- --------- ---------
- - 5,000
-------- --------- ---------
$ - $ (2,000) $ (50,000)
-------- --------- ---------
DISCONTINUED OPERATIONS
--------------------------------------
2000 1999 1998
Current
Federal $ - $ - $ 11,000
State - - -
-------- --------- ---------
- - 11,000
-------- --------- ---------
Deferred
Federal $ - - 81,000
State - - 13,000
-------- --------- ---------
- - 94,000
-------- --------- ---------
$ - $ - $ 105,000
-------- --------- ---------
F-14
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- --------------------------------------------------------------------------------
Significant components of the Company's deferred tax assets and liabilities are
summarized as follows:
2000 1999
Deferred tax assets
Net operating losses $ 14,224,000 $ 6,222,000
Foreign tax credits 13,000 13,000
Depreciation and amortization 292,000 216,000
Accounts receivable and inventory reserves 219,000 95,000
Accrued bonuses 46,000 -
Other 4,000 4,000
------------ -----------
14,798,000 6,550,000
Valuation Allowance (14,798,000) (6,550,000)
------------ -----------
NET DEFERRED TAX ASSET (LIABILITY) $ - $ -
------------ -----------
The Company has tax credit carryforwards of $13,000 which have expiration dates
through 2001. In addition, the Company has approximately $36,093,000 of net
operating loss carryforwards which have expiration dates through 2020. 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 34% as follows:
2000 1999 1998
Statutory federal income tax rate (34.00)% (34.00)% (34.00)%
State taxes, net of federal tax benefit (5.24) (5.40) 0.40
Other 0.08 0.20 -
Valuation allowance on deferred tax asset 39.16 39.18 35.10
------- ------- ------
Effective tax rate - % (0.02)% 1.50 %
------- ------- ------
F-15
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- --------------------------------------------------------------------------------
7. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT CONTRACTS
The Company has entered into certain employment contracts, which expire
through December 31, 2003. As of December 31, 2000, the Company's
aggregate commitment for future base salary under these employment
contracts is:
2001 $ 1,235,000
2002 867,000
2003 233,000
-------------
TOTAL $ 2,335,000
-------------
OPERATING LEASES
The Company leases equipment and space under various leases which
expire at various dates beginning in 2001 and running through 2010.
Rent expense aggregated approximately $345,000, $156,000 and $78,000
for the years ended December 31, 2000, 1999 and 1998, respectively. As
of December 31, 2000, future minimum payments, excluding utilities, are
as follows:
2001 $ 1,677,000
2002 932,000
2003 421,000
2004 434,000
2005 434,000
Thereafter 1,671,000
------------
TOTAL $ 5,569,000
------------
MARKETING AND ADVERTISING COMMITMENTS
As of December 31, 2000, the Company has advertising and marketing
commitments in connection with its online and offline relationships of
approximately $1,758,000 through December 31, 2001.
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.
On March 27, 2001, the Company received a summons alleging that it
knowingly and intentionally violated California's Safe Drinking
Water and Toxic Enforcement Act of 1986. The plaintiff is seeking civil
penalties of $2,500 per day since April 1997. Management believes that
the ultimate disposition of this claim will not have a material effect
on the Company's financial condition or results of operations.
F-16
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- --------------------------------------------------------------------------------
8. SHAREHOLDER'S (DEFICIT) EQUITY AND REDEEMABLE EQUITY
AUTHORIZED SHARES
As of December 31, 2000, the Company was 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"). Subsequent to year end and
pursuant to the Second Soros Investment Agreement (as defined below),
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.
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 Series A
Preferred Stock was convertible into shares of Common Stock at a rate
of $10.50 per share, and bore 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 has 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 that may be issued 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 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, 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"). See Note 11
for the unaudited pro forma balance sheet that reflects the
consummation of the transactions contemplated by the Second Soros
Investment Agreement.
F-17
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- --------------------------------------------------------------------------------
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. The Amended Series A
Preferred Stock has a liquidation preference equal to its face value
plus accrued dividends 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 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, Soros
Notes (as defined below in the heading "Soros Warrants") and the New
Note were converted into shares of Series B Preferred Stock at a rate
of $2.34 per share. See Note 11 for the unaudited pro forma balance
sheet that reflects the consummation of the transactions contemplated
by the Second Soros Investment Agreement.
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. The Series B Preferred
Stock has a liquidation preference equal to its face value plus accrued
dividends plus an amount equal the amount funded by Soros pursuant to
its Standby Commitment in the Rights Offering (as defined below under
the heading "Rights Offering") 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 and certain
pre-emptive rights with respect to future issuances of capital stock by
the Company.
F-18
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- --------------------------------------------------------------------------------
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 $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.
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 is
being 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. During the fourth quarter of 1998, 135,250
UPO's were exercised and during 1999, 3,250 UPO's were exercised. As of
December 31, 2000, 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, and upon specific notice
provisions. On December 21, 1998, the Company provided notice of its
election to redeem the Warrants. In the
F-19
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- --------------------------------------------------------------------------------
first quarter of 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
In July 2000, the Company's Board of Directors adopted a stock option
plan (the "2000 Plan") and in May 1997, the Company's Board of
Directors adopted a stock option plan (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.
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
Eligible for exercise at December 31, 1998 96,694 4.21
-----------
Eligible for exercise at December 31, 1999 169,763 7.15
-----------
Elibible for exercise at December 31, 2000 644,457 7.23
-----------
The stock options are exercisable in different periods commencing in
1998 through 2010.
F-20
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- --------------------------------------------------------------------------------
Additional information with respect to the outstanding options as of
December 31, 2000, 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
$0.63 - $3.28 3,803,712 9.62 Years $ 2.88 317,220 $ 2.74
$5.00 - $5.22 47,250 7.79 Years 5.09 27,625 5.00
$8.34 - $9.66 170,823 8.64 Years 9.09 59,283 9.10
$10.28 - $11.28 440,200 8.88 Years 11.06 124,304 11.04
$12.13 - $14.38 75,000 8.95 Years 12.87 24,990 13.09
$15.09 - $16.60 213,900 8.07 Years 15.48 91,035 15.55
------------ ------------
$0.63 - $16.60 4,750,885 9.42 Years 4.61 644,457 7.23
The Company does not recognize compensation expense for stock options
granted at or above fair market value, as permitted by the accounting
standards. The fair value of options granted during 2000, 1999 and 1998
was approximately $7.8 million, $8.6 million and $332,000,
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,
-----------------------------------------
2000 1999 1998
Risk-free interest rates 5.16 -6.81% 4.80-6.55% 4.46-5.72%
Expected lives (in years) 6 6 6
Dividend yield 0% 0% 0%
Expected volitility 80% 62% 49%
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,
--------------------------------------------------
2000 1999 1998
Basic and diluted net loss as reported $ 21,109,000 $ 13,194,000 $ 3,656,000
Basic and diluted net loss per share, as reported $ 4.45 $ 2.82 $ 1.32
Basic and diluted net loss, pro forma $ 22,611,000 $ 14,009,000 $ 3,988,000
Basic and diluted net loss per share, pro forma $ 4.59 $ 2.92 $ 1.44
As of December 31, 2000 the Company has reserved an aggregate of
6,151,266 shares of Common Stock for the exercise of the UPO's, Stock
Options and the conversion of Preferred Stock.
F-21
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- --------------------------------------------------------------------------------
9. CONCENTRATION
The Company acquired approximately 15.3% and 14.6%, respectively, for
the years ended December 31, 2000, and 1999 of its inventory from one
supplier.
10. DISCONTINUED OPERATIONS
The operating loss from discontinued operations of $1,178,000 in 1998
includes a $479,000 loss relating to the write down of the assets of
the golf sportswear division. In September 1998, the Company sold all
of its trademarks related to the discontinued golf sportswear division
to Klear Knit Sales, Inc. Under the terms of the agreement, the Company
received $400,000 in cash and is entitled to receive future payments
for a period up to five years based on certain performance measures.
Total future payments to be made to the Company, if any, during the
five year period, are capped at an aggregate amount of $290,000. A
non-employee, non-director shareholder of the Company acted as a broker
on the sale of the trademarks and is entitled to a broker's fee equal
to 11.9% of future payments received, if any, by the Company (a maximum
of $34,500 in fees may be due under the agreement).
The disposal of the golf sportswear division has been accounted for as
a discontinued operation and, accordingly, its operating results are
segregated and reported as discontinued operations in the accompanying
consolidated statements of operations and cash flows.
Information relating to the discontinued operations of the golf
sportswear division for the years ended December 31, 2000, 1999 and
1998 are as follows:
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998
Net sales $ - $ - $ 3,914,000
Cost of sales - - 3,838,000
------------ ----------- -------------
GROSS PROFIT - - 76,000
Income from adjustments to allowances and
accruals - 67,000 -
Selling, marketing, design and administrative - 8,000 1,155,000
Writedown of property and equipment - - 379,000
------------ ----------- -------------
OPERATING INCOME (LOSS) - 59,000 (1,458,000)
Income from sale of trademarks - - 400,000
Other income (expenses) - 4,000 (15,000)
Amortization and write-off of deferred costs
for bridge financing - - -
------------ ----------- -------------
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES - 63,000 (1,073,000)
Provision for income taxes - - (105,000)
------------ ----------- -------------
NET INCOME (LOSS) $ - $ 63,000 $ (1,178,000)
------------ ----------- -------------
F-22
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- --------------------------------------------------------------------------------
11. SUBSEQUENT EVENTS
RIGHTS OFFERING
On November 13, 2000, the Company entered into the Second Soros
Agreement pursuant to which affiliates of Soros agreed to invest up to
an additional $15 million in the Company, subject to certain
conditions. Under the terms of the agreement, Soros initially invested
an additional $5 million in the form the New Note, convertible into
preferred stock at a price of $2.34 per share. Soros also exchanged
$15 million of Amended Notes issued to it for subordinated convertible
promissory notes of equal principal amount. The agreement required the
Company to offer the public shareholders of the Company, the right to
purchase up to an aggregate of $20 million of common stock. Soros
would purchase the difference between $20 million and the amount
purchased by the public shareholders, up to a total of $10 million, all
at a rate of $2.34 per share. As part of the transaction, on February
5, 2001, the Amended Notes as well as the New Note, converted into
shares of the Company's Series B Convertible Preferred Stock (the
"Series B Preferred Stock") at a rate of $2.34 per share, and the
conversion price of the Company's Series A Convertible Preferred Stock
("Series A Preferred Stock") previously issued to Soros and other
investors was reduced to $2.34 per share. 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 table below reflects the Company's Balance Sheet had
the transactions described above occurred on December 31, 2000.
The pro forma adjustment reflects: (i) the conversion of the Amended
Notes and the New Notes 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 Notes of $851,000 through February 5, 2001 into
shares of Series B Preferred Stock; (ii) the recording of 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 is charged to additional paid-in capital and offset against
accumulated deficit in accordance with EITF 98-5; and (iii) the
conversion of the Series A Preferred Stock into permanent equity and
the reduction of the conversion price from $10.50 to $2.34 resulting in
the recording of approximately $7,771,000 to additional paid-in
capital. The corresponding charge to accumulated deficit was broken out
as follows: $5,000,000 was classified as debt discount on the New Note,
$2,149,000 was classified as interest expense and $622,000 was assigned
to dividends, and was a result of certain changes made to the
Certificate of Designation for the Series A Preferred Stock in
connection with the second closing of the Investment Agreement. The pro
forma adjustment also reflects the reclassification of the Series A
Preferred Stock from redeemable Preferred Stock into permanent equity
at a new conversion price of $2.34.
F-23
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- --------------------------------------------------------------------------------
Pro Forma
As Adjusted
(Unaudited)
-----------
Cash 15,350
Inventory, net 7,294
Other current assets 1,704
Property and equipment, net 1,326
Other assets 194
-----------
Total Assets $ 25,868
Accounts Payable and Accrued Liabilities 5,280
Notes Payable, net - Amended Notes -
New Notes -
-----------
Total Liabilities 5,280
Redeemable Preferred Stock Series A, -
$.01 par value, 500,000 and 0 shares authorized and 500,000 and 0 shares
issued and outstanding, actual and pro forma, respectively
Shareholders' equity:
Convertible Preferred Stock Series A, 5
$.01 par value, 0 and 500,000 shares authorized and 0 and 500,000 shares
issued and outstanding, actual and pro forma, respectively
Convertible Preferred Stock Series B, 89
$.01 par value, 0 and 9,000,000 shares authorized actual and pro forma,
respectively; 0 and 8,910,782 shares issued and outstanding, actual and
pro forma, respectively
Common Stock - $.01 par value, 15,000,000 and 92
40,000,000 shares authorized actual and pro forma respectively;
4,924,906 issued and outstanding actual and 9,205,331 shares pro forma,
respectively
Additional Paid In Capital 72,069
Accumulated Deficit (51,667)
-----------
Total Shareholders' Equity 20,588
-----------
Total Liabilities and Shareholders' Equity $ 25,868
-----------
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 will provide to the Company certain credit accommodations,
including loans or 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 will pay 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%.
The Company also agreed to pay Rosenthal (a) an annual facility fee equal to 1%
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 1/2
of 1% of the face amount of the letter of credit or guarantee plus, 1/4 of 1% of
the face amount of such letters of credit or guarantees for each thirty (30)
days or a portion such letter of credit or guarantees are open. Rosenthal also
agreed to charge the Company's suppliers a factoring fee not to exceed 2% of
the gross invoiced amount.
F-24
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- --------------------------------------------------------------------------------
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 Standby Letter of Credit (defined below) for more than 10
days. The Company issued to Rosenthal a warrant to purchase 50,000 shares of the
Company's Common Stock at an exercise price of $2.34 exercisable for five years.
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 Standby Letter of Credit 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 and the term "Standby Letter of Credit" shall
mean any standby letter of credit issued by Soros in favor of Rosenthal in
connection with the Loan Facility. In consideration for the Soros Guarantee, the
Company granted to Soros a lien (the "Soros Lien") subordinated to the Rosenthal
Lien on substantially all of the Company's assets, and issued to Soros a warrant
(the "Soros Upfront Warrant") to purchase 100,000 shares of the Company's Common
Stock at an exercise price equal to the average closing price of the Company's
Common Stock on the 10 days preceeding September 15, 2001, exercisable for ten
years beginning on September 15, 2001.
Under the Financing Agreement, Soros has the right to purchase all of the
Company's obligations 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 Standby Letter of
Credit as consideration for Soros to purchase such obligations.
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 Standby
Letter of Credit to satisfy any such obligations. If and when Rosenthal draws on
the Standby Letter of Credit, 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 Standby Letter of Credit plus
interest accrued thereon. In addition, to the extent that Rosenthal draws on the
Standby Letter of Credit 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 Standby Letter of Credit, 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 the Company's 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 the Company's Common Stock on the 10 days preceding the latter of (a) 10 days
after the date of issuance and (b) September 15, 2001.
F-25
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
DOLLARS ROUNDED TO THE NEAREST THOUSAND
- --------------------------------------------------------------------------------
12. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Amounts in thousands, except per share data
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) 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)
===================================================================
**Amounts have been reclassified in accordance with EITF 00-10
F-26
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 36 Chairman of the Board of Directors, Chief
Executive Officer, President and Treasurer
Patrick C. Barry 38 Chief Financial Officer and Chief Operating
Officer
Jonathan B. Morris 33 Executive Vice President and Secretary
Robert G. Stevens 47 Executive Vice President and Director
Red Burns 75 Director
Mark H. Goldstein 40 Director
Martin Miller 70 Director
Neal Moszkowski 35 Director
Ellin J. Saltzman 63 Director
David Wassong 30 Director
Lorne Weil 54 Director
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 since
July 1998 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.
GOLDIE BURNS (AKA RED BURNS) served as a Director of the Company from August
1998 to February 2001. Since September 1993, Ms. Burns has served as the
Chairman of the Interactive Telecommunications Program at New York University,
where she is currently Chairman and Professor of the Interactive
Telecommunications Program and has been named the Tokyo Broadcasting System
Chair. On February 5, 2001, Ms. Burns resigned as a Director in order to allow
the designee of the Company's newly-issued Series B Preferred Stock to serve as
a Director.
25
MARK H. GOLDSTEIN has served as a Director of the Company since December 1999.
Since August 1999, Mr. Goldstein has served as an Internet Executive at Softbank
Holdings ("Softbank"), a venture capital fund that specializes in investments in
Internet companies, and since December 1999, he has 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.
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") since August 1998. Prior to joining
Soros, 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, and Medscape, Inc., a medical data, information and technology
company.
ELLIN J. SALTZMAN served as a Director of the Corporation from December 1999 to
February 2001. Ms. Saltzman served as Vice President and Corporate Fashion
Director of The Limited, Inc. from 1994 to 1997. From 1992 to 1994, Ms. Saltzman
served as Senior Vice President and Fashion Director for Bergdorf Goodman. From
1989 to 1992, she served as Senior Vice President and Corporate Fashion Director
for R.H. Macy & Co., and from 1974 to 1989, she held the same position with Saks
Fifth Avenue. Since 1997, Ms. Saltzman has been an independent consultant to
various companies in the fashion industry. Ms. Saltzman resigned from her
position as a Director of the Corporation, effective as of February 1, 2001 and
is now a Fashion Director at the Company.
DAVID WASSONG was appointed as a Director in February 2001 and is the Series B
Preferred Stock designee. Mr. Wassong has been a partner of Soros since June
1998. Prior to joining Soros, 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 and Meteor
Mobile Comminucations.
LORNE WEIL was appointed as a Director of the Corporation, 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. Mr. Weil was unanimously elected by the
directors of the corporation to fill the vacancy created by Ms. Saltzman's
resignation on February 1, 2001.
The Board of Directors has established an Audit Committee ("Audit Committee")
comprised of Martin Miller and Lorne Weil. 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.
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.
26
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 and certain
representations of the Reporting Persons, the Corporation believes that during
the 2000 fiscal year all Reporting Persons complied with all applicable Section
16(a) reporting requirements.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
The Company's 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, 2000, 1999 and 1998 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 2000 (the "Named Executive Officers").
ANNUAL COMPENSATION LONG TERM COMPENSATION
--------------------------------------------- ------------------------------
AWARDS
------
SECURITIES
OTHER ANNUAL RESTRICTED UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION STOCK AWARDS OPTIONS
- --------------------------- ---- ------ ----- ------------ ------- -------
E. Kenneth Seiff 2000 $250,367 $ -- $1,000 $-- 980,000(1)(3)
Chief Executive Officer, President 1999 $206,519 $ 25,491 $1,000 $-- 100,000(1)(4)
and Treasurer 1998 $165,000 $ 25,000 $1,000 $-- 25,000(1)
Patrick C. Barry 2000 $175,433 $ -- $ 590 $-- 489,912(2)(3)
Chief Financial Officer and Chief 1999 $150,958 $ 25,491 $ 590 $-- 99,900(2)(4)
Operating Officer 1998 $ 59,076 $ -- $ -- $-- 55,100(2)
Jonathan B. Morris 2000 $175,433 $ -- $ 330 $-- 490,000(2)(3)
Executive Vice President 1999 $150,958 $ 25,491 $ 330 $-- 100,000(2)(4)
1998 $ 47,423 $ -- $ -- $-- 55,000(2)
Robert G. Stevens 2000 $168,000 $ -- $ -- $-- 490,000(2)(3)
Executive Vice President 1999 $ -- $ -- $ -- $-- 100,000(2)
1998 $ -- $ -- $ -- $--
(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.
27
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 $250,000, 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. In addition, the Company maintains a
$1.2 million key person life insurance policy on the life of Mr. Seiff.
OPTIONS GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the grant of stock options
under the Plans to the Named Executives Officers during the fiscal year ended
December 31, 2000:
INDIVIDUAL GRANTS
-----------------
NUMBER OF SECURITIES % OF TOTAL OPTIONS
UNDERLYING OPTIONS GRANTED TO EMPLOYEES IN EXERCISE OR
NAME GRANTED (#) FISCAL YEAR (%) BASE PRICE ($) EXPIRATION DATE
---- ----------- --------------- -------------- ---------------
E. Kenneth Seiff 150,000 4.02% $3.23 7/11/05
500,000 13.41% $3.06 10/11/05
330,000 8.85% $3.06 10/11/05
Patrick C. Barry 150,000 4.02% $2.94 7/11/10
289,912 7.78% $2.78 10/11/10
50,000 1.34% $2.78 10/11/10
Jonathan B. Morris 150,000 4.02% $2.94 7/11/10
290,000 7.78% $2.78 10/11/10
50,000 1.34% $2.78 10/11/10
Robert G. Stevens 150,000 4.02% $2.94 7/11/10
290,000 7.78% $2.78 10/11/10
50,000 1.34% $2.78 10/11/10
The Company does not currently grant stock appreciation rights.
OPTION HOLDINGS
The following table sets forth information with respect to the Named Executive
Officers concerning the exercise of options during the last fiscal year and the
unexercised options held at December 31, 2000. None of the Named Executive
Officers exercised any outstanding options during the fiscal year ended December
31, 2000.
28
SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS AT DECEMBER 31, 2000 (#) OPTIONS AT DECEMBER 31, 2000 ($)
-------------------------------- --------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
E. Kenneth Seiff 111,458 993,542 $ 0 $ 0
Patrick C. Barry 119,700 525,212 $ 0 $ 0
Jonathan B. Morris 110,208 534,792 $ 0 $ 0
Robert G. Stevens 89,292 513,958 $ 0 $ 0
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, 2000,
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 820,358(3)(4) 15.66%
Red Burns 14,500(5) *
Mark H. Goldstein 3,750(6) *
Martin Miller 20,000(7)(8) *
Neal Moszkowski (9) 7,500(10) *
Ellin Saltzman 7,500(11) *
David Wassong (9) - -
Lorne Weil - -
Robert G. Stevens 181,461(12) 3.57%
Patrick C. Barry 223,145(13) 4.33%
Jonathan B. Morris 255,697(14) 4.95%
Quantum Industrial Partners LDC 12,424,736(15)(18) 71.61%
George Soros 12,832,264(16)(18) 73.82%
All directors and executive officers as a group (9 persons) 1,511,910(17) 25.66%
- ----------------
*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
Securities and Exchange Commission ("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 315,201 shares of Common Stock issuable upon exercise of options
granted under the Plan.
(5) Includes 14,500 shares of Common Stock issuable upon exercise of options
granted under the Plan. On February 5, 2001, Ms. Burns resigned as a
Director in order to allow the designee of the Company's newly-issued
Series B Preferred Stock to serve as a Director.
(6) Includes 3,750 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) Includes 17,000 shares of Common Stock issuable upon exercise of options
granted under the Plan.
(9) Messrs. Moszkowski and Wassong's address is c/o Soros Private Equity
Partners LLC, 888 Seventh Avenue, New
29
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.
(10) Includes 7,500 shares of Common Stock issuable upon exercise of options
granted under the Plan.
(11) Includes 7,500 shares of Common Stock issuable upon exercise of options
granted under the Plan. Ms. Saltzman resigned from her position as a
Director of the Corporation, effective as of February 1, 2001 and is now a
Fashion Director at the Company.
(12) Includes 158,522 shares of Common Stock issuable upon exercise of options
granted under the Plan.
(13) Includes 223,145 shares of Common Stock issuable upon exercise of options
granted under the Plan.
(14) Includes 242,834 shares of Common Stock issuable upon exercise of options
granted under the Plan.
(15) Represents 8,254,700 shares of Common Stock issuable upon conversions of
8,254,700 shares of Series B Preferred Stock; 3,806,923 shares of Common
Stock issuable upon conversion of the 445,410 shares Series A Preferred
Stock; 363,112.50 shares of Common Stock issuable upon exercise of
warrants; (collectively, the "QIP Shares") held in the name of Quantum
Industrial Partners LDC ("QIP"). Excludes shares of Common Stock and
warrants issued pursuant to the Standby Commitment on March 28, 2001 and
the Rosenthal Financing on March 30, 2001, respectively. QIP is a Cayman
Islands limited duration company with its principal address at Kaya
Flamboyan 9, Willemstad, Curacao, Netherlands Antilles. The sole general
partner of QIP is QIH Management Investor L.P., a Delaware limited
partnership ("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, 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 270,941 shares of Common Stock issuable on conversion of 270,941
shares of Series B Preferred Stock; 124,700 shares of Common Stock issuable
on conversion of 14,590 shares of Series A Preferred Stock; 11,887.50
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 (ii) the QIP Shares referenced in
Note 15 above. Excludes shares of Common Stock issued pursuant to the
Standby Commitment on March 28, 2001. As 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 967,951 shares of Common Stock issuable upon exercise of options
granted under the Plan. Shares held by Ms. Burns and Ms. Saltzman's are not
included in this amount as they resigned their positions as Directors in
February 2001.
(18) See "Risk Factors - Quantum Industrial Partners LDC and SFM Domestic
Investments LLC Own a Majority of Our Stock; 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, 2000, 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 - -
Mark H. Goldstein - -
Red Burns - -
Martin Miller - -
Neal Moszkowski (3) - -
30
NUMBER OF SHARES
NAME (1) BENEFICIALLY OWNED PERCENTAGE (2)
-------- ------------------ --------------
Ellin Saltzman - -
David Wassong (3) - -
Lorne Weil - -
Robert G. Stevens - -
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
Securities and Exchange Commission ("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 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. 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 - Quantum Industrial Partners LDC and SFM Domestic
Investments LLC Own a Majority of Our Stock; 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, 2000, 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 - -
Red Burns - -
31
NUMBER OF SHARES
NAME (1) BENEFICIALLY OWNED PERCENTAGE (2)
-------- ------------------ --------------
Mark H. Goldstein - -
Martin Miller - -
Neal Moszkowski (3) - -
Ellin Saltzman - -
David Wassong (3) - -
Lorne Weil - -
Robert G. Stevens - -
Patrick C. Barry - -
Jonathan B. Morris - -
Quantum Industrial Partners LDC 8,254,700(4)(6) 96.58%
George Soros 8,525,641(5)(6) 99.75%
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
Securities and Exchange Commission ("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 - Quantum Industrial Partners LDC and SFM Domestic
Investments LLC Own a Majority of Our Stock; Change of Control Covenant and
Liquidation Preference of Series A Preferred Stock And Series B Preferred
Stock."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to the New Soros Financing, Quantum and SFM had agreed to purchase a
total dollar amount of shares equal to the difference between $20 million and
the aggregate total dollar amount of shares purchased by our shareholders in the
Rights Offering, provided that, in no event would Quantum and SFM be required to
purchase more than $10 million of Common Stock in the aggregate. The Rights
Offering ended at 5 p.m., New York City time, on March 26, 2001. The public
shareholders subscribed for 6,921 shares in the Rights Offering for aggregate
proceeds of $16,000. In accordance with the Standby Commitment, Quantum and SFM
purchased 4,273,504 shares of Common Stock of the Company for an aggregate
amount of
32
$10 million on March 28, 2001 at a price of $2.34 per share. Immediately after
the closing of the offering Soros beneficially owned approximately 78% of the
outstanding Common Stock.
Pursuant to the Note and Warrant Purchase Agreement dated as of March 28, 2000,
by and among the Corporation, QIP and SFMDI, Soros committed to provide to the
Corporation, at the Corporation's 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 is provided. From March 2000 through October 2000,
the Corporation received this $15.0 million under the Soros Commitment in the
form of notes that bear interest at a rate of 8% per annum and are due in May
2001. In connection with the issuance of those notes, the Corporation granted
Soros warrants 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 5 years
following issuance. Those warrants were valued at $465,000 using the Black
Scholes option pricing model. Pursuant to the Investment Agreement, the notes
issued under the Soros Commitment have been amended and, as amended, are
referred to as the "Amended Notes" in the section above entitled "The Soros
Investment." Reference is made to that section for a complete description of the
Investment Agreement.
In December 2000, Ellin J. Saltzman, a director of the Corporation, agreed to
serve as the Corporation's Fashion Director. As compensation for her services as
Fashion Director, Ms. Saltzman will receive an annual base salary of $72,000,
subject to increase by the Board of Directors, and has received a signing bonus
of $14,000. Ms. Saltzman has also been granted an option to purchase 20,000
shares of Common Stock. Ms. Saltzman's option is exercisable at the fair market
value of the Common Stock on the date of the grant and vests monthly over
four-year period according to the following schedule: 12.5% of the options vests
on the six-month anniversary of the date of the grant and 2.0833% of the option
vests each month thereafter until the option has completely vested. Ms. Saltzman
has resigned as a director of the Corporation, effective as of February 1, 2001.
In connection with the Loan Facility we entered into with Rosenthal, 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 the Company's
obligations under the Financing Agreement. In addition, during the term of the
Financing Agreement, at our request, Soros will issue another Standby Letter of
Credit for up to an additional $1.5 million. In consideration for the Soros
Guarantee, we granted to Soros a lien subordinated to the Rosenthal Lien on
substantially all of our assets, and we issued to Soros a warrant to purchase
100,000 shares of our Common Stock at an exercise price equal to the average
closing price of our Common Stock on the 10 days preceding September 15, 2001,
exercisable for ten years beginning on September 15, 2001.
Under the Financing Agreement, Soros has the right to purchase all of our
obligations from Rosenthal 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 Standby Letter of Credit as consideration
for Soros' purchase of such obligations.
Subject to certain conditions, if we default on any of our obligations under the
Financing Agreement, Rosenthal has the right to draw upon such Standby Letter of
Credit to satisfy any such obligations. If and when Rosenthal draws on the
Standby Letter of Credit, 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 Standby Letter of Credit plus interest accrued thereon.
In addition, to the extent that Rosenthal draws on the Standby Letter of Credit
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
Standby Letter of Credit, we will be required to issue to Soros another warrant
to purchase the 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 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 current
market price of our Common Stock as of the latter of 10 days after the date of
issuance and September 15, 2001.
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following is a list of exhibits filed as part of this Annual Report on
Form 10-K:
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1 Certificate of Incorporation of the Company.
3.2 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.
33
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.
10.14(f) Bluefly, Inc. 2000 Stock Option Plan.
10.15(e) Letter Agreement, dated June 22, 2000, by and between the
Company and Soros Private Equity Partners LLC
+10.16(f) Service Agreement by and between the Company and Distribution
Associates, Inc., dated July 27, 2000
10.17(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.
10.18(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.
10.19(h) Letter Agreement, dated October, 12, 2000 by and between the
Company, Soros Private Equity Partners, LLC
10.20(f) Investment Agreement dated November 13, 2000 by and among the
Company, Newco, Quantum Industrial Partners LDC and SFM
Domestic Investments LLC.
10.21 Financing Agreement dated March 30, 2001 between the Company
and Rosenthal & Rosenthal, Inc.
10.22 Reimbursement Agreement dated March 30, 2001 between the
Company, Quantum Industrial Partners LDC and SFM Domestic
Investment LLC.
10.23 Warrant dated March 30, 2001 issued to Rosenthal & Rosenthal,
Inc.
10.24 Warrant dated March 30, 2001 issued to Quantum Industrial
Partners LDC.
10.25 Warrant dated March 30, 2001 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.
(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, 1999.
(h) - Incorporated by reference to the Company's report filed on Form 8-K, dated
October 17, 2000.
+ Confidential treatment granted as to certain portions of this Exhibit.
Such portions have been redacted.
(d) Reports on Form 8-K
The Company filed a report on Form 8-K, dated October 17, 2000 regarding a non
binding letter of intent relating to a proposed investment in us by affiliates
of Soros Private Equity Partners LLC.
The Company filed a report on Form 8-K, dated November 20, 2000 concerning a
report of our independent accountants updated for subsequent events.
The Company filed a report on Form 8-K, dated February 6, 2001 concerning the
second closing of the investment agreement between us and affiliates of Soros
Private Equity Partners LLC and the change in control resulting therefrom.
34
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 30, 2001
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 Chairman of the Board of March 30, 2001
- ------------------------- Directors, Chief Executive
E. Kenneth Seiff Officer, President, and Treasurer
(Principal Executive Officer)
/s/ Patrick C. Barry Chief Financial Officer and March 30, 2001
- ------------------------- Chief Operating Officer
Patrick C. Barry (Principal Accounting Officer)
/s/ Martin Miller Director March 30, 2001
- -------------------------
Martin Miller
/s/ Robert G. Stevens Director March 30, 2001
- -------------------------
Robert G. Stevens
/s/ Neal Moszkowski Director March 30, 2001
- -------------------------
Neal Moszkowski
/s/ Mark H. Goldstein Director March 30, 2001
- -------------------------
Mark H. Goldstein
/s/ David Wassong Director March 30, 2001
- -------------------------
David Wassong
/s/ Lorne Weil Director March 30, 2001
- -------------------------
Lorne Weil
35