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, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______ to ______
Commission File Number: 001-14498
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BLUEFLY, INC.
(Name of registrant as specified in its charter)
Delaware 13-3612110
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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: Common Stock, par
value $.01 per share
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]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
As of February 19, 2004, there were 14,471,375 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 June 30, 2003, based
upon the last sale price of such equity reported on the National Associated of
Securities Dealers Automated Quotation SmallCap Market, was approximately
$5,621,000.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Bluefly, Inc. is a leading Internet retailer of designer fashion and home
accessories at discount prices. We sell over 350 brands of designer apparel,
accessories and home products at discounts up to 75% off retail value. During
2003, we offered over 80,000 different types of items for sale in categories
such as men's, women's and accessories as well as house and home accessories. We
launched the Bluefly.com Web site (the "Web site") in September 1998. Since its
inception, www.bluefly.com has served over 500,000 customers and shipped to over
20 countries.
Our common stock is listed on the Nasdaq SmallCap Market under the symbol "BFLY"
and on the Boston Stock Exchange under the symbol "BFL" and we are incorporated
in Delaware. 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. We make available, free of charge, through our Web site, our
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the SEC.
In this report, the terms "we," "us," "Bluefly" and the "Company" refer to
Bluefly, Inc. and its predecessors and subsidiaries, unless the context
indicates otherwise.
RECENT DEVELOPMENTS
JANUARY 2004 FINANCING
On January 12, 2004, we completed a private placement (the "New Financing")
pursuant to which we raised $5,000,000. Under the terms of the deal, we issued
1,543,209 shares of common stock at $3.24 per share, which was 90% of the
trailing five-day average of the Company's volume-weighted stock price as of
December 29, 2003, the date that a preliminary agreement was reached as to the
pricing of the deal. We also issued the new investors warrants to purchase
385,801 shares of common stock at any time during the next five years at an
exercise price equal to $3.96 per share.
In January 2004, we also extended the maturity dates on the Convertible
Promissory Notes issued to affiliates of Soros Private Equity Partners, LLC that
collectively own a majority of our capital stock (collectively, "Soros") in July
and October 2003 (the "Notes"). The maturity dates of the Notes, which were
originally January and April 2004, respectively, were each extended to March 1,
2005. In February 2004, the maturity date of the Notes was further extended to
May 1, 2005.
PERSONNEL
In September 2003, we hired Melissa Payner-Gregor, former President and CEO of
Spiegel Catalog, Inc., as our President. Ms. Payner-Gregor reports directly to
our CEO and is responsible for our merchandising, marketing and e-commerce
groups. She also joined the Company's Board of Directors, which has been
expanded to eight members.
GENERAL
Based on current plans and assumptions relating to our operations, we believe
that our existing resources and working capital, are sufficient to satisfy our
cash requirements through the end of 2004. Of course, there can be no assurance
that such expectations will prove to be correct. Moreover, we may seek
additional debt and/or equity financing in order to grow our business. The
environment for raising investment capital has been difficult and there can be
no assurance that additional financing or other capital will be available upon
terms acceptable to us, or at all. If such financings are not available on terms
acceptable to us or we do not achieve our sales plan, future operations will
need to be modified, scaled back or discontinued. The inability to obtain
additional financing, if needed, would have a material adverse effect on our
business, prospects, financial condition and results of operations. See "Risk
Factors -We Are Making A Substantial Investment In Our Business And May Need To
Raise Additional Funds" and "Risk Factors -Certain Events Could Result in
Significant Dilution Of Your Ownership Of Our Common Stock."
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BUSINESS STRATEGY
Bluefly strives to be the "Store of First Resort for Fashion" by offering the
most compelling combination of selection, value, service and convenience. By
selectively acquiring end-of-season and excess inventory of high-end designer
fashion products and offering a friendly, convenient and upscale shopping
atmosphere, we believe that we are creating a hybrid retail environment that
combines the best of the three traditional retail channels: the selection of
full price department stores; the service and convenience of catalogs; and the
savings of traditional off-price stores.
Each of the three traditional retail channels offers something different to
consumers. Full price department stores typically offer a wide selection of top
designer products and make substantial efforts to provide good customer service.
Often missing from the full price department store experience are convenience
(of necessity, consumers must travel to and from the store, which in some
instances can take several hours) and discounts (while full price stores
generally have price mark-downs, the majority of their business is at full
price). While catalogs offer convenience and 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, are "vertical brands"
that sell only one brand of products). Off-price stores, such as T.J. Maxx and
Ross Stores, typically offer significant discounts to the customer but do not
offer the designer brand selection and customer service of full price department
stores or the convenience of catalogs.
Bluefly seeks to combine the best that these three traditional channels have to
offer with added benefits offered only by the Internet. At Bluefly.com, we aim
to offer the designer selection of a full price department store, the customer
service of a high-end retailer or catalog, the discounts of an off-price store,
the convenience of 24/7 shopping from home or the office, and sophisticated
search and sort functionality made possible by the Internet. We recognize that
we will not be able to satisfy all of our customers, all of the time, but then
no retailer can. Our proposition to the consumer is simply this: "Come to
Bluefly.com first for all of your fashion needs. We will do our best to exceed
your expectations and, if we have what you are looking for, you will receive top
designer merchandise at a discount and outstanding customer service in a
friendly, convenient, upscale environment. In those instances (which we hope to
be rare) where our designer selection does not meet your needs, the cost to you
will be the few minutes it took to browse or search our Web site. We, on the
other hand, will have the opportunity to complete many more sales with you if we
successfully build an experience that convinces you to visit us first to see if
we can fill your fashion needs." For these reasons, we hope to become the "Store
of First Resort for Fashion."
Our business is also designed to provide a compelling value proposition for our
suppliers and, in particular, the more than 350 top designer brands that we
offer on our Web site. We recognize that liquidating excess inventory can be a
"necessary evil" and that brand dilution can occur when a brand's product is
offered in a traditional discount environment. We would like to make the
liquidation of excess inventory a positive experience for our vendors rather
than a distasteful one. We intend to do this by treating our suppliers with
honesty and respect and by creating a high-end retail environment that offers
only a premium matrix of brands. In doing so, we hope that Bluefly's younger,
affluent customer base will come to understand our suppliers' brands as the
designer intended, thereby reducing the potential for brand dilution.
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 and the lead times required to print a catalog make them
significantly inflexible in addressing inventory sell outs, price changes and
new styles. To work around these limitations, a traditional cataloger typically
requires products that are replenishable, available in a full range of sizes and
in substantial quantities. Similarly, retailing on television is costly and
requires substantial quantities of products that are available in all sizes in
order for it to be an economical medium. In addition, the number of items that
can be displayed on television is limited, and television does not allow viewers
to search for products that interest them. The availability of excess inventory
of high-end apparel and accessories is often at odds with these needs as such
merchandise is rarely replenishable and frequently offered in incomplete color
and size ranges.
The Internet, however, can be a far less expensive and far more effective
medium. By using the Internet as our platform, the number of items that we offer
is not limited by the high costs of printing and mailing catalogs. With the
Internet, we can automatically update product images as new products arrive and
other items sell out. By integrating real-time databases containing information
about both inventory and customers' size and brand preferences, we can create a
personalized shopping
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environment and allow our customers to search for the products that specifically
interest them, and more importantly, limit what they see to the items that are
available in their size. In addition, we believe that we are able to more
economically and consistently maintain an upscale environment through the design
of a single online storefront.
We believe that we have created a customer experience that is fundamentally
better than that offered by traditional off-price retailers. Similarly, we
believe that our upscale atmosphere, professional photography and premium brand
matrix create a superior distribution channel for designers who wish to
liquidate their end-of-season and excess merchandise without suffering the brand
dilution inherent in traditional off-price channels.
E-COMMERCE AND THE ONLINE APPAREL MARKET
The dramatic growth of e-commerce has been widely reported and is expected to
continue. According to the United States Department of Commerce, online sales
grew by over 26% to $50 billion in 2003 compared to 2002. 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.
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, who account for a larger share of
retail apparel purchases, (ii) the expansion of online traffic from technology
oriented users to users with mainstream demographic, (iii) the development of
sophisticated tools to search complex product categories such as apparel and
(iv) the growing adoption of high speed access of cable modems and DSL, which
makes viewing large numbers of photos much faster. Of course, there can be no
assurance that such expectations will prove to be correct or that they will have
a positive effect on our business.
CATALOG SALES AS A PREDICTOR OF FUTURE GROWTH
In many respects, shopping for apparel online is similar to purchasing apparel
through a print catalog. In both cases, the tactile experience is absent from
the transaction and shoppers must make purchase decisions on the basis of a
photograph and a textual description. While we believe that sophisticated
database technology, personalization technology, and the interactivity of the
Web will ultimately make the Internet a far more compelling medium than
catalogs, we also believe that the success of apparel sales via catalogs is a
good predictor of the future success of apparel sales via the Internet.
The success of companies such as J.Crew and Lands' End is perhaps the best
evidence that people are prepared to purchase clothing and accessories remotely
despite the fact that no catalog can convey the tactile element of clothing or
provide a fitting room in which consumers can try on clothing.
MARKETING
We are seeking to position ourselves as the fashion consumer's store of first
resort, combining the service and selection found at high-end retailers with
savings typically available only at off-price stores or company-owned outlet
stores. We seek to incorporate this branding effort into all aspects of our
operations, including advertising, customer service, site experience, packaging
and delivery. We acquire new customers through multiple channels, including
traditional and online advertising, direct marketing and print advertising.
MERCHANDISING
Our merchandising efforts are led by our recently hired President and our 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 350 name brand designers, which we believe to be the
widest selection of designers available from any online store. We have
established direct supply relationships with over 200 such designers. We believe
that we have been successful in opening up over 200 direct supply relationships,
in part because we have devoted substantial resources to establishing
Bluefly.com as a high-end retail environment. In this regard, we are committed
to displaying all of our merchandise in an attractive manner, offering superior
customer service and gearing all aspects of our business towards creating a
better channel for top designers to liquidate their excess inventory.
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For a number of reasons, we believe that our inventory risk can be lower than
that of traditional retailers:
. 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;
. Our Web site captures a tremendous amount of customer data that
we can use to optimize our purchase of inventory;
. 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; and
. Unlike traditional brick-and-mortar retailers, which have a
limited amount of shelf space, significant rent payments and
attendant sales personnel costs, we hold inventory in a
warehouse with a lower per square foot rental charge, lower
personnel costs and more shelf space.
These factors can create lower inventory carrying costs. We believe that these
advantages have allowed us to continue to sell products at higher margin prices
for a longer period of time than traditional retailers, who are often forced to
mark down the price of a product to clear it from the floor if it does not sell
within the first few weeks. For example, we were able to increase our margin
from 30.5% in 2001 to 32.8% in 2002 despite the fact that our inventory grew
from approximately $6.4 million to approximately $10.9 million. While our margin
decreased to 29.9% in 2003, this decrease resulted from our decision to turn
more of our out-of-season merchandise into cash that could be used to purchase
new inventory, rather than holding it for the next season. Of course, there can
be no assurance that we will be able to continue to leverage these advantages
successfully and enhance their effects on our business.
WAREHOUSING AND FULFILLMENT
When we receive an order, the information is transmitted to our third party
warehouse and fulfillment center located in Virginia, where the items included
in the order are picked, packed and shipped directly to the customer. Our
inventory database is updated on a real-time basis, allowing us to display on
our Web site only those styles, sizes and colors of product available for sale.
We focus on customer satisfaction throughout our organization. In December 2003,
during our peak weeks of the holiday season, the vast majority of our orders
were shipped within one business day from receipt of the customer's order.
CUSTOMER SERVICE
We believe that a high level of customer service and support is critical to
differentiating ourselves from traditional off-price retailers and maximizing
customer acquisition and retention efforts. Our customer service effort starts
with our Web site, which is designed to provide an intuitive shopping
experience. An easy to use help center is available on the Web site and is
designed to answer many of our customers' most frequently asked questions. For
customers who prefer e-mail or telephone assistance, customer service
representatives are available seven days a week to provide assistance. To insure
that customers are satisfied with their shopping experience, we generally allow
returns for any reason within 90 days of the sale for a full refund.
TECHNOLOGY
We have implemented a broad array of state-of-the-art technologies that
facilitate Web site management, complex database search functionality, customer
interaction and personalization, transaction processing, fulfillment and
customer service functionality. Such technologies include a combination of
proprietary technology and commercially available, licensed technology. To
address the critical issues of privacy and security on the Internet, we
incorporate, for transmission of confidential personal information between
customers and our Web server, Secure Socket Layer Technology ("SSL") such that
all data is transmitted via a 128-bit encrypted session.
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 as Neiman Marcus, Saks Fifth Avenue, The Gap,
Nordstrom, and Macy's, which are using the Internet to expand
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their channels of distribution, established Internet companies such as
Amazon.com and ebay.com and less established companies such as eLuxury, which
are building their brands online. In addition, our competition for customers
comes from traditional direct marketers such as L.L. Bean, Lands' End, and
J.Crew, television direct marketers such as QVC, and land-based off-price retail
stores, such as T.J. Maxx, Marshalls, Filene's Basement and Loehmanns, which may
or may not use the Internet in the future to grow their customer base. Many of
these competitors have longer operating histories, significantly greater
resources, greater brand recognition and more firmly established supply
relationships. Moreover, we expect additional competitors to emerge in the
future.
We believe that the principal competitive factors in our market include: brand
recognition, merchandise selection, price, convenience, customer service, order
delivery performance, site features, and content. Although we believe that we
compare favorably with our competitors, we recognize that this market is
relatively new and is evolving rapidly, and, accordingly, there can be no
assurance that this will continue to be the case.
INTELLECTUAL PROPERTY
We rely on various intellectual property laws and contractual restrictions to
protect our proprietary rights in services and technology, including
confidentiality, invention assignment and nondisclosure agreements with
employees and contractors. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use our intellectual property
without our authorization. In addition, we pursue the registration of our
trademarks and service marks in the U.S. and internationally and the
registration of our domain name and variations thereon. 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. We are not aware
of any permits or licenses that are required in order for us, generally, to sell
apparel and fashion accessories on the Internet, although licenses are sometimes
required to sell products made from specific materials. In addition, permits or
licenses may be required from international, federal, state or local
governmental authorities to operate or to sell certain other products on the
Internet in the future. No assurances can be given that we will be able to
obtain such permits or licenses. We may be required to comply with future
national and/or international legislation and statutes regarding conducting
commerce on the Internet in all or specific countries throughout the world. No
assurance can be made that we will be able to comply with such legislation or
statutes. Our Internet operations are not currently impacted by federal, state,
local and foreign environmental protection laws and regulations.
EMPLOYEES
As of February 19, 2004, we had 89 full-time employees and 3 part-time
employees, as compared to 77 full-time and 5 part-time employees as of February
19, 2003. 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
We Have A History Of Losses And Expect That Losses Will Continue In The Future.
As of December 31, 2003, we had an accumulated deficit of $92,336,000. We
incurred net losses of $6,369,000, $6,479,000 and $25,006,000 for the years
ended December 31, 2003, 2002 and 2001, respectively. We have incurred
substantial costs to develop our Web site and infrastructure. In order to expand
our business, we intend to invest in sales, marketing, merchandising,
operations, information systems, site development and additional personnel to
support these activities. We therefore expect to continue to incur substantial
operating losses for the foreseeable future. Our ability to become profitable
depends on our ability to generate and sustain substantially higher net sales
while maintaining reasonable expense levels, both of which are uncertain. If we
do achieve profitability, we cannot be certain that we would be able to sustain
or increase profitability on a quarterly or annual basis in the future.
We Are Making A Substantial Investment In Our Business And May Need To Raise
Additional Funds. We may need additional financing to effect our business plan.
The environment for raising investment capital has been difficult and there can
be no assurance that additional financing or other capital will be available
upon terms acceptable to us, or at all. In the event that we are unable to
obtain additional financing, if needed, we could be forced to decrease expenses
that we believe are necessary for us to realize on our long-term prospects for
growth and profitability and/or liquidate inventory in order to generate cash.
Moreover, any additional equity financing that we may raise could result in
significant dilution of the existing holders of common stock. See "- Certain
Events Could Result In Significant Dilution Of Your Ownership Of Common Stock."
Our Lenders Have Liens On Substantially All Of Our Assets And Could Foreclose In
The Event That We Default Under Our Loan Facility. Under the terms of our loan
facility (the "Loan Facility"), Rosenthal & Rosenthal, Inc. ("Rosenthal"),
provides us with certain credit accommodations, including loans and advances,
factor-to-factor guarantees, letters of credit in favor of suppliers or factors
and purchases of payables owed to our suppliers. Pursuant to the Loan Facility,
we gave a first priority lien to Rosenthal on substantially all of our assets,
including our cash balances. In connection with the Loan Facility, we entered
into a reimbursement agreement with affiliates of Soros Private Equity Partners,
LLC that collectively own a majority of our capital stock (collectively,
"Soros"), pursuant to which Soros agreed to guarantee a portion of the Loan
Facility, (the "Soros Guarantee") we agreed to reimburse Soros for any amounts
it paid to our lender pursuant to such guarantee and we granted Soros a
subordinated lien on substantially all of our assets, including our cash
balances, in order to secure our reimbursement obligations. If we default under
the Loan Facility, Rosenthal and Soros would be entitled, among other things, to
foreclose on our assets in order to satisfy our obligations under the loan
facility and the reimbursement agreement. In addition, to the extent that Soros
is required to make any payments to Rosenthal under its guarantee of our
obligations under the Loan Facility, we would be required to issue an additional
warrant to Soros, which could result in a significant dilution of your ownership
of our Common Stock. See "- Certain Events Could Result In Significant Dilution
Of Your Ownership Of Our Common Stock."
Our Ability To Comply With Our Financial Covenants and Pay Our Indebtedness
Under Our Loan Facility Is Dependent Upon Meeting Our Business Plan. We are
required to pay interest under our Loan Facility on a monthly basis. In
addition, we are required, under the facility, to maintain working capital of at
least $4 million and net tangible worth of at least $5 million as of the end of
each fiscal year. Assuming we meet our business plan, we will satisfy these
covenants. To a certain extent, however, our ability to meet our business plan,
is subject to general economic, financial, competitive, legislative, regulatory
and other factors that are beyond our control and therefore we cannot assure you
that based on our business plan we will generate sufficient cash flow from
operations to enable us to pay our indebtedness under the Loan Facility and
maintain compliance with our net working capital covenant throughout the term of
the agreement or that we will be able to maintain compliance with the net worth
covenant. If we fall short of our business plan and are unable to raise
additional capital, we could default under our Loan Facility. In the event of a
default under the Loan Facility, Rosenthal and Soros would be entitled, among
other things, to foreclose on our assets (whether inside or outside a bankruptcy
proceeding) in order to satisfy our obligations under the Loan Facility and the
reimbursement agreement. In addition, a default under our Loan Facility could
require us to issue an additional warrant to Soros, which could result in a
significant dilution of your ownership of our common stock. See "Risk Factors -
Our Lenders Have Liens On Substantially All Of Our Assets And Could Foreclose In
The Event That We Default Under Our Loan Facility" and "- Certain Events Could
Result In Significant Dilution of Your Ownership of Our Common Stock."
Certain Events Could Result In Significant Dilution Of Your Ownership Of Our
Common Stock. Stockholders could be
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subject to significant dilution to the extent that we raise additional equity
financing, as a result of both the issuance of additional equity securities, the
potential conversion of the convertible promissory notes described below and the
anti-dilution provisions of our Series B, C, D and E preferred stock described
below, which provide for the issuance of additional securities to the holders
thereof, under certain circumstances, to the extent that the Preferred Stock is
converted at any time after a sale of Common Stock at less than $0.76 per share.
Moreover, as of February 19, 2004, there were outstanding options to purchase
9,102,557 shares of our Common Stock issued under our 1997 and 2000 Stock Option
Plans, warrants to purchase 981,644 shares of our Common Stock issued to Soros,
and additional warrants and options to purchase 723,301 shares of our Common
Stock. In addition, as of such date, our outstanding Preferred Stock was
convertible into an aggregate of 43,323,430 shares of our Common Stock (plus any
shares of our Common Stock issued upon conversion in payment of any accrued and
unpaid dividends). The exercise of our outstanding options and warrants and/or
the conversion of our outstanding Preferred Stock would dilute the then existing
stockholders' percentage ownership of our common stock, and any sales in the
public market of our Common Stock underlying such securities, could adversely
affect prevailing market price of our Common Stock. In the event that all of the
securities described above were converted to Common Stock, the holders of the
Common Stock immediately prior to such conversion would own approximately 21% of
the outstanding Common Stock immediately after such conversion, excluding the
effect of accrued dividends on Preferred Stock.
As described above, our Series B, C, D and E Preferred Stock contain
anti-dilution provisions pursuant to which, subject to certain exceptions, in
the event that we issue or sell our Common Stock or new securities convertible
into our Common Stock in the future for less than $0.76 per share, the number of
shares of our Common Stock to be issued upon the conversion of such Preferred
Stock would be increased to a number equal to the face amount of such Preferred
Stock divided by the price at which such Common Stock or other new securities
are sold.
In addition, Soros owns $4 million of convertible promissory notes issued by us
that bear interest at the rate of 12% per annum and are convertible, at Soros'
option, into our equity securities sold in any subsequent round of financing at
a price that is equal to the lowest price per share accepted by any investor
(including Soros or any of its affiliates) in such subsequent round of
financing.
Moreover, if Rosenthal draws on the Soros Guarantee during the continuance of a
default under the Loan Facility, or if at any time the total amount outstanding
under the Loan Facility exceeds 90% of the undrawn amount of the Soros
Guarantee, we will be required to issue to Soros another warrant (each a
"Contingent Warrant") to purchase a number of shares of Common Stock equal to
the quotient of (a) any amounts drawn under the Soros Guarantee and (b) 75% of
the average closing price of our Common Stock on the ten days preceding the date
of issuance of such warrant. Each Contingent Warrant will be exercisable for ten
years from the date of issuance at an exercise price equal to 75% of the average
closing price of our Common Stock on the ten days after the date of issuance.
Soros Owns A Majority Of Our Stock And Therefore Effectively Controls Our
Management And Policies. As of February 19, 2004, through its holdings of our
common stock, as well as our preferred stock, and warrants convertible into our
common stock, Soros beneficially owned, in the aggregate, approximately 84% of
our common stock. The holders of our preferred stock vote on an "as converted"
basis with the holders of our common stock. By virtue of its ownership of our
preferred stock, Soros has the right to appoint two designees to our Board of
Directors, each of whom has seven votes on any matter voted upon by our Board of
Directors. Collectively, these two designees have 14 out of 20 possible votes on
each matter voted upon by our Board of Directors. In addition, we are required
to obtain the approval of holders of our preferred stock prior to taking certain
actions. The holders of our preferred stock have certain pre-emptive rights to
participate in future equity financings and certain anti-dilution rights that
could result in the issuance of additional securities to such holders. In view
of their large percentage of ownership and rights as the holders of our
preferred stock, Soros effectively controls our management and policies, such as
the election of our directors, the appointment of new management and the
approval of any other action requiring the approval of our stockholders,
including any amendments to our certificate of incorporation, a sale of all or
substantially all of our assets or a merger. In addition, Soros has demand
registration rights with respect to the shares of our common stock that it
beneficially owns. Any decision by Soros to exercise such registration rights
and to sell a significant amount of our shares in the public market could have
an adverse effect on the price of our common stock. See "- Certain Events Could
Result In Significant Dilution of Your Ownership Of Common Stock."
If We Are Not Accurate In Forecasting Our Revenues, We May Be Unable To Adjust
Our Operating Plans In A Timely
8
Manner. Because our business has not yet reached a mature stage, it is difficult
for us to forecast our revenues accurately. We base our current and future
expense levels and operating plans on expected revenues, but in the short term a
significant portion of our expenses are fixed. Accordingly, we may be unable to
adjust our spending in a timely manner to compensate for any unexpected revenue
shortfall. This inability could cause our operating results in some future
quarter to fall below the expectations of securities analysts and investors. In
that event, the trading price of our common stock could decline significantly.
In addition any such unexpected revenue shortfall could significantly affect our
short-term cash flow and our net worth, which could require us to seek
additional financing and/or cause a default under our credit facility. See "- We
Are Making A Substantial Investment In Our Business And May Need To Raise
Additional Funds" and "- Our Ability To Comply With Our Financial Covenants and
Pay Our Indebtedness Under Our Loan Facility Is Dependent Upon Meeting Our
Business Plan."
Unexpected Changes In Fashion Trends Could Cause Us To Have Either Excess or
Insufficient Inventory. Fashion trends can change rapidly, and our business is
sensitive to such changes. There can be no assurance that we will accurately
anticipate shifts in fashion trends and adjust our merchandise mix to appeal to
changing consumer tastes in a timely manner. If we misjudge the market for our
products or are unsuccessful in responding to changes in fashion trends or in
market demand, we could experience insufficient or excess inventory levels or
higher markdowns, either of which would have a material adverse effect on our
business, financial condition and results of operations.
We Will Be Subject To Cyclical Variations In The Apparel And E-Commerce Markets.
The apparel industry historically has been subject to substantial cyclical
variations. Furthermore Internet usage slows down in the summer months. We and
other apparel vendors rely on the expenditure of discretionary income for most,
if not all, sales. In the first three quarters of 2003, the retail apparel
market experienced sluggish growth, requiring many retailers to significantly
reduce prices and discount merchandise. We lowered our prices during the first
quarter of 2003, in part, as the result of this sluggish growth, and maintained
lower pricing levels in the second and third quarters of 2003 in order to
generate cash from excess out-of-season inventory. While the fourth quarter of
2003 saw a slight improvement in the retail apparel market, any future decrease
in growth rates or downturn, whether real or perceived, in economic conditions
or prospects could adversely affect consumer spending habits and, therefore,
have a material adverse effect on our revenue, cash flow and results of
operations. Alternatively, any improvement, whether real or perceived, in
economic conditions or prospects could adversely impact our ability to acquire
merchandise and, therefore, have a material adverse effect on our business,
prospects, financial condition and results of operations, as our supply of
merchandise is dependent on the inability of designers and retailers to sell
their merchandise in full-price venues. See "- We Do Not Have Long Term
Contracts With The Majority Of Our Vendors And Therefore The Availability of
Merchandise Is At Risk."
We Purchase Product From Some Indirect Supply Sources, Which Increases Our Risk
of Litigation Involving The Sale Of Non-Authentic Or Damaged Goods. We purchase
merchandise both directly from brand owners and indirectly from retailers and
third party distributors. The purchase of merchandise from parties other than
the brand owners increases the risk that we will mistakenly purchase and sell
non-authentic or damaged goods which could result in potential liability under
applicable laws, regulations, agreements and orders. Moreover, any claims by a
brand owner, with or without merit, could be time consuming, result in costly
litigation, generate bad publicity for us, and have a material adverse impact on
our business, prospects, financial condition and results of operations.
If Our Co-Location Facility Or Our Third Party Distribution Center Fails, Our
Business Could be Interrupted For A Significant Period Of Time. Our ability to
receive and fulfill orders successfully and provide high-quality customer
service, largely depends on the efficient and uninterrupted operation of our
computer and communications hardware systems and fulfillment center.
Substantially all of our computer and communications hardware is located at a
single co-location facility in New Jersey. Our inventory is held, and our
customer orders are filled, at a third party distribution center located in
Virginia. These operations are vulnerable to damage or interruption from fire,
flood, power loss, telecommunications failure, terrorist attacks, acts of war,
break-ins, earthquake and similar events. We do not presently have redundant
systems in multiple locations or a formal disaster recovery plan. Accordingly, a
failure at one of these facilities could interrupt our business for a
significant period of time, and our business interruption insurance may be
insufficient to compensate us for losses that may occur. Any such interruption
would negatively impact our sales, results of operations and cash flows for the
period in which it occurred, and could have a long-term adverse effect on our
relationships with our customers and suppliers.
Security Breaches To Our Systems And Database Could Cause Interruptions to Our
Business And Impact Our Reputation With Customers, And We May Incur Significant
Expenses to Protect Against Such Breaches. A fundamental
9
requirement for online commerce and communications is the secure transmission of
confidential information over public networks. There can be no assurance that
advances in computer capabilities, new discoveries in the field of cryptography,
or other events or developments will not result in a compromise or breach of the
algorithms we use to protect customer transaction and personal data contained in
our customer database. A party who is able to circumvent our security measures
could misappropriate proprietary information or cause interruptions in our
operations. If any such compromise of our security were to occur, it could have
a material adverse effect on our reputation with customers, thereby affecting
our long-term growth prospects. In addition, we may be required to expend
significant capital and other resources to protect against such security
breaches or to alleviate problems caused by such breaches.
Brand Owners Could Establish Procedures To Limit Our Ability To Purchase
Products Indirectly. Brand owners have implemented, and are likely to continue
to implement, procedures to limit or control off-price retailers' ability to
purchase products indirectly. In addition, several brand owners in the U.S. have
distinctive legal rights rendering them the only legal importer of their
respective brands into the U.S. If we acquire such product indirectly from
distributors and other third parties who may not have complied with applicable
customs laws and regulations, such goods could be subject to seizure from our
inventory by U.S. Customs Service, and the importer may have a civil action for
damages against us. See "Risk Factors - We Do Not Have Long Term Contracts With
The Majority of Our Vendors And Therefore The Availability Of Merchandise Is At
Risk."
Our Growth May Place A Significant Strain On Our Management And Administrative
Resources And Cause Disruptions In Our Business. Our historical growth has
placed, and any further growth is likely to continue to place, a significant
strain on our management and administrative resources. To be successful, we must
continue to implement information management systems and improve our operating,
administrative, financial and accounting systems and controls. We will also need
to train new employees and maintain close coordination among our executive,
accounting, finance, marketing, merchandising, operations and technology
functions. Any failure to implement such systems and training, and to maintain
such coordination, could affect our ability to plan for, and react quickly to,
changes in our business and, accordingly, could cause an adverse impact on our
cash flow and results of operations in the periods during which such changes
occur. In addition, as our workforce grows, our exposure to potential employment
liability issues increases, and we will need to continue to improve our human
resources functions in order to protect against such increased exposure.
Moreover, our business is dependent upon our ability to expand our third-party
fulfillment operations, customer service operations, technology infrastructure,
and inventory levels to accommodate increases in demand, particularly during the
peak holiday selling season. Our planned expansion efforts in these areas could
cause disruptions in our business. Any failure to expand our third-party
fulfillment operations, customer service operations, technology infrastructure
or inventory levels at the pace needed to support customer demand could have a
material adverse effect on our cash flow and results of operations during the
period in which such failures occur and could have a long-term effect on our
reputation with our customers.
We Are Heavily Dependent On Third-Party Relationships, And Failures By A Third
Party Could Cause Interruptions To Our Business. We are heavily dependent upon
our relationships with our fulfillment operations provider and Web hosting
provider, delivery companies like UPS and the United States Postal Service, and
credit card processing companies such as Paymentech and Cybersource to service
our customers' needs. To the extent that there is a slowdown in mail service or
package delivery services, whether as a result of labor difficulties, terrorist
activity or otherwise, our cash flow and results of operations would be
negatively impacted during such slowdown, and the results of such slowdown could
have a long-term negative effect on our reputation with our customers. The
failure of our fulfillment operations provider, credit card processors or Web
hosting provider to properly perform their services for us could cause similar
effects. Our business is also generally dependent upon our ability to obtain the
services of other persons and entities necessary for the development and
maintenance of our business. If we fail to obtain the services of any such
person or entities upon which we are dependent on satisfactory terms, or we are
unable to replace such relationship, we would have to expend additional
resources to develop such capabilities ourselves, which could have a material
adverse impact on our short-term cash flow and results of operations and our
long-term prospects.
We Are In Competition With Companies Much Larger Than Ourselves. Electronic
commerce generally and, in particular, the online retail apparel and fashion
accessories market, is a new, dynamic, high-growth market and is rapidly
changing and intensely competitive. Our competition for customers comes from a
variety of sources including:
. existing land-based, full price retailers, such as Neiman
Marcus, Saks Fifth Avenue, Nordstrom, The Gap, and Macy's, which
are using the Internet to expand their channels of distribution;
10
. less established companies, such as eLuxury, which are building
their brands online;
. internet sites such as Amazon.com and ebay.com
. traditional direct marketers, such as L.L. Bean, Lands' End and
J. Crew;
. television direct marketers such as QVC; and
. traditional off-price retail stores such as T.J. Maxx,
Marshalls, Ross, Filene's Basement and Loehmanns, which may or
may not use the Internet to grow their customer base.
We expect competition in our industry to intensify and believe that the list of
our competitors will grow. Many of our competitors and potential competitors
have longer operating histories, significantly greater resources, greater brand
name recognition and more firmly established supply relationships. We believe
that the principal competitive factors in our market include:
. brand recognition;
. merchandise selection;
. price;
. convenience;
. customer service;
. order delivery performance;
. site features; and
. content.
There can be no assurance that we will be able to compete successfully against
competitors and future competitors, and competitive pressures faced by us could
force us to increase expenses and/or decrease our prices at some point in the
future.
We Do Not Have Long Term Contracts With The Majority of Our Vendors And
Therefore The Availability Of Merchandise Is At Risk. We have few agreements
controlling the long-term availability of merchandise or the continuation of
particular pricing practices. Our contracts with suppliers typically do not
restrict such suppliers from selling products to other buyers. There can be no
assurance that our current suppliers will continue to sell products to us on
current terms or that we will be able to establish new or otherwise extend
current supply relationships to ensure product acquisitions in a timely and
efficient manner and on acceptable commercial terms. Our ability to develop and
maintain relationships with reputable suppliers and obtain high quality
merchandise is critical to our success. If we are unable to develop and maintain
relationships with suppliers that would allow us to obtain a sufficient amount
and variety of quality merchandise on acceptable commercial terms, our ability
to satisfy our customer's needs, and therefore our long-term growth prospects,
would be materially adversely affected. See "Risk Factors - Brand Owners Could
Establish Procedures to Limit Our Ability to Purchase Products Indirectly."
We Need To Further Establish Brand Name Recognition. We believe that further
establishing, maintaining and enhancing our brand is a critical aspect of our
efforts to attract and expand our online traffic. The number of Internet sites
that offer competing services, many of which already have well established
brands in online services or the retail apparel industry generally, increases
the importance of establishing and maintaining brand name recognition. Promotion
of Bluefly.com will depend largely on our success in providing a high quality
online experience supported by a high level of customer service, which cannot be
assured. In addition, to attract and retain online users, and to promote and
maintain Bluefly.com in response to competitive pressures, we may find it
necessary to increase substantially our advertising and marketing expenditures.
If we are unable to provide high quality online services or customer support, or
otherwise fail to promote and maintain Bluefly.com, or if we incur excessive
expenses in an attempt to promote and maintain Bluefly.com, our long-term growth
prospects, would be materially adversely affected.
There Can Be No Assurance That Our Technology Systems Will Be Able To Handle
Increased Traffic; Implementation of Changes to Web Site. A key element of our
strategy is to generate a high volume of traffic on, and use of, Bluefly.com.
Accordingly, the satisfactory performance, reliability and availability of
Bluefly.com, transaction processing systems and
11
network infrastructure are critical to our reputation and our ability to attract
and retain customers, as well as maintain adequate customer service levels. Our
revenues will depend on the number of visitors who shop on Bluefly.com and the
volume of orders we can handle. Unavailability of our Web site or reduced order
fulfillment performance would reduce the volume of goods sold and could also
adversely affect consumer perception of our brand name. We may experience
periodic system interruptions from time to time. If there is a substantial
increase in the volume of traffic on Bluefly.com or the number of orders placed
by customers, we will be required to expand and upgrade further our technology,
transaction processing systems and network infrastructure. There can be no
assurance that we will be able to accurately project the rate or timing of
increases, if any, in the use of Bluefly.com or expand and upgrade our systems
and infrastructure to accommodate such increases on a timely basis. In addition,
in order to remain competitive, we must continue to enhance and improve the
responsiveness, functionality and features of Bluefly.com, which is particularly
challenging given the rapid rate at which new technologies, customer preferences
and expectations and industry standards and practices are evolving in the online
commerce industry. Accordingly, we redesign and enhance various functions on our
Web site on a regular basis, and we may experience instability and performance
issues as a result of these changes.
We May Be Subject To Higher Return Rates. We recognize that purchases of apparel
and fashion accessories over the Internet may be subject to higher return rates
than traditional store bought merchandise. We have established a liberal return
policy in order to accommodate our customers and overcome any hesitancy they may
have with shopping via the Internet. If return rates are higher than expected,
our business, prospects, financial condition, cash flows and results of
operations could be materially adversely affected.
Our Success Is Largely Dependent Upon Our Executive Personnel. We believe our
success will depend to a significant extent on the efforts and abilities of our
executive personnel. In particular, we rely upon their strategic guidance, their
relationships and credibility in the vendor and financial communities and their
ability to recruit key operating personnel. We have entered into employment
agreements with each of our executive officers. The employment agreements with
our CEO and CFO/COO expire on June 30, 2005. The employment agreement with our
President expires on March 1, 2007. However, none of these employment agreements
prohibit the executive officer from terminating his or her employment with us in
order to pursue a more attractive opportunity and, to the extent that we do not
successfully implement our plans, other opportunities may appear more
attractive. The loss of the services of any of our executive officers could have
a material adverse effect on our credibility in the vendor communities and our
ability to recruit new key operating personnel.
Our Success Is Dependent Upon Our Ability To Attract New Key Personnel. Our
operations will also depend to a great extent on our ability to attract new key
personnel with relevant experience and retain existing key personnel in the
future. The market for qualified personnel is extremely competitive. Our failure
to attract additional qualified employees could have a material adverse effect
on our prospects for long-term growth.
There Are Inherent Risks Involved In Expanding Our Operations. We may choose to
expand our operations by developing new Web sites, promoting new or
complementary products or sales formats, expanding the breadth and depth of
products and services offered, expanding our market presence through
relationships with third parties, adopting non-Internet based channels for
distributing our products, or consummating acquisitions or investments.
Expansion of our operations in this manner would require significant additional
expenses and development, operations and editorial resources and would strain
our management, financial and operational resources. For example, we have
historically expended significant internal resources in connection with the
redesign of our Web site and the implementation of our online strategic
alliances, and we expect to devote significant manpower to the launch of our
storefront on Amazon.com. Moreover, in the event that we expand upon our efforts
to open brick-and-mortar outlet stores, we will be required to devote
significant internal resources and capital to such efforts. There can be no
assurance that we would be able to expand our efforts and operations in a
cost-effective or timely manner or that any such efforts would increase overall
market acceptance. Furthermore, any new business or Web site that is not
favorably received by consumer or trade customers could damage our reputation.
We May Be Liable For Infringing The Intellectual Property Rights Of Others.
Third parties may assert infringement claims against us. From time to time in
the ordinary course of business we have been, and we expect to continue to be,
subject to claims alleging infringement of the trademarks and other intellectual
property rights of third parties. These claims and any resulting litigation, if
it occurs, could subject us to significant liability for damages. In addition,
even if we prevail, litigation could be time-consuming and expensive and could
result in the diversion of our time and attention. Any claims from third parties
may also result in limitations on our ability to use the intellectual property
subject to these claims unless we are able to enter into agreements with the
third parties making these claims.
12
We May Be Liable for Product Liability Claims. We sell products manufactured by
third parties, some of which may be defective. If any product that we sell were
to cause physical injury or injury to property, the injured party or parties
could bring claims against us as the retailer of the product. Our insurance
coverage may not be adequate to cover every claim that could be asserted. If a
successful claim were brought against the Company in excess of our insurance
coverage, it could have a material adverse effect on our cash flow and on our
reputation with customers. Unsuccessful claims could result in the expenditure
of funds and management time and could have a negative impact on our business.
We Cannot Guarantee The Protection Of Our Intellectual Property. Our
intellectual property is critical to our success, and we rely on trademark,
copyright, domain names and trade secret protection to protect our proprietary
rights. Third parties may infringe or misappropriate our trademarks or other
proprietary rights, which could have a material adverse effect on our business,
prospects, results of operations or financial condition. While we enter into
confidentiality agreements with our employees, consultants and strategic
partners and generally control access to and distribution of our proprietary
information, the steps we have taken to protect our proprietary rights may not
prevent misappropriation. We are pursuing registration of various trademarks,
service marks and domain names in the United States and abroad. Effective
trademark, copyright and trade secret protection may not be available in every
country, and there can be no assurance that the United States or foreign
jurisdictions will afford us any protection for our intellectual property. There
also can be no assurance that any of our intellectual property rights will not
be challenged, invalidated or circumvented. In addition, we do not know whether
we will be able to defend our proprietary rights since the validity,
enforceability and scope of protection of proprietary rights in Internet-related
industries is uncertain and still evolving. Moreover, even to the extent that we
are successful in defending our rights, we could incur substantial costs in
doing so.
Our Business Could Be Harmed By Consumers' Concerns About The Security of
Transactions Over the Internet. Concerns over the security of transactions
conducted on the Internet and commercial online services, the increase in
identity theft and the privacy of users may also inhibit the growth of the
Internet and commercial online services, especially as a means of conducting
commercial transactions. Moreover, although we have developed systems and
processes that are designed to protect consumer information and prevent
fraudulent credit card transactions and other security breaches, failure to
mitigate such fraud or breaches could have a material adverse effect on our
business, prospects, financial condition and results of operations.
We Face Legal Uncertainties Relating To The Internet In General and To Our
Industry In Particular And May Become Subject To Costly Government Regulation.
We are not currently subject to direct regulation by any domestic or foreign
governmental agency, other than regulations applicable to businesses generally,
and laws or regulations directly applicable to online commerce. However, it is
possible that laws and regulations may be adopted that would apply to the
Internet and other online services. Furthermore, the growth and development of
the market for online commerce may prompt calls for more stringent consumer
protection laws that may impose additional burdens on those companies conducting
business online. The adoption of any additional laws or regulations may increase
our cost of doing business and/or decrease the demand for our products and
services and increase our cost of doing business.
The applicability to the Internet of existing laws in various jurisdictions
governing issues such as property ownership, sales and other taxes, libel and
personal privacy is uncertain and may take years to resolve. Any such new
legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to our business, or the
application of existing laws and regulations to the Internet and online commerce
could also increase our cost of doing business. In addition, if we were alleged
to have violated federal, state or foreign, civil or criminal law, we could face
material liability and damage to our reputation and, even if we successfully
defend any such claim, we incur significant costs in connection with such
defense.
We Face Uncertainties Relating To Sales And Other Taxes. We are not currently
required to pay sales or other similar taxes in respect of shipments of goods
into states other than Virginia, New Jersey and New York. However, one or more
states may seek to impose sales tax collection obligations on out-of-state
companies such as our company that engage in online commerce. In addition, any
new operation in states outside Virginia, New Jersey and New York could subject
shipments into such states to state sales taxes under current or future laws. A
successful assertion by one or more states or any foreign country that the sale
of merchandise by us is subject to sales or other taxes, could subject us to
material liabilities and, to the extent that we pass such costs on to our
customers, could decrease our sales.
Change Of Control Covenant And Liquidation Preference of Preferred Stock. We
have agreed with Soros, that for so long as any shares of their Preferred Stock
are outstanding, we will not take any action to approve or otherwise facilitate
any merger,
13
consolidation or change of control, unless provisions have been made for the
holders of such Preferred Stock to receive from the acquirer an amount in cash
equal to the respective aggregate liquidation preferences of such Preferred
Stock. The aggregate liquidation preference of the Preferred Stock is equal to
the greater of (i) approximately $48,300,000 (plus any accrued and unpaid
dividends) and (ii) the amount that the holders of shares of Preferred Stock
would receive if they were to convert such shares of Common Stock immediately
prior to liquidation.
The Holders Of Our Common Stock May Be Adversely Affected By The Rights Of
Holders Of Preferred Stock That May Be Issued In The Future. Our certificate of
incorporation and by-laws, as amended, contain certain provisions that may
delay, defer or prevent a takeover. Our Board of Directors has the authority to
issue up to 15,486,250 additional shares of preferred stock, and to determine
the price, rights, preferences and restrictions, including voting rights, of
those shares, without any further vote or action by the stockholders.
Accordingly, our Board of Directors is empowered, without approval of the
holders of 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.
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.
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 expense for the current office space during 2003 were approximately
$427,000.
ITEM 3. LEGAL PROCEEDINGS
We currently, and from time to time, are involved in litigation incidental to
the conduct of our business. However, we are not party to any lawsuit or
proceeding which in the opinion of management is likely to have a material
adverse effect on us.
In October 2002, the Company commenced an action against Breider Moore & Co.,
LLC ("Breider Moore") and Joseph Breider in the Supreme Court of the State of
New York, County of New York, as a result of Breider Moore's failure to
consummate an agreed upon investment in the Company in connection with a June
2002 Soros investment. Breider Moore had committed to invest approximately $7
million on the same terms and conditions as those that applied to Soros'
investment. However, this investment was not consummated. In the action, we
asserted breach of contract claim against Breider Moore, fraud claims against
Breider Moore and Mr. Breider and a piercing the corporate veil claim against
Mr. Breider. In February 2003, we obtained summary judgment on our breach of
contract claim, and our piercing the corporate veil claim was dismissed. One of
our fraud claims is still pending and one has been dismissed. Given that we had
been granted summary judgment on the breach of contract claim, an evidentiary
hearing on our damages was held before a special referee in May 2003. In July
2003, the special referee recommended that we be awarded damages in the amount
of approximately $3.3 million for our breach of contract claim against Breider
Moore. On December 2, 2003, the court entered judgment in our favor against
Breider Moore in the amount of $3,793,688. We do not know what assets, if any,
Breider Moore has and whether we will be able to collect on the judgment. We are
currently trying to ascertain the location of assets owned by Breider Moore and
it may be necessary for us to commence collection proceedings in connection with
our efforts to collect on any such judgment, and, given the substantial costs
involved with such litigation, there can be no assurance that the amount that we
would be able to collect with respect to any such judgment would exceed the
costs associated with obtaining and executing on such judgment.
14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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 bid prices for the Common Stock for the periods
indicated, as reported by the Nasdaq SmallCap Market:
Fiscal 2003 High Low
-------------- ------ ------
First Quarter $ 1.69 $ 0.67
Second Quarter $ 1.60 $ 0.72
Third Quarter $ 1.80 $ 0.76
Fourth Quarter $ 5.96 $ 1.20
Fiscal 2002 High Low
-------------- ------ ------
First Quarter $ 2.24 $ 1.27
Second Quarter $ 1.93 $ 1.07
Third Quarter $ 1.30 $ 0.55
Fourth Quarter $ 1.74 $ 0.62
HOLDERS
As of February 19, 2004, there were approximately 114 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.
15
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
EQUITY COMPENSATION PLAN INFORMATION (as of December 31, 2003)
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
FUTURE ISSUANCE UNDER
NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE EXERCISE EQUITY COMPENSATION PLANS
ISSUED UPON EXERCISE OF PRICE OF OUTSTANDING (excluding securities
OUTSTANDING OPTIONS, OPTIONS, WARRANTS AND reflected in column (a))
PLAN CATEGORY WARRANTS AND RIGHTS(a) RIGHTS (b) (b)
- ------------------------------- ---------------------------- ---------------------------- -------------------------
Equity compensation plans
approved by security holders 7,184,468 $ 2.17 3,270,508
Equity compensation plans not
approved by security holders 1,323,902 $ 1.34 65,110
Total 8,508,370 $ 2.04 3,335,618
The following is a summary of the material provisions of the Bluefly, Inc. 2000
Plan Stock Option Plan (the "2000 Plan"), our only equity compensation plan that
has not been approved by our stockholders.
Eligibility. Key employees of the Company who are not officers or directors of
the Company and its affiliates and consultants to the Company are eligible to be
granted options.
Administration of the 2000 Plan. The Option Plan/Compensation Committee
administers the 2000 Plan. The Option Plan/Compensation Committee has the full
power and authority, subject to the provisions of the 2000 Plan, to designate
participants, grant options and determine the terms of all options. The 2000
Plan provides that no participant may be granted options to purchase more than
1,000,000 shares of Common Stock in a fiscal year. The Option Plan/Compensation
Committee is required to make adjustments with respect to options granted under
the 2000 Plan in order to prevent dilution or expansion of the rights of any
holder. The 2000 Plan requires that the Option Plan/Compensation Committee be
composed of at least two directors.
Amendment. The 2000 Plan may be wholly or partially amended or otherwise
modified, suspended or terminated at any time or from time to time by the Board
of Directors, but no amendment without the approval of our stockholders shall be
made if stockholder approval would be required under any law or rule of any
governmental authority, stock exchange or other self-regulatory organization to
which we are subject. Neither the amendment, suspension or termination of the
2000 Plan shall, without the consent of the holder of an option under the 2000
Plan, alter or impair any rights or obligations under any option theretofore
granted.
Options Issued Under 2000 Plan. The Option Plan/Compensation Committee
determines the term and exercise price of each option under the 2000 Plan and
the time or times at which such option may be exercised in whole or in part, and
the method or methods by which, and the form or forms in which, payment of the
exercise price may be paid.
Upon the exercise of an option under the 2000 Plan, the option holder shall pay
us the exercise price plus the amount of the required federal and state
withholding taxes, if any. The 2000 Plan also allows participants to elect to
have shares withheld upon exercise for the payment of withholding taxes.
16
The unexercised portion of any option granted to a key employee under the 2000
Plan generally will be terminated (i) 30 days after the date on which the
optionee's employment is terminated for any reason other than (a) Cause (as
defined in the 2000 Plan), (b) retirement or mental or physical disability, or
(c) death; (ii) immediately upon the termination of the optionee's employment
for Cause; (iii) three months after the date on which the optionee's employment
is terminated by reason of retirement or mental or physical disability; or (iv)
(A) 12 months after the date on which the optionee's employment is terminated by
reason of his death or (B) three months after the date on which the optionee
shall die if such death occurs during the three-month period following the
termination of the optionee's employment by reason of retirement or mental or
physical disability. The Option Plan/Compensation Committee has in the past, and
may in the future, extend the period of time during which an optionee may
exercise options following the termination of his or her employment.
Under the 2000 Plan, an option generally may not be transferred by the optionee
other than by will or by the laws of descent and distribution. During the
lifetime of an optionee, an option under the 2000 Plan may be exercised only by
the optionee or, in certain instances, by the optionee's guardian or legal
representative, if any.
RECENT SALE OF UNREGISTERED SECURITIES
JANUARY 2004
On January 12, 2004, we completed the New Financing pursuant to which we raised
$5,000,000 from a group of investors led by Redwood Grove Capital Management,
LLC, a California-based private equity firm. Under the terms of the deal, we
issued 1,543,209 shares of common stock at $3.24 per share, which was 90% of the
trailing five-day average of the Company's volume-weighted stock price as of
December 29, 2003, the date that a preliminary agreement was reached as to the
pricing of the deal. We also issued the new investors warrants to purchase
385,801 shares of common stock at any time during the next five years at an
exercise price equal to $3.96 per share. We agreed to file a registration
statement with the Securities and Exchange Commission on behalf of these new
investors within 30 days of the closing, in order to register the common stock
issued as well as the common stock underlying the warrants, and to use
commercially reasonable efforts to have such registration statement declared
effective within 90 days of the closing. We also agreed to certain liquidated
damages provisions to the extent that we do not meet these deadlines. A
registration statement was filed on January 16, 2004, but has not yet been
declared effective. We paid Enable Capital, LLC and Broadband Capital Management
finders fees of $194,000 and $100,000, respectively, in consideration for their
roles in introducing us to the participants in the New Financing.
The above-described sales were deemed to be exempt from registration under the
Securities Act of 1933, as amended (the "Securities Act"), pursuant to Section
4(2) of the Securities Act.
17
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction
with the consolidated financial statements and the notes thereto and the
information contained in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Historical results are not
necessarily indicative of future results. All data is in thousands, except share
data:
Year Ended December 31,
----------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
Statement of Operations Data:
Net sales $ 37,928 $ 30,606 $ 22,950 $ 17,512 $ 5,109
Cost of sales 26,603 20,571 15,954 14,018 4,554
------------ ------------ ------------ ------------ ------------
Gross profit 11,325 10,035 6,996 3,494 555
Selling, marketing and fulfillment expenses 12,197 11,547 13,765 18,797 10,794
General and administrative expenses 5,103 4,686 5,098 5,296 3,450
------------ ------------ ------------ ------------ ------------
Total operating expenses 17,300 16,233 18,863 24,093 14,244
Operating loss (5,975) (6,198) (11,867) (20,599) (13,689)
Interest (expense)/other income (394) (281) (13,139) (510) 430
Loss from continuing operations (6,369) (6,479) (25,006) (21,109) (13,257)
Net loss (6,369) (6,479) (25,006) (21,109) (13,194)
Basic and diluted loss from continuing operations
per share $ (0.88) $ (2.44) $ (3.41) $ (4.45) $ (2.83)
Basic and diluted loss per share: $ (0.88) $ (2.44) $ (3.41) $ (4.45) $ (2.82)
Basic and diluted weighted average number of
common shares outstanding available to common
stockholders 11,171,018 9,927,027 8,185,065 4,924,906 4,802,249
Balance Sheet Data:
As of December 31,
----------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
Cash $ 7,721 $ 1,749 $ 5,419 $ 5,350 $ 7,934
Inventories, net 11,340 10,868 6,388 7,294 7,020
Other current assets 1,863 1,159 1,417 1,510 739
Total assets 22,998 16,595 14,572 15,674 16,768
Current liabilities 8,459 7,072 5,988 5,937 6,182
Short-term convertible notes payable, net - - - 19,698 -
Long term liabilities 4,260 2,439 182 - -
Redeemable preferred stock - - - 11,088 10,286
Shareholders' equity (deficit) 10,279 7,084 8,402 (21,049) 300
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion and analysis of our financial condition and results of
operations contains forward-looking statements that involve risks and
uncertainties. We have based these forward-looking statements on our current
expectations and projections of future events. However, our actual results could
differ materially from those discussed herein as a result of the risks that we
face, including but not limited to those risks stated in "Risk Factors," or
faulty assumptions on our part. In addition, the following discussion should be
read in conjunction with the audited consolidated financial statements and the
related notes thereto included elsewhere in this report.
OVERVIEW
Bluefly, Inc., a Delaware corporation, is a leading Internet retailer of
designer fashions and home accessories at outlet store prices. We sell over 350
brands of designer apparel, accessories and home products at discounts up to 75%
off retail value. Bluefly.com, a Web site that sells end-of-season and excess
inventory of apparel and accessories, was launched in September 1998.
We have grown significantly since launching our Web site in September 1998. Our
net sales increased approximately 24% to $37,928,000 for the year ended December
31, 2003 from $30,606,000 for the year ended December 31, 2002. In the fourth
quarter of 2003, our net sales increased by approximately 42% to $13,993,000
from $9,856,000 in the fourth quarter of 2002. Net sales attributable to the
Company's Manhattan holiday clearance store, which opened in late November, were
approximately $465,000.
In the fourth quarter of 2003, we achieved our first ever quarterly net profit.
For the fourth quarter of 2003, we had net income of $111,000 as compared to a
net loss of $1,660,000 in the fourth quarter of 2002. The Manhattan holiday
clearance store, in part, contributed to our profitability in the fourth quarter
of 2003. Our net loss for the year ended December 31, 2003 decreased by
approximately 2% to $6,369,000 from $6,479,000 for the year ended 2002. Despite
our net profit during the fourth quarter of 2003, we expect to operate at a net
loss in 2004.
Our gross margin decreased to 29.9% in 2003 from 32.8% in 2002 and 30.5% in
2001. The decrease in 2003 was driven by our decision to turn more of our
out-of-season merchandise, as well as inventory items that we were particular
deep in, into cash that could be used to purchase new inventory, rather than
holding the inventory for the next season. Given our stronger balance sheet, we
believe that we can improve upon our 2003 margin levels in 2004, although there
is no assurance that we will be successful in doing so.
Our customer acquisition costs decreased to $10.22 per customer in 2003, from
$17.04 per customer in 2002 and $39.32 per customer in 2001. We believe that it
may be prudent to increase our customer acquisition costs in 2004 and beyond in
order to acquire larger numbers of customers with profitable ordering patterns.
Our reserve for returns and credit card chargebacks increased to 37% in 2003
from 36% in 2002 and 32% in 2001. The increase in return rates has primarily
been driven by shifts in our merchandise mix towards products that generate
higher return rates, but also higher gross margins and average order sizes.
While we are testing initiatives to reduce our return rates, we believe that the
overall shift in merchandise mix has been beneficial to the overall gross profit
realized per order. Accordingly, we do not expect return rates to decrease to
2001 levels in the near term.
Our inventory levels increased to approximately $11.3 million as of December 31,
2003, from approximately $10.9 million as of December 31, 2002 and approximately
$6.4 million as of December 31, 2001. We believe that we were underinvested in
inventory as of December 31, 2001 as a result of the limitations on our working
capital at that time, and that the heavier investment that we made in inventory
during 2002 was a key factor in our sales growth during both 2002 and 2003.
Historically, due to our limited working capital, a number of our suppliers
limited our payment terms and, in some cases, required us to pay for merchandise
in advance of delivery. The effect of this has been to further limit our working
capital and to increase our usage of the factoring agreement included in the
Loan Facility. Given our stronger balance sheet, we have recently been able to
improve our payment terms with many suppliers, and we intend to continue to seek
to improve these terms during 2004. Of course, there can be no assurance that we
will be successful in these efforts.
19
At December 31, 2003, we had an accumulated deficit of $92,336,000. The net
losses and accumulated deficit resulted primarily from the costs associated with
developing and marketing our Web site and building our infrastructure. In order
to expand our business, we intend to invest in sales, marketing, merchandising,
operations, information systems, site development and additional personnel to
support these activities. We therefore expect to continue to incur substantial
operating losses for the foreseeable future. Although we have experienced
revenue growth in recent years, this growth may not be sustainable and therefore
should not be considered indicative of future performance.
CRITICAL ACCOUNTING POLICIES
Management 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 the disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the reporting periods. The
most significant estimates and assumptions relate to the adequacy of the
allowances for sales returns and recoverability of inventories. Actual amounts
could differ significantly from these estimates.
Revenue Recognition
The Company recognizes revenue in accordance with Staff Accounting Bulletin
("SAB") No. 101 "Revenue Recognition in the Financial Statements", as amended.
Gross sales consists primarily of revenue from product sales and shipping and
handling charges and is net of promotional discounts. Net sales represent gross
sales, less provisions for returns, credit card chargebacks, and adjustments for
uncollected sales taxes. Revenue is recognized when all the following criteria
are met:
. A customer executes an order via our website.
. The product price and the shipping and handling fee have been
determined.
. Credit card authorization has occurred and collection is
reasonably assured.
. The product has been shipped and received by the customer.
Shipping and handling billed to customers are classified as revenue in
accordance with Financial Accounting Standards Board ("FASB") Task Force's
Emerging Issues Task Force ("EITF") No. 00-10, "Accounting for Shipping and
Handling Fees and Costs" ("EITF No. 00-10").
Provision for Returns and Doubtful Accounts
We generally permit returns for any reason within 90 days of the sale.
Accordingly, we establish a reserve for estimated future returns and bad debt at
the time of shipment based primarily on historical data. We perform credit card
authorizations and check the verification of our customers prior to shipment of
merchandise. However, our future return and bad debt rates could differ from
historical patterns, and, to the extent that these rates increase significantly,
it could have a material adverse effect on our business, prospects, cash flows,
financial condition and results of operations.
Inventory Valuation
Inventories, which consist of finished goods, are stated at the lower of cost or
market value. Cost is determined by the first-in, first-out ("FIFO") method. We
review our inventory levels in order to identify slow-moving merchandise and in
some instances use markdowns below cost to clear merchandise. Markdowns below
cost may be used if inventory exceeds customer demand for reasons of style,
changes in customer preference or lack of consumer acceptance of certain items,
or if it is determined that the inventory in stock will not sell at its
currently marked price. Such markdowns may have an adverse impact on earnings,
depending on the extent of the markdowns and amount of inventory affected.
20
Deferred Tax Valuation Allowance
We recognize deferred income tax assets and liabilities on the differences
between the financial statement and tax bases of assets and liabilities using
enacted statutory 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 included the enactment date. We have
assessed the future taxable income and determined that a 100% deferred tax
valuation allowance is deemed necessary. In the event that we were to determine
that we would be able to realize our deferred tax assets, an adjustment to the
deferred tax valuation allowance would increase income in the period such
determination is made.
RESULTS OF OPERATIONS
The following table sets forth our statement of operations data for the years
ended December 31st. All data is in thousands except as indicated below:
2003 2002 2001
-------------------- -------------------- --------------------
As a % of As a % of As a % of
Net Sales Net Sales Net Sales
Net sales $ 37,928 100.0% $ 30,606 100.0% $ 22,950 100.0%
Cost of sales 26,603 70.1% 20,571 67.2% 15,954 69.5%
-------- -------- --------
Gross profit 11,325 29.9% 10,035 32.8% 6,996 30.5%
Selling, marketing and fulfillment expenses 12,197 32.2% 11,547 37.7% 13,765 59.9%
General and administrative expenses 5,103 13.5% 4,686 15.3% 5,098 22.2%
-------- -------- --------
Total operating expenses 17,300 45.7% 16,233 53.0% 18,863 82.1%
Operating loss (5,975) (15.8)% (6,198) (20.2)% (11,867) (51.6)%
Interest (expense) other income (394) (1.0)% (281) (0.9)% (13,139) (57.3)%
-------- -------- --------
Net loss $ (6,369) (16.8)% $ (6,479) (21.1)% $(25,006) (108.9)%
We also measure and evaluate ourselves against certain other key operational
metrics. The following table sets forth our actual results based on these other
metrics for the years ended December 31st, as indicated below:
2003 2002 2001
---------- ---------- ----------
Average Order Size (including shipping & handling) $ 174.99 $ 167.20 $ 143.71
Average Order Size Per New Customer (including shipping & handling) $ 158.38 $ 149.74 $ 127.41
Average Order Size Per Repeat Customer (including shipping & handling) $ 184.95 $ 177.31 $ 156.85
Total Customers 512,948 388,700 287,637
Customers Added during the Year 124,248 101,063 102,397
Revenue from Repeat Customers as a % of total Revenue 66% 67% 60%
Customer Acquisition Costs $ 10.22 $ 17.04 $ 39.32
We define a "repeat customer" as a person who has bought more than once from us
during their lifetime. We calculate customer acquisition cost by dividing total
advertising expenditures (excluding staff related costs) during a given time
period by total new customers added during that period. All measures of the
number of customers are based on unique email addresses.
21
FOR THE YEAR ENDED DECEMBER 31, 2003 COMPARED TO THE YEAR ENDED DECEMBER 31,
2002
Net sales: Gross sales for the year ended December 31, 2003 increased by
approximately 27% to $60,279,000, from $47,491,000 for the year ended December
31, 2002. For the year ended December 31, 2003, we recorded a provision for
returns and credit card chargebacks and other discounts of $22,351,000, or
approximately 37% of gross sales. For the year ended December 31, 2002, the
provision for returns and credit card chargebacks and other discounts was
$16,885,000, or approximately 36% of gross sales. The increase in this provision
as a percentage of gross sales was related primarily to an increase in the
return rate. We believe that the increase in return rate was partly the result
of a shift in our merchandise mix towards certain product categories that
historically have generated higher return rates, but also higher gross margins
and average order size.
After the necessary provisions for returns, credit card chargebacks and
adjustments for uncollected sales taxes, our net sales for the year ended
December 31, 2003 were $37,928,000. This represents an increase of approximately
24% compared to the year ended December 31, 2002, in which net sales totaled
$30,606,000. The growth in net sales was largely driven by the increase in the
numbers of new customers acquired (approximately 23% higher than the full year
2002) and the increase in gross average order size (approximately 5% higher than
the full year 2002). In addition, our shipping and handling revenue increased as
we raised our standard shipping rate from $5.95 per order to $7.95 per order in
the first quarter of 2003. For the year ended December 31, 2003 revenue from
shipping and handling (which is included in net sales) increased by 44% to
$2,939,000 from $2,048,000 for the year ended December 31, 2002.
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, 2003 totaled
$26,603,000, resulting in gross margin of approximately 30%. Cost of sales for
the year ended December 30, 2002 totaled $20,571,000, resulting in gross margin
of 33%. Gross profit increased by 13%, to $11,325,000 for the year ended
December 31, 2003, compared to $10,035,000 for the year ended December 31, 2002.
The decrease in gross margin resulted primarily from our decision to reduce our
product margin during the first three quarters of 2003 on certain merchandise in
an effort to reduce prior season inventory levels. The increase in gross profit
is related to the increase in net sales on an absolute basis.
Selling, marketing and fulfillment expenses: Selling, marketing and fulfillment
expenses increased by approximately 6% for the year 2003 compared to the year
ended 2002. As a percentage of net sales, our selling, marketing and fulfillment
expenses decreased to 32% in 2003 from approximately 37.7% in 2002. The decrease
resulted primarily from refinements to our marketing strategy that allowed us to
better target potential new customers and convert repeat customers, as well as
the cost savings we derived from our move to a new web hosting facility.
Selling, marketing and fulfillment expenses were comprised of the following:
Year Ended Year Ended Percentage Difference
December 31, 2003 December 31, 2002 increase (decrease)
----------------- ----------------- ---------------------
Marketing $ 1,898,000 $ 2,274,000 (16.5)%
Operating 5,349,000 4,534,000 18.0%
Technology 3,430,000 3,552,000 (3.4)%
E-Commerce 1,520,000 1,187,000 28.1%
----------------- -----------------
$ 12,197,000 $ 11,547,000 5.6%
Marketing expenses include expenses related to online and print advertising,
direct mail campaigns as well as staff related costs. The decrease in marketing
expenses of approximately 17% was largely related to a shift in our customer
acquisition strategy. We reduced our advertising expenditures and focused more
on email, affiliate programs and other performance based programs. Primarily as
a result of this shift, we were able to decrease our customer acquisition costs
for the year ended December 31, 2003 by approximately 40% to $10.22 per new
customer from $17.04 per new customer for the year ended December 31, 2002.
However, in the event that we attempt to accelerate revenue growth, it may be
necessary to utilize less cost efficient methods of customer acquisition, and
accordingly there can be no assurance that customer acquisition costs will not
increase in the future.
Operating expenses include all costs related to inventory management,
fulfillment, customer service, credit card processing and during the fourth
quarter of 2003, the costs associated with the Company's Manhattan holiday
clearance store. Operating expenses increased in 2003 by approximately 18%
compared to 2002 as a result of variable costs associated with the increased
sales volume (e.g., picking and packing orders, processing returns and credit
card fees).
22
Technology expenses consist primarily of Web site hosting and staff related
costs. For the year ended December 31, 2003, technology expenses decreased by
approximately 3% compared to the year ended December 31, 2002. This decrease was
related to a decrease in overall web hosting costs offset by accelerated
depreciation of equipment acquired under a capital lease due to a change in the
estimated useful life, along with increased amortization expense incurred as a
result of capitalized costs incurred in connection with the upgraded version of
the Web Site. Depreciation and amortization for the year ended December 31, 2003
represented approximately 40% of the total technology expense, while
depreciation and amortization for the year ended December 31, 2002 represented
approximately 17% of the total technology expense. These amounts were partially
offset by a reduction of approximately 61% in our Web Site hosting costs in
connection with our move to a new web hosting facility.
E-Commerce expenses include expenses related to our photo studio, image
processing, and Web Site design. For the year ended December 31, 2003, this
amount increased by approximately 28% as compared to the year ended December 31,
2002, primarily due to the creation of an Online Retail Group within the
E-Commerce department. The department employed an average of 17 employees per
month in 2003, compared to an average of 13 per month in 2002. The Online Retail
Group is, among other things, responsible for leveraging the Web Site technology
to improve the on-site customer experience. In September 2003, we launched a
redesigned Web Site. The redesigned Web Site provides a new look and, we
believe, more intuitive navigation. The costs of the new site were primarily
included in E-Commerce and expensed as incurred.
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, 2003 increased by approximately 9% to $5,103,000 as compared to
$4,686,000 for the year ended December 31, 2002. As a percentage of net sales,
general and administrative expenses decreased to 13.5% in 2003 from 15.3% in
2002. The increase in general and administrative expenses was the result of
increased salary and benefit expenses of approximately 7% as well as an increase
in professional fees of 50%.
Loss from operations: Operating loss decreased by approximately 4% in 2003, to
$5,975,000 from $6,198,000 in 2002 as a result of the increase in sales and
gross margin dollars and decreases in selling, marketing and fulfillment
expenses and general and administrative expenses as a percentage of net sales.
Interest expense and other income, net: Interest expense for the year ended
December 31, 2003 totaled $432,000, and related to fees paid in connection with
our Loan Facility, amortization of warrants issued in connection with the
January 2003 Financing, and interest on the notes issued in connection with the
July 2003 Financing. For the year ended December 31, 2002, interest expense
totaled $349,000, and related primarily to fees paid in connection with the Loan
Facility.
Interest income for the year ended December 31, 2003 decreased to $38,000 from
$68,000 for the year ended December 31, 2002. The decrease is related to the
decrease in our cash balance as interest income primarily represents interest
earned on our cash balance.
FOR THE YEAR ENDED DECEMBER 31, 2002 COMPARED TO THE YEAR ENDED DECEMBER 31,
2001
Net sales: Gross sales for the year ended December 31, 2002 increased by
approximately 40% to $47,491,000, from $33,833,000 for the year ended December
31, 2001. For the year ended December 31, 2002, we recorded a provision for
returns and credit card chargebacks and other discounts of $16,885,000, or
approximately 36% of gross sales. For the year ended December 31, 2001, the
provision for returns and credit card chargebacks and other discounts was
$10,883,000, or approximately 32% of gross sales. The increase in this provision
as a percentage of gross sales was related primarily to an increase in the
return rate. We believe that the increase in return rate was partly the result
of a shift in our merchandise mix towards certain product categories that
historically have generated higher return rates, but also higher gross margins
and average order size. Accordingly, we believe that this shift had a positive
impact on our per order economics. For the year ended December 31, 2002, revenue
from shipping and handling (which is included in net sales) increased by
approximately 19% to $2,048,000 from $1,724,000 for the year ended December 31,
2001.
After the necessary provisions for returns, credit card chargebacks and
adjustments for uncollected sales taxes, our net sales for the year ended
December 31, 2002 were $30,606,000. This represents an increase of approximately
33% compared to the year ended December 31, 2001, in which net sales totaled
$22,950,000. The growth in net sales was largely driven by the increases in
average order size and sales to repeat customers. We believe that the decrease
in the amount of advertising directed at potential customers
23
(as opposed to existing customers) contributed to the fact that the number of
new customers acquired in 2002 decreased by 1% from that of 2001. We believe
that the increase in sales to repeat customers (67% of total sales in 2002,
compared to 60% of total sales in 2001) was the result of increased marketing
efforts to repeat customers.
Cost of sales: Cost of sales for the year ended December 31, 2002 totaled
$20,571,000, resulting in gross margin of approximately 33%. Cost of sales for
year ended December 30, 2001 totaled $15,954,000, resulting in gross margin of
30.5%. Gross profit increased by 43%, to $10,035,000 for the year ended December
31, 2002 compared to $6,996,000 for the year ended December 31, 2001. The
increase in gross margin resulted primarily from improved product margins.
Selling, marketing and fulfillment expenses: Selling, marketing and fulfillment
expenses decreased by approximately 16.1% for the year 2002 compared to the year
ended 2001. As a percentage of net sales, our selling, marketing and fulfillment
expenses decreased to 37.7% in 2002 from approximately 60% in 2001. The decrease
resulted primarily from a more targeted marketing strategy aimed at our existing
customer base and the cost savings we derived from our move to a new web hosting
facility. Selling, marketing and fulfillment expenses were comprised of the
following:
Year Ended Year Ended Percentage Difference
December 31, 2002 December 31, 2001 increase (decrease)
----------------- ----------------- ---------------------
Marketing $ 2,274,000 $ 4,858,000 (53.2)%
Operating 4,534,000 3,939,000 15.1%
Technology 3,552,000 3,733,000 (4.8)%
E-Commerce 1,187,000 1,235,000 (3.9)%
----------------- -----------------
$ 11,547,000 $ 13,765,000 (16.1)%
The decrease in marketing expenses of approximately 53% was largely related to a
shift in our customer acquisition strategy. Consistent with our streamlined
operating plan announced in June 2001, we significantly reduced our advertising
expenditures and focused more on email and direct mail programs. Primarily as a
result of this shift, we were able to decrease our customer acquisition costs
for the year ended December 31, 2002 by approximately 57% to $17.04 per new
customer from $39.32 per new customer for the year ended December 31, 2001.
Operating expenses increased in 2002 by approximately 15% compared to 2001 as a
result of variable costs associated with the increased sales volume (e.g.,
picking and packing orders, processing returns and credit card fees).
For the year ended December 31, 2002, technology expenses decreased by
approximately 5% compared to the year ended December 31, 2001. This reduction
was primarily related to a reduction in our Web site hosting costs in connection
with our move to a new web hosting facility. These cost savings were offset by
increased amortization expense resulting from the launch of the new Web site.
Effective September 15, 2002 (the launch date of the new Web site) we began
amortizing costs related to the launch of the new Web site over the estimated
useful life of the new site. Previously, these costs were capitalized.
E-Commerce expenses for the year ended December 31, 2002, decreased by
approximately 4% as compared to the year ended December 31, 2001, primarily due
to a headcount reduction in the creative services department in June 2001.
General and administrative expenses: General and administrative expenses for the
year ended December 31, 2002 decreased by approximately 8% to $4,686,000 as
compared to $5,098,000 for the year ended December 31, 2001. As a percentage of
net sales, general and administrative expenses decreased to 15.3% in 2002 from
22.2% in 2001.
The decrease in general and administrative expenses was the result of decreased
salary and benefit expenses related to the headcount reduction that was put into
place in connection with the Company's June 2001 streamlined operating plan, in
which the Company eliminated approximately 32 jobs or, approximately 34% of the
Company's workforce.
Loss from operations: Operating loss decreased by approximately 48% in 2002, to
$6,198,000 from $11,867,000 in 2001 as a result of the increase in sales and
gross margin and decreases in selling, marketing and fulfillment expenses and
general and administrative expenses.
24
Interest expense and other income, net: Interest expense for the year ended
December 31, 2002 totaled $349,000, and consisted primarily of fees paid in
connection with our Loan Facility. For the year ended December 31, 2001,
interest expense totaled $13,379,000. This amount consisted principally of
approximately $13,007,000 of non-cash, one-time charges that were incurred in
connection with the conversion of certain notes payable and redeemable equity
into permanent equity. This amount also included interest expense of $175,000,
related to the interest on the notes payable that were issued during fiscal 2000
and converted to permanent equity in fiscal 2001.
Interest income for the year ended December 31, 2002 decreased to $68,000 from
$240,000 for the year ended December 31, 2001. The decrease resulted from the
decrease in our cash balance as interest income primarily represents interest
earned on our cash balance.
LIQUIDITY AND CAPITAL RESOURCES
General
At December 31, 2003, we had approximately $7.7 million of liquid assets,
entirely in the form of cash and cash equivalents, and working capital of
approximately $12.5 million. In addition, as of December 31, 2003, we had
approximately $2.3 million of borrowings committed under the Loan Facility,
leaving approximately $2.1 million of availability. Subsequent to year end, in
January of 2004 we raised $5,000,000 through the sale of 1,543,209 shares of our
common stock and warrants to purchase an additional 385,801 shares of our common
stock at an exercise price of $3.96 per share. See "Recent Developments."
In January 2004, we also extended the maturity dates on the Convertible
Promissory Notes issued to affiliates of Soros that collectively own a majority
of our capital stock in July and October 2003. The Notes originally matured in
January and April 2004, respectively, and the maturity date was extended to
March 1, 2005. In February 2004, the maturity date on the on the Convertible
Promissory Notes issued to affiliates of Soros were again extended to May 1,
2005. See "Recent Developments."
We fund our operations through cash on hand, operating cash flow, as well as the
proceeds of any equity or debt financing. Operating cash flow is affected by
revenue and gross margin levels, as well as return rates, and any deterioration
in our performance on these financial measures would have a negative impact on
our liquidity. Total availability under the Loan Facility is based upon our
inventory levels and is dependent, among other things, on the Company having at
least $5.0 million of tangible net worth and $4.0 million of working capital. In
addition, both availability under the Loan Facility and our operating cash flows
are affected by the payment terms that we receive from suppliers and service
providers, and the extent to which suppliers require us to request Rosenthal to
provide credit support under the Loan Facility. We believe that our suppliers'
decision-making with respect to payment terms and/or the type of credit support
requested is largely driven by their perception of our credit rating, which is
affected by information reported in the industry and financial press and
elsewhere as to our financial strength. Accordingly, negative perceptions as to
our financial strength could have a negative impact on our liquidity.
Historically, due to our limited working capital, a number of our suppliers
limited our payment terms and, in some cases, required us to pay for merchandise
in advance of delivery. The effect of this has been to further limit our working
capital and to increase our usage of the factoring agreement included in the
Loan Facility. Given our stronger balance sheet, we have recently been able to
improve our payment terms with many suppliers, and we intend to continue to seek
to improve these terms during 2004. Of course, there can be no assurance that we
will be successful in these efforts.
We anticipate that our existing resources and working capital should be
sufficient to satisfy our cash requirements through the end of fiscal 2004. Of
course, there can be no assurance that such expectations will prove to be
correct. Moreover, we currently plan to seek additional debt and/or equity
financing in order to maximize the growth of our business. If such financing is
not available on terms acceptable to us and or we do not achieve our sales plan,
future operations will need to be modified, scaled back or discontinued. 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.
Loan Facility
Pursuant to the Loan Facility, Rosenthal provides us with certain credit
accommodations, including loans and advances, factor-to-factor guarantees,
letters of credit in favor of suppliers or factors and purchases of payables
owed to our suppliers. The Rosenthal Financing Agreement was amended in March
2003 to: (i) extend the term until June 30, 2004; (ii) increase the
25
maximum amount available under the Loan Facility (subject to an existing $10
million cap) to an amount equal to the Soros Guarantee plus the lower of (x)
$2.0 million (instead of the prior $1.0 million), (y) 20% of the book value of
our inventory or (z) the full liquidation value of our inventory; (iii) increase
the tangible net worth requirement to $5.0 million from $1.5 million; (iv)
redefine the working capital definition to exclude short-term debt held by
affiliates (effective as of December 19, 2002), (v) increase the working capital
requirement to $4.0 million from $3.5 million; (vi) increase the annual fee we
pay Rosenthal for the Loan Facility to $30,000 from $10,000, (vii) require us to
maintain a cash balance of at least $250,000 and; (viii) require Soros to
increase from $1.5 million to $2.0 million the amount of the Soros Guarantee and
extend its term to November 15, 2004 from November 15, 2003. In consideration
for Soros' agreement to increase the amount of and to maintain the Soros
Guarantee until November 15, 2004, we issued to Soros a warrant to purchase
25,000 shares of our Common Stock at an exercise price equal to $0.78 per share
(the 10 day trailing average of the closing sale price of our Common Stock on
the date of issuance), exercisable at any time prior to March 17, 2013. The
Financing Agreement was further amended in the fourth quarter of 2003 to allow
Rosenthal in its sole discretion to increase the amount available under the Loan
Facility (subject to the existing $10 million cap) by $500,000.
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%. In addition to the annual facility fee of $30,000, we also pay
Rosenthal certain fees to open letters of credit and guarantees in an amount
equal to a certain percentage of the face amount of the letter of credit for
each thirty (30) days such letter of credit, or a portion thereof, remains open.
In consideration for the Loan Facility, among other things, we granted to
Rosenthal a first priority lien on substantially all of our assets, including
control of all of our cash accounts upon an event of default and certain of our
cash accounts in the event that the total amount of funded debt loaned to us
under the Loan Facility exceeds 90% of the maximum amount available under the
Loan Facility for more than 10 days. We also issued to Rosenthal a warrant to
purchase 50,000 shares of Common Stock at an exercise price of $2.34,
exercisable, as amended, for three years from the date of issuance.
Subject to certain conditions, if we default on any of our obligations under the
Loan Facility, Rosenthal has the right to draw upon the Soros Guarantee to
satisfy any such obligations. If and when Rosenthal draws on the Soros
Guarantee, pursuant to the terms of the Reimbursement Agreement, we would have
the obligation to, among other things, reimburse Soros for any amounts drawn
under the Soros Guarantee plus interest accrued thereon. In addition, to the
extent that Rosenthal draws on the Soros Guarantee during the continuance of a
default under the Loan Facility or at any time that the total amount outstanding
under the Loan Facility exceeds 90% of the Soros Guarantee, we will be required
to issue to Soros a warrant (each a "Contingent Warrant") to purchase a number
of shares of Common Stock equal to the quotient of (a) any amounts drawn under
the Soros Guarantee and (b) 75% of the average of the closing price of our
Common Stock on the ten days preceding the date of issuance of such warrant.
Each Contingent Warrant will be exercisable for ten years from the date of
issuance at an exercise price equal to 75% of the average closing price of our
Common Stock on the ten days preceding the ten days after the date of issuance.
Under the terms of the Loan Facility, Soros has the right to purchase all of our
obligations from Rosenthal at any time during its term (the "Buyout Option").
With respect to such Buyout Option, Soros has the right to request that
Rosenthal make a draw under the Soros Guarantee as consideration to Soros for
the purchase of such obligations.
Commitments and Long Term Obligations
As of December 31, 2003, we had the following commitments and long term
obligations:
2004 2005 2006 2007 2008 Thereafter Total
----------- ----------- ----------- ----------- ----------- ----------- ------------
Marketing and Advertising $ 168,000 -- -- -- -- -- $ 168,000
Operating Leases 454,000 461,000 468,000 481,000 441,000 475,000 $ 2,780,000
Capital Leases 314,000 101,000 -- -- -- -- $ 415,000
Employment Contracts 1,316,000 838,000 450,000 75,000 -- -- $ 2,679,000
Notes payable to shareholders 182,000 4,000,000* -- -- -- -- $ 4,182,000
----------- ----------- ----------- ----------- ----------- ----------- ------------
Grand total $ 2,434,000 5,400,000 918,000 556,000 441,000 475,000 $ 10,224,000
*Notes were reclassified to long term in January 2004, See "Recent Developments"
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.
26
However, our marketing budget and our ability to hire such employees is subject
to a number of factors, including our results of operations as well as the
amount of additional capital that we raise.
In September 2003, we entered into an employment agreement with a new President.
Under the terms of the Agreement, which expires in March 2007, the President, in
addition to an annual salary and employee stock options to purchase shares of
the Company's Common Stock, is entitled to an annual bonus with minimum amounts
that cannot be less than 3% of the Company's net income for the fiscal year for
which the bonus is awarded, subject to a cap equal to 200% of her base salary
for that year. Her bonus for 2004 is subject to a minimum floor of $100,000. The
agreement also provides for her to receive an additional bonus in connection
with certain change of control transactions equal to 1% of the consideration
distributed to stockholders in connection with any such transaction. In the
event that the President relocates herself and her family to the New York City
area on or before August 31, 2004, she is also entitled to an additional bonus
of $75,000. The salary commitment and minimum bonus obligation for 2004 that is
payable under the agreement are reflected in the table above. The other
obligations (which are contingent in nature) are not included above.
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,
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51". ("FIN 46") requires an investor to
consolidate a variable interest entity if it is determined that the investor is
a primary beneficiary of that entity, subject to the criteria set forth in FIN
46. Assets, liabilities, and non controlling interests of newly consolidated
variable interest entities will be initially measured at fair value. After
initial measurement, the consolidated variable interest entity will be accounted
for under the guidance provided by Accounting Research Bulletin No. 51,
"Consolidated Financial Statements." FIN 46 is effective for variable interest
entities created or entered into after January 31, 2003. For variable interest
entities created or acquired before February 1, 2003, FIN 46 applies in the
first fiscal year or interim period beginning after December 15, 2003. The
adoption of FIN 46 will not have a material impact on our consolidated financial
statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No. 149
clarifies under what circumstances a contract with an initial net investment
meets the characteristics of a derivative as discussed in Statement No. 133. It
also specifies when a derivative contains a financing component that warrants
special reporting in the Consolidated Statement of Cash Flows. SFAS No. 149
amends certain other existing pronouncements in order to improve consistency in
reporting these types of transactions. The new guidance is effective for
contracts entered into or modified after September 30, 2003, and for hedging
relationships designated after September 30, 2003. We adopted this standard and
it did not have a material impact on our consolidated financial statements.
In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity" ("SFAS No. 150"). SFAS No. 150 established standards for
classification and measurement in the statement of financial position of certain
financial instruments with characteristics of both liabilities and equity. It
requires classification of a financials instrument that is within its scope as a
liability (or an asset in some circumstances). SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003,and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. We adopted SFAS No. 150 and it did not have a material effect on our
financial position or results of operations.
27
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have assessed our vulnerability to certain market risks, including interest
rate risk associated with financial instruments included in cash and cash
equivalents and our notes payable. Due to the short-term nature of these
investments we have determined that the risks associated with interest rate
fluctuations related to these financial instruments do not pose a material risk
to us.
28
ITEM 8. FINANCIAL STATEMENTS
(a) Index to the Financial Statements
Report of Independent Auditors F-1
Consolidated Balance Sheets as of December 31, 2003 and
2002 F-2
Consolidated Statements of Operations for the three years
ended December 31, 2003, 2002 and 2001 F-3
Consolidated Statements of Changes in Shareholders' Equity
and Redeemable Preferred Stock for the three years ended
December 31, 2003, 2002 and 2001 F-4
Consolidated Statements of Cash Flows for the three years
ended December 31, 2003, 2002 and 2001 F-5
Notes to Consolidated Financial Statements F-6
Schedule II - Valuation and Qualifying Accounts S-1
29
REPORT OF INDEPENDENT AUDITORS
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, 2003 and December 31, 2002, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2003 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule 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.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 24, 2004
F-1
BLUEFLY, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2003 AND 2002
(DOLLARS ROUNDED TO THE NEAREST THOUSAND)
- --------------------------------------------------------------------------------
2003 2002
--------------- ---------------
ASSETS
Current assets
Cash and cash equivalents $ 7,721,000 $ 1,749,000
Inventories, net 11,340,000 10,868,000
Accounts receivable, net of allowance for doubtful accounts 1,157,000 833,000
Prepaid expenses and other current assets 706,000 326,000
--------------- ---------------
Total current assets 20,924,000 13,776,000
Property and equipment, net 1,659,000 2,604,000
Other assets 415,000 215,000
--------------- ---------------
Total assets $ 22,998,000 $ 16,595,000
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 3,156,000 $ 3,120,000
Accrued expenses and other current liabilities 3,869,000 3,067,000
Deferred revenue 1,252,000 885,000
Notes payable to related party shareholders 182,000 -
--------------- ---------------
Total current liabilities 8,459,000 7,072,000
Notes payable to related party shareholders 4,000,000 2,182,000
Long-term interest payable to related party shareholders 159,000 -
Long-term obligations under capital lease 101,000 257,000
--------------- ---------------
Total liabilities 12,719,000 9,511,000
Commitments and contingencies (Note 7)
Shareholders' equity
Series A Preferred Stock - $.01 par value; 500,000 shares authorized,
460,000 and 500,000 shares issued and outstanding as of December 31,
2003 and 2002, respectively (liquidation preference: $9.2 million plus
accrued dividends) 5,000 5,000
Series B Preferred Stock - $.01 par value; 9,000,000 shares authorized,
8,889,414 and 8,910,782 shares issued and outstanding as of December 31,
2003 and 2002, respectively (liquidation preference: $30 million plus
accrued dividends) 89,000 89,000
Series C Preferred Stock - $.01 par value; 3,500 shares authorized,
1,000 shares issued and outstanding as of December 31, 2003 and 2002,
(liquidation preference: $1 million plus accrued dividends) - -
Series D Preferred Stock - $.01 par value; 7,150 shares authorized,
7,136.548 shares issued and outstanding as of December 31, 2003; no
shares authorized, issued and outstanding as of December 31, 2002,
(liquidation preference: $7.1 million plus accrued dividends) - -
Series E Preferred Stock - $.01 par value; 1,000 shares authorized, issued and
outstanding as of December 31, 2003; no shares authorized, issued and
outstanding as of December 31, 2002, (liquidation preference:
$1.0 million plus accrued dividends) - -
Series 2002 Convertible Preferred Stock - $.01 par value;
2,100 shares authorized, and 0 and 2,100 shares issued and outstanding
as of December 31, 2003 and 2002, respectively (liquidation preference:
$2.1 million) - -
Common Stock - $.01 par value; 92,000,000 shares authorized, 12,894,166
and 10,391,904 shares issued and outstanding as of December 31, 2003
and 2002, respectively 129,000 104,000
Additional paid-in capital 102,392,000 92,628,000
Accumulated deficit (92,336,000) (85,742,000)
--------------- ---------------
Total shareholders' equity 10,279,000 7,084,000
--------------- ---------------
Total liabilities and shareholders' equity $ 22,998,000 $ 16,595,000
=============== ===============
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
BLUEFLY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(DOLLARS ROUNDED TO THE NEAREST THOUSAND)
- --------------------------------------------------------------------------------
2003 2002 2001
--------------- --------------- ---------------
Net sales $ 37,928,000 $ 30,606,000 $ 22,950,000
Cost of sales 26,603,000 20,571,000 15,954,000
--------------- --------------- ---------------
Gross profit 11,325,000 10,035,000 6,996,000
Selling, marketing and fulfillment expenses 12,197,000 11,547,000 13,765,000
General and administrative expenses 5,103,000 4,686,000 5,098,000
--------------- --------------- ---------------
Total operating expenses 17,300,000 16,233,000 18,863,000
--------------- --------------- ---------------
Operating loss (5,975,000) (6,198,000) (11,867,000)
Interest (expense) and other income, net of interest income
of $38,000, $68,000 and $240,000 in 2003, 2002 and 2001,
respectively (394,000) (281,000) (13,139,000)
--------------- --------------- ---------------
Net loss $ (6,369,000) $ (6,479,000) $ (25,006,000)
=============== =============== ===============
Preferred stock dividends (3,225,000) (2,489,000) (2,926,000)
--------------- --------------- ---------------
Deemed dividend related to beneficial conversion feature
on Series B and C Preferred Stock (225,000) (15,295,000) -
--------------- --------------- ---------------
Net loss available to common shareholders $ (9,819,000) $ (24,263,000) $ (27,932,000)
=============== =============== ===============
Basic and diluted loss per common share $ (0.88) $ (2.44) $ (3.41)
=============== =============== ===============
Weighted average number of shares outstanding used in
calculating basic and diluted loss per common share 11,171,018 9,927,027 8,185,065
=============== =============== ===============
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
BLUEFLY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(DOLLARS ROUNDED TO THE NEAREST THOUSAND)
- --------------------------------------------------------------------------------
SERIES A
REDEEMABLE PREFERRED STOCK
PREFERRED STOCK $.01 PAR VALUE
---------------------------- ----------------------------
NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
Balance at January 1, 2001 500,000 $ 11,088,000 - $ -
Conversion of Redeemable
Preferred Stock to Series A
Preferred Stock (500,000) (11,088,000) 500,000 5,000
Conversion of debt to Series B
Preferred Stock - - - -
Sale of common stock in
connection with Rights
Offering ($2.34 per share
net of $350,000 of expenses - - - -
Issuance of warrants to lender - - - -
Issuance of warrants in exchange
for services - - - -
Issuance of warrants to shareholders - - - -
Net loss - - - -
------------ ------------ ------------ ------------
Balance at December 31, 2001 - - 500,000 5,000
Sale of common stock in connection
with the Standby Commitment
Agreement ($1.57 per share)
net of $75,000 of expenses - - - -
Sale of Series 2002 Preferred Stock
in connection with the Standby
Agreement ($1,000 per share)
net of $115,000 of expenses - - - -
Sale of Series C Preferred Stock
($1,000 per share) net of $23,000
of expenses - - - -
Sale of warrants to investor in
connection with the Standby
Agreement - - - -
Deemed dividend related to
beneficial conversion
feature on Series B
Preferred Stock - - - -
Issuance of warrants to lender - - - -
Issuance of warrants to shareholders - - - -
Issuance of warrants in exchange
for services - - - -
Net loss - - - -
------------ ------------ ------------ ------------
Balance at December 31, 2002 - $ - 500,000 $ 5,000
============ ============ ============ ============
Sale of Series D Preferred Stock
($1,000 per share) - - - -
Exchange of note for Series D Preferred
Stock ($1,000 per share) - - - -
Conversion of January 2003 Note to
Series D Preferred Stock - - - -
Sale of Series E Preferred Stock
($1,000 per share) - - - -
Deemed dividend related to
beneficial conversion
feature on Series C
Preferred Stock - - - -
Exercise of Employee Stock
Options and Warrants - - - -
Conversion of Series 2002 Preferred
Stock to Series D Preferred Stock - - - -
Conversion of Series A Preferred
Stock and Series B Preferred Stock
to Common Stock - - (40,000) -
Issuance of warrants to supplier - - - -
Issuance of warrants to shareholders - - - -
Issuance of warrants in exchange
for obligations - - - -
Net loss - - - -
------------ ------------ ------------ ------------
Balance at December 31, 2003 - $ - 460,000 $ 5,000
============ ============ ============ ============
SERIES B SERIES C
PREFERRED STOCK PREFERRED STOCK
$.01 PAR VALUE $.01 PAR VALUE
---------------------------- ---------------------------
NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
Balance at January 1, 2001 - $ - - $ -
Conversion of Redeemable
Preferred Stock to Series A
Preferred Stock - - - -
Conversion of debt to Series B
Preferred Stock 8,910,782 89,000 - -
Sale of common stock in
connection with Rights
Offering ($2.34 per share
net of $350,000 of expenses - - - -
Issuance of warrants to lender - - - -
Issuance of warrants in exchange
for services - - - -
Issuance of warrants to shareholders - - - -
Net loss - - - -
------------ ------------ ------------ ------------
Balance at December 31, 2001 8,910,782 89,000 - -
Sale of common stock in connection
with the Standby Commitment
Agreement ($1.57 per share)
net of $75,000 of expenses - - - -
Sale of Series 2002 Preferred Stock
in connection with the Standby
Agreement ($1,000 per share)
net of $115,000 of expenses - - - -
Sale of Series C Preferred Stock
($1,000 per share) net of $23,000
of expenses - - 1,000 -
Sale of warrants to investor in
connection with the Standby
Agreement - - - -
Deemed dividend related to
beneficial conversion
feature on Series B
Preferred Stock - - - -
Issuance of warrants to lender - - - -
Issuance of warrants to shareholders - - - -
Issuance of warrants in exchange
for services - - - -
Net loss - - - -
------------ ------------ ------------ ------------
Balance at December 31, 2002 8,910,782 $ 89,000 1,000 $ -
============ ============ ============ ============
Sale of Series D Preferred Stock
($1,000 per share) - - - -
Exchange of note for Series D Preferred
Stock ($1,000 per share) - - - -
Conversion of January 2003 Note to
Series D Preferred Stock - - - -
Sale of Series E Preferred Stock
($1,000 per share) - - - -
Deemed dividend related to
beneficial conversion
feature on Series C
Preferred Stock - - - -
Exercise of Employee Stock
Options and Warrants - - - -
Conversion of Series 2002 Preferred
Stock to Series D Preferred Stock - - - -
Conversion of Series A Preferred
Stock and Series B Preferred Stock
to Common Stock (21,368) - - -
Issuance of warrants to supplier - - - -
Issuance of warrants to shareholders - - - -
Issuance of warrants in exchange
for obligations - - - -
Net loss - - - -
------------ ------------ ------------ ------------
Balance at December 31, 2003 8,889,414 $ 89,000 1,000 $ -
============ ============ ============ ============
SERIES D SERIES E
PREFERRED STOCK PREFERRED STOCK
$.01 PAR VALUE $.01 PAR VALUE
--------------------------- ---------------------------
NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
Balance at January 1, 2001 - $ - - $ -
Conversion of Redeemable
Preferred Stock to Series A
Preferred Stock - - - -
Conversion of debt to Series B
Preferred Stock - - - -
Sale of common stock in
connection with Rights
Offering ($2.34 per share
net of $350,000 of expenses - - - -
Issuance of warrants to lender - - - -
Issuance of warrants in exchange
for services - - - -
Issuance of warrants to shareholders - - - -
Net loss - - - -
------------ ------------ ------------ ------------
Balance at December 31, 2001 - - - -
Sale of common stock in connection
with the Standby Commitment
Agreement ($1.57 per share)
net of $75,000 of expenses - - - -
Sale of Series 2002 Preferred Stock
in connection with the Standby
Agreement ($1,000 per share)
net of $115,000 of expenses - - - -
Sale of Series C Preferred Stock
($1,000 per share) net of $23,000
of expenses - - - -
Sale of warrants to investor in
connection with the Standby
Agreement - - - -
Deemed dividend related to
beneficial conversion
feature on Series B
Preferred Stock - - - -
Issuance of warrants to lender - - - -
Issuance of warrants to shareholders - - - -
Issuance of warrants in exchange
for services - - - -
Net loss - - - -
------------ ------------ ------------ ------------
Balance at December 31, 2002 - $ - - $ -
============ ============ ============ ============
Sale of Series D Preferred Stock
($1,000 per share) 2,000 - - -
Exchange of note for Series D Preferred
Stock ($1,000 per share) 2,027 - - -
Conversion of January 2003 Note to
Series D Preferred Stock 1,009 - - -
Sale of Series E Preferred Stock
($1,000 per share) - - 1,000 -
Deemed dividend related to
beneficial conversion
feature on Series C
Preferred Stock - - - -
Exercise of Employee Stock
Options and Warrants - - - -
Conversion of Series 2002 Preferred
Stock to Series D Preferred Stock 2,100 - - -
Conversion of Series A Preferred
Stock and Series B Preferred Stock
to Common Stock - - - -
Issuance of warrants to supplier - - - -
Issuance of warrants to shareholders - - - -
Issuance of warrants in exchange
for obligations - - - -
Net loss - - - -
------------ ------------ ------------ ------------
Balance at December 31, 2003 7,136 $ - 1,000 $ -
============ ============ ============ ============
SERIES 2002
PREFERRED STOCK COMMON STOCK
$.01 PAR VALUE $.01 PAR VALUE
---------------------------- ---------------------------
NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
Balance at January 1, 2001 - $ - 4,924,906 $ 49,000
Conversion of Redeemable
Preferred Stock to Series A
Preferred Stock - - - -
Conversion of debt to Series B
Preferred Stock - - - -
Sale of common stock in
connection with Rights
Offering ($2.34 per share
net of $350,000 of expenses - - 4,280,425 43,000
Issuance of warrants to lender - - - -
Issuance of warrants in exchange
for services - - - -
Issuance of warrants to shareholders - - - -
Net loss - - - -
------------ ------------ ------------ ------------
Balance at December 31, 2001 - - 9,205,331 92,000
Sale of common stock in connection
with the Standby Commitment
Agreement ($1.57 per share)
net of $75,000 of expenses - - 1,186,573 12,000
Sale of Series 2002 Preferred Stock
in connection with the Standby
Agreement ($1,000 per share)
net of $115,000 of expenses 2,100 - - -
Sale of Series C Preferred Stock
($1,000 per share) net of $23,000
of expenses - - - -
Sale of warrants to investor in
connection with the Standby
Agreement - - - -
Deemed dividend related to
beneficial conversion
feature on Series B
Preferred Stock - - - -
Issuance of warrants to lender - - - -
Issuance of warrants to shareholders - - - -
Issuance of warrants in exchange
for services - - - -
Net loss - - - -
------------ ------------ ------------ ------------
Balance at December 31, 2002 2,100 $ - 10,391,904 $ 104,000
============ ============ ============ ============
Sale of Series D Preferred Stock
($1,000 per share) - - - -
Exchange of note for Series D Preferred
Stock ($1,000 per share) - - - -
Conversion of January 2003 Note to
Series D Preferred Stock - - - -
Sale of Series E Preferred Stock
($1,000 per share) - - - -
Deemed dividend related to
beneficial conversion
feature on Series C
Preferred Stock - - - -
Exercise of Employee Stock
Options and Warrants - - 1,869,598 19,000
Conversion of Series 2002 Preferred
Stock to Series D Preferred Stock (2,100) - - -
Conversion of Series A Preferred
Stock and Series B Preferred Stock
to Common Stock - - 632,664 6,000
Issuance of warrants to supplier - - - -
Issuance of warrants to shareholders - - - -
Issuance of warrants in exchange
for obligations - - - -
Net loss - - - -
------------ ------------ ------------ ------------
Balance at December 31, 2003 - $ - 12,894,166 $ 129,000
============ ============ ============ ============
ADDITIONAL TOTAL
PAID-IN ACCUMULATED SHAREHOLDERS'
CAPITAL DEFICIT EQUITY
------------ ------------ -------------
Balance at January 1, 2001 $ 17,242,000 $(38,340,000) $ (21,049,000)
Conversion of Redeemable
Preferred Stock to Series A
Preferred Stock 18,852,000 (622,000) 18,235,000
Conversion of debt to Series B
Preferred Stock 26,318,000 - 26,407,000
Sale of common stock in
connection with Rights
Offering ($2.34 per share
net of $350,000 of expenses 9,622,000 - 9,665,000
Issuance of warrants to lender 45,000 - 45,000
Issuance of warrants in exchange
for services 31,000 - 31,000
Issuance of warrants to shareholders 74,000 - 74,000
Net loss - (25,006,000) (25,006,000)
------------ ------------ -------------
Balance at December 31, 2001 72,184,000 (63,968,000) 8,402,000
Sale of common stock in connection
with the Standby Commitment
Agreement ($1.57 per share)
net of $75,000 of expenses 1,776,000 - 1,788,000
Sale of Series 2002 Preferred Stock
in connection with the Standby
Agreement ($1,000 per share)
net of $115,000 of expenses 1,985,000 - 1,985,000
Sale of Series C Preferred Stock
($1,000 per share) net of $23,000
of expenses 977,000 - 977,000
Sale of warrants to investor in
connection with the Standby
Agreement 37,000 - 37,000
Deemed dividend related to
beneficial conversion
feature on Series B
Preferred Stock 15,295,000 (15,295,000) -
Issuance of warrants to lender 80,000 - 80,000
Issuance of warrants to shareholders 255,000 - 255,000
Issuance of warrants in exchange
for services 39,000 - 39,000
Net loss - (6,479,000) (6,479,000)
------------ ------------ -------------
Balance at December 31, 2002 $ 92,628,000 $(85,742,000) $ 7,084,000
============ ============ =============
Sale of Series D Preferred Stock
($1,000 per share) 2,000,000 - 2,000,000
Exchange of note for Series D Preferred
Stock ($1,000 per share) 2,027,000 - 2,027,000
Conversion of January 2003 Note to
Series D Preferred Stock 1,009,000 - 1,009,000
Sale of Series E Preferred Stock
($1,000 per share) 1,000,000 - 1,000,000
Deemed dividend related to
beneficial conversion
feature on Series C
Preferred Stock 225,000 (225,000) -
Exercise of Employee Stock
Options and Warrants 2,947,000 - 2,966,000
Conversion of Series 2002 Preferred
Stock to Series D Preferred Stock - - -
Conversion of Series A Preferred
Stock and Series B Preferred Stock
to Common Stock (6,000) - -
Issuance of warrants to supplier 503,000 - 503,000
Issuance of warrants to shareholders 42,000 - 42,000
Issuance of warrants in exchange
for obligations 17,000 - 17,000
Net loss - (6,369,000) (6,369,000)
------------ ------------ -------------
Balance at December 31, 2003 $102,392,000 $(92,336,000) $ 10,279,000
============ ============ =============
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
BLUEFLY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(DOLLARS ROUNDED TO THE NEAREST THOUSAND)
- --------------------------------------------------------------------------------
2003 2002 2001
-------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (6,369,000) $ (6,479,000) $ (25,006,000)
Adjustments to reconcile net loss to net cash used in operating
activities
Depreciation and amortization 1,744,000 1,167,000 719,000
Issuance of warrants for services rendered - 39,000 31,000
Beneficial conversion - interest expense - - 13,007,000
Provision for returns 803,000 350,000 332,000
Allowance for doubtful accounts 131,000 241,000 196,000
Write down of inventory 484,000 17,000 248,000
Changes in operating assets and liabilities
(Increase) decrease in:
Inventories (956,000) (4,497,000) 658,000
Accounts receivable (455,000) (131,000) (472,000)
Other current assets (124,000) 127,000 252,000
Prepaid expenses (5,000) (29,000) 84,000
Other assets - 39,000 (18,000)
(Decrease) increase in:
Accounts payable 89,000 36,000 444,000
Accrued expenses (124,000) 314,000 (423,000)
Deferred revenue 367,000 194,000 548,000
Long-term interest payable to related party shareholders 159,000 - -
-------------- -------------- --------------
Net cash used in operating activities (4,256,000) (8,612,000) (9,400,000)
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (481,000) (1,788,000) (378,000)
-------------- -------------- --------------
Net cash used in investing activities (481,000) (1,788,000) (378,000)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from exercise of Stock Options and Warrants 2,966,000 - -
Proceeds from issuance of Notes Payable (October 2003 Financing) 2,000,000 - -
Proceeds from issuance of Notes Payable (July 2003 Financing) 2,000,000 - -
Proceeds from sale of Series D Preferred Stock 2,000,000 - -
Proceeds from issuance of Notes Payable (January 2003 Financing) 1,000,000 - -
Proceeds from sale of Series E Preferred Stock 1,000,000 - -
Payments of capital lease obligation (257,000) (214,000) -
Net proceeds from sale of Series 2002 Preferred Stock - 2,045,000 -
Proceeds from issuance of Notes Payable (September 2002 Financing) - 2,000,000 -
Net proceeds from sale of Common Stock and Warrants - 1,899,000 -
Net proceeds from sale of Series C Preferred Stock - 1,000,000 -
Net proceeds from rights offering - 9,665,000
Net proceeds from notes payable to related party shareholders - - 182,000
-------------- -------------- --------------
Net cash provided by financing activities 10,709,000 6,730,000 9,847,000
-------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents 5,972,000 (3,670,000) 69,000
CASH AND CASH EQUIVALENTS
Beginning of year 1,749,000 5,419,000 5,350,000
-------------- -------------- --------------
End of year $ 7,721,000 $ 1,749,000 $ 5,419,000
============== ============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for
Interest $ 85,000 $ 94,000 $ 14,000
============== ============== ==============
Non-cash investing and financing activites
Exchange of note for equity $ 2,027,000 $ - $ -
============== ============== ==============
Conversion of debt to equity $ 1,009,000 $ - $ -
============== ============== ==============
Warrants issued to supplier $ 503,000 $ - $ -
============== ============== ==============
Deemed dividend related to beneficial conversion feature on
Series C Preferred Stock $ 225,000 $ - $ -
============== ============== ==============
Equipment acquired under capital lease $ 224,000 $ 661,000 $ -
============== ============== ==============
Warrants issued to related party shareholders $ 42,000 $ 98,000 $ 74,000
============== ============== ==============
Deemed dividend related to beneficial conversion feature on
Series B Preferred Stock $ - $ 15,295,000 $ -
============== ============== ==============
Warrant issued in exchange for obligation $ 17,000
============== ============== ==============
Warrant issued to lender $ - $ 80,000 $ 45,000
============== ============== ==============
Beneficial conversion charge on conversion of debt to equity $ - $ - $ 20,851,000
============== ============== ==============
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
1. THE COMPANY
Bluefly, Inc., a Delaware corporation, (the "Company"), is a leading
Internet retailer of designer fashions and home accessories at discount
prices. The Company sells over 350 brands of designer apparel,
accessories and home products at discounts off retail value.
Bluefly.com, a Web site that sells end-of-season and excess inventory of
apparel and accessories was launched in September 1998.
The Company has sustained net losses and negative cash flows from
operations since the formation of Bluefly.com. The Company's ability to
meet its obligations in the ordinary course of business is dependent
upon its ability to establish profitable operations or raise additional
financing through public or private debt or equity financing, or other
sources of financing to fund operations. Management believes that its
current funds, together with the January 2004 Financing (see Note 12)
and working capital will be sufficient to enable the Company to meet its
planned expenditures through December 31, 2004. The Company may seek
additional equity or debt financings to maximize the growth of its
business or if anticipated operating results are not achieved. If such
financings are not available on terms acceptable to the Company, and/or
the Company does not achieve its sales plan, future operations will need
to be modified, scaled back or discontinued.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary. All significant intercompany
balances and transactions have been eliminated in consolidation.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with Staff Accounting
Bulletin ("SAB 101") No. 101 "Revenue Recognition in the Financial
Statements," as amended. Gross sales consists primarily of revenue from
product sales and shipping and handling charges and is net of
promotional discounts. Net sales represent gross sales, less provisions
for returns, credit card chargebacks and adjustments for uncollected
sales tax. Revenue is recognized when all the following criteria are
met:
. A customer executes an order via the Company's website.
. The product price and the shipping and handling fee have been
determined.
. Credit card authorization has occurred and collection is
reasonably assured.
. The product has been shipped and received by the customer.
Shipping and handling billed to customers are classified as revenue in
accordance with Financial Accounting Standards Board ("FASB") Task
Force's Emerging Issues Task Force ("EITF") No. 00-10, "Accounting for
Shipping and Handling Fees and Costs" ("EITF No. 00-10").
PROVISIONS FOR SALES RETURNS AND DOUBTFUL ACCOUNTS
The Company generally permits returns for any reason within 90 days of
the sale. The Company performs credit card authorizations and checks the
verifications of its customers prior to shipment of merchandise.
Accordingly, the Company establishes a reserve for estimated future
sales returns and allowance for doubtful accounts at the time of
shipment based primarily on historical data. Accounts receivable is
presented on the consolidated balance sheet net of the allowance for
doubtful accounts. As
F-6
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
of December 31, 2003 and 2002, the allowance for doubtful accounts was
$40,000 and $50,000, respectively, and the allowance for sales returns
was $2,528,000 and $1,725,000, respectively.
Deferred revenue, which consists primarily of goods shipped to customers
but not yet received and customer credits, totaled approximately
$1,252,000 and $885,000 as of December 31, 2003 and 2002, respectively.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash and 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. The Company reviews its inventory levels in order to identify
slow-moving merchandise and in some instances uses markdowns below cost
to clear merchandise. Inventory reserves are established based on
historical data and management's best estimate of excess inventory.
Inventory may be marked down below cost if management determines that
the inventory stock will not sell at its currently marked price.
Inventory is presented net of reserves on the consolidated balance sheet
As of December 31, 2003 and 2002, inventories, net consists of the
following:
2003 2002
-------------- --------------
Inventory on hand $ 10,755,000 $ 10,591,000
Inventory to be received due to returns 1,258,000 837,000
Inventory reserves (673,000) (560,000)
-------------- --------------
Total inventories, net $ 11,340,000 $ 10,868,000
-------------- --------------
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost net of depreciation. Equipment
and software are depreciated on a straight-line basis over two to seven
years. Leasehold improvements are amortized over the shorter of their
estimated useful lives or the term of the lease. Lease amortization is
included in depreciation expense. Maintenance and repairs are expensed
as incurred.
Certain equipment held under capital leases is classified as property
and equipment and amortized using the straight-line method over the
lease terms and the related obligations are recorded as liabilities.
Costs related to the upgrade and development of the Web Site are
accounted for in accordance with EITF Issue No. 00-02 "Accounting for
Website Development Costs", and to the extent they capitalized, are
amortized over 24 months.
LONG-LIVED ASSETS
The Company's policy is to evaluate long-lived assets 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-7
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
INCOME TAXES
The Company recognizes deferred income 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
At December 31, 2003, the Company has two stock-based employee
compensation plans, which are described more fully in Note 8. The
Company accounts for those plans under the recognition and measurement
principles of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations.
No stock-based employee compensation cost is reflected in net income, as
all options granted under those plans had an exercise price equal to the
market value of the underlying common stock on the date of the grant.
The following table illustrates the effect on net loss and loss per
share if the Company had applied the fair value recognition provisions
of Financial Accounting Standards No. ("SFAS") 123 "Accounting for Stock
Based Compensation," to stock based employee compensation:
YEAR ENDED DECEMBER 31,
--------------------------------------------------
2003 2002 2001
-------------- -------------- --------------
Net loss, as reported $ (6,369,000) $ (6,479,000) $ (25,006,000)
Deduct: total stock-based employee
compensation expense determined
under fair value based methods for all (4,219,000) (4,259,000) (3,432,000)
awards, net of related tax effects
Pro forma net loss $ (10,588,000) $ (10,738,000) $ (28,438,000)
Loss per share:
Basic and diluted, as reported $ (0.88) $ (2.44) $ (3.41)
Basic and dilute, pro forma $ (1.26) $ (2.97) $ (3.83)
The effects of applying SFAS No. 123 in this pro forma disclosure are
not indicative of future amounts, as additional stock option awards are
anticipated in future years.
NET LOSS PER SHARE
The Company calculated net loss per share in accordance with SFAS No.
128, "Earnings Per Share." Basic loss per share excludes dilution and is
computed by dividing loss available to common shareholders by the
weighted average number of common shares outstanding for the period. For
purposes of calculating basic and diluted loss per share, the Company
presents the amount of dividends earned but unpaid on the face of the
statement of operations.
Diluted loss per share is computed by dividing 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, the following shares of Common Stock issuable pursuant to
options, warrants, Preferred Stock and Notes Payable were not included
in the computation of diluted earnings per share because the result of
such inclusion would be antidilutive:
F-8
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
EXERCISE
COMMON STOCK ISSUABLE PRICES
------------------------------------------------
2003 2002
-------------- --------------
SECURITY
Options 8,508,370 8,508,412 $0.69- $16.60
Warrants 1,319,144 1,069,144 $0.88 - $9.08
Preferred stock 43,323,430 27,769,450
Convertible debt -* 2,150,538
* Excludes debt issued in connection with the July 2003 financing and
October 2003 financing, which is curently not convertible into
Common Stock
MARKETING EXPENSES
In addition to marketing salaries, marketing expenses consist primarily
of online advertising, print advertising, direct mail campaigns as well
as the related external production costs. The costs associated with
online and print advertising are expensed as incurred, while the costs
associated with direct mail campaigns are capitalized and charged to
expense over the expected future revenue stream. There were no amounts
associated with direct mail campaigns capitalized at December 31, 2003
and 2002. Marketing expenses (excluding marketing and public relations
salaries and related salary expenses of $628,000, $553,000 and $832,000)
for the years ended December 31, 2003, 2002 and 2001 amounted to
approximately $1,270,000, $1,722,000 and $4,026,000, respectively.
FULFILLMENT EXPENSES
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, 2003,
2002 and 2001, fulfillment expenses totaled $2,776,000, $2,622,000 and
$2,290,000, respectively. These amounts are included in selling,
marketing and fulfillment expenses in the statement of operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, including
cash and cash equivalents, other assets, accounts payable, accrued
liabilities, and notes payable to related party shareholders approximate
fair value due to their short maturities.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51". FIN 46 requires an
investor to consolidate a variable interest entity if it is determined
that the investor is a primary beneficiary of that entity, subject to
the criteria set forth in FIN 46. Assets, liabilities, and non
controlling interests of newly consolidated variable interest entities
will be initially measured at fair value. After initial measurement, the
consolidated variable interest entity will be accounted for under the
guidance provided by Accounting Research Bulletin No. 51, "Consolidated
Financial Statements." FIN 46 is effective for variable interest
entities created or entered into after January 31, 2003. For variable
interest entities created or acquired before February 1, 2003, FIN 46
applies in the first fiscal year or interim period beginning after
December 15, 2003. The adoption of FIN 46 will not have a material
impact on the Company's consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS
No. 149 clarifies under what circumstances a contract with an initial
net investment meets the characteristics of a derivative as
F-9
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
discussed in Statement No. 133. It also specifies when a derivative
contains a financing component that warrants special reporting in the
Consolidated Statement of Cash Flows. SFAS No. 149 amends certain other
existing pronouncements in order to improve consistency in reporting
these types of transactions. The new guidance is effective for contracts
entered into or modified after September 30, 2003, and for hedging
relationships designated after September 30, 2003. The Company adopted
this standard and it did not have a material impact on its consolidated
financial statements.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150 "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" ("SFAS No. 150"). SFAS
No. 150 established standards for classification and measurement in the
statement of financial position of certain financial instruments with
characteristics of both liabilities and equity. It requires
classification of a financials instrument that is within its scope as a
liability (or an asset in some circumstances). SFAS No. 150 is effective
for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The Company adopted this standard and it
did not have a material impact on its consolidated financial statements.
RECLASSIFICATIONS
Certain amounts in the consolidated financial statements of the prior
periods have been reclassified to conform to the current period
presentation for comparative purposes.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Significant estimates and assumptions
include the adequacy of the allowances for sales returns and
recoverability of inventories. Actual results could differ from those
estimates.
3. PROPERTY AND EQUIPMENT
As of December 31, 2003 and 2002, property and equipment consists of the
following:
2003 2002
-------------- --------------
Leasehold improvements $ 544,000 $ 538,000
Office equipment 433,000 433,000
Computer equipment and software 4,550,000 3,851,000
-------------- --------------
5,527,000 4,822,000
Less: Accumulated depreciation (3,868,000) (2,218,000)
-------------- --------------
$ 1,659,000 $ 2,604,000
============== ==============
Depreciation and amortization of property and equipment was
approximately $1,650,000, $1,000,000 and $547,000, for the years ended
December 31, 2003, 2002 and 2001, respectively.
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
As of December 31, 2003 and 2002, prepaid expenses and other current
assets consist of the following:
F-10
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
2003 2002
-------------- --------------
Prepaid expenses $ 253,000 $ 248,000
Prepaid inventory 252,000 -
Other current assets 201,000 78,000
-------------- --------------
$ 706,000 $ 326,000
============== ==============
5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
As of December 31, 2003 and 2002, accrued expenses and other current
liabilities consist of the following:
2003 2002
-------------- --------------
Allowance for sales returns $ 2,528,000 $ 1,725,000
Salary, vacation and bonus accrual 550,000 655,000
Current portion of capital lease liability 314,000 190,000
Accrued expenses 240,000 185,000
Deposit from third party 170,000 170,000
Accrued media expenses 67,000 142,000
-------------- --------------
$ 3,869,000 $ 3,067,000
============== ==============
6. INCOME TAXES
Significant components of the Company's deferred tax assets and
liabilities are summarized as follows:
2003 2002
-------------- --------------
DEFERRED TAX ASSETS
Net operating losses $ 26,230,000 $ 21,615,000
Depreciation and amortization (142,000) 427,000
Accounts receivable and inventory reserves 288,000 281,000
Accrued bonuses 134,000 174,000
Other 362,000 4,000
-------------- --------------
26,872,000 22,501,000
Valuation Allowance (26,872,000) (22,501,000)
-------------- --------------
Net deferred tax asset (liability) $ - $ -
============== ==============
The Company is in an accumulated loss position for both financial and
income tax reporting purposes. The Company has U.S. Federal net
operating loss carryforwards of approximately $64,910,000 at December
31, 2003 which have expiration dates from 2018 through 2023.
Approximately $5.1 million of these net operating loss carryforwards
relate to the exercise of employee stock options and any tax benefit
derived therefrom, when realized, will be accounted for as a credit to
additional paid-in-capital rather than a reduction of the income tax
provision. Pursuant to Section 382 of the Internal Revenue Code, the
usage of these net operating loss carryforwards may be limited due to
changes in ownership that have occurred. The Company has not yet
determined the impact, if any, that changes in ownership have had on net
operating loss carryforwards. 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.
F-11
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
The Company's effective tax rate differs from the U.S. Federal Statutory
income tax rate of 35% as follows:
2003 2002 2001
------------ ------------ ------------
Statutory federal income tax rate (35.00)% (35.00)% (35.00)%
State tax benefit, net of federal taxes (5.41) (5.41) (5.41)
Other 0.16 0.55 0.05
Valuation allowance on deferred tax asset 40.25 39.86 40.36
------------ ------------ ------------
Effective tax rate -% -% -%
============ ============ ============
7. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT CONTRACTS
The Company has entered into certain employment contracts, which expire
through September 30, 2007. As of December 31, 2003, the Company's
aggregate commitment for future base salary under these employment
contracts is:
2004 $ 1,316,000
2005 838,000
2006 450,000
2007 75,000
---------------
Total $ 2,679,000
===============
In September 2003, the Company entered into an employment agreement with
a new President. Under the terms of the Agreement, which expires in
March 2007, the President, in addition to an annual salary and employee
stock options to purchase shares of the Company's Common Stock, is
entitled to an annual bonus which cannot be less than 3% of the
Company's net income for the fiscal year for which the bonus is awarded,
subject to a cap equal to 200% of her base salary for that year. Her
bonus for 2004 is subject to a minimum floor of $100,000. The agreement
also provides for her to receive an additional bonus in connection with
certain change of control transactions equal to 1% of the consideration
distributed to stockholders in connection with any such transaction. In
the event that the President relocates herself and her family to the New
York City area on or before August 31, 2004, she is also entitled to an
additional bonus of $75,000. The salary commitment and minimum bonus
obligation for 2004 that is payable under the agreement are reflected in
the table above. The other obligations (which are contingent in nature)
are not included above.
LEASES
The Company leases equipment and space under various capital and
operating leases that expire at various dates through 2011. Future
minimum lease payments under capital and operating leases, excluding
utilities, that have initial or remaining non-cancelable terms in excess
of one year are as follows:
F-12
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
CAPITAL OPERATING
LEASES LEASES
------------ ------------
2004 $ 314,000 $ 454,000
2005 101,000 461,000
2006 - 468,000
2007 - 481,000
2008 - 441,000
Thereafter - 475,000
------------ ------------
Total minimum payments 415,000 $ 2,780,000
------------ ============
Obligations due within one year (314,000)
------------
Long-term obligations under capital leases $ 101,000
============
Rent expense aggregated approximately $427,000, $412,000 and $407,000
for the years ended December 31, 2003, 2002 and 2001, respectively.
MARKETING COMMITMENTS
As of December 31, 2003, the Company has advertising and marketing
commitments in connection with its online relationships of approximately
$168,000 through December 31, 2004.
LEGAL PROCEEDINGS
The Company is, from time to time, involved in litigation incidental to
the conduct of its business. However, the Company is not party to any
lawsuit or proceeding which, in the opinion of management is likely to
have a material adverse effect on its financial condition.
8. SHAREHOLDERS' EQUITY
AUTHORIZED SHARES
The Company is incorporated in Delaware and has 92,000,000 authorized
shares of common stock, $.01 par value per share ("Common Stock"), and
25,000,000 authorized shares of preferred stock, $.01 par value per
share (the "Preferred Stock"). 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"); 3,500 shares of Series
C Convertible Preferred Stock (the "Series C Preferred Stock"); 2,100
shares of Series 2002 Convertible Preferred Stock (the "Series 2002
Convertible Preferred Stock"); 7,150 shares of Series D Convertible
Preferred Stock (the "Series D Preferred Stock"); 1,000 shares of Series
E Convertible Preferred Stock (the "Series E Preferred Stock"); and,
15,486,250 shares undesignated and available for issuance.
PREFERRED STOCK
OUTSTANDING SHARES
The Company's currently outstanding shares of Preferred Stock
(collectively, the "Outstanding Preferred Stock") include the following:
460,000 shares of Series A Preferred Stock with a stated value of $9.2
million; 8,889,414 shares of Series B Preferred Stock with a stated
value of $20 million; 1,000 shares of Series C Preferred Stock with a
stated value of $1.0 million; 7,136.548 shares of Series D Preferred
Stock with a stated value of approximately $7.1 million; and 1,000
shares of Series E Preferred Stock with a stated value of approximately
$1.0 million. All such shares are held by affiliates of Soros Private
Equity Partners, LLC ("Soros"), a related party.
F-13
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
LIQUIDATION PREFERENCE
Each share of Outstanding Preferred Stock has a liquidation preference
equal to the greater of (i) its stated value plus accrued dividends
(and, in the case of the Series B Preferred Stock an additional $10
million, resulting in an aggregate liquidation preference for all
Outstanding Preferred Stock of $48,300,000) or (ii) the amount that the
holder of such share would receive if it were to convert such share into
shares of Common Stock immediately prior to the liquidation, dissolution
or winding up of the Company.
DIVIDENDS
Each share of Outstanding Preferred Stock bears a cumulative compounding
dividend, payable upon conversion in cash or Common Stock, at the
Company's option. The Series A Preferred Stock, Series B Preferred Stock
and Series C Preferred Stock accrue dividends at the rate of 8% per
annum, and the Series D Preferred Stock and Series E Preferred Stock
accrue dividends at the rate of 12% per annum.
RANKING
All of the shares of Outstanding Preferred Stock rank pari passu with
each other, and 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.
CONVERSION
The Series A Preferred Stock is convertible into Common Stock at the
rate of $2.34 in stated value per share of Common Stock. The other
shares of Outstanding Preferred Stock are convertible into Common Stock
at the rate of $0.76 in stated value per share of Common Stock. The
conversion price of all of the Outstanding Preferred Stock, other than
the Series A Preferred Stock, is subject to anti-dilution adjustments,
pursuant to which, subject to certain exceptions, to the extent that the
Company issues Common Stock or securities convertible into Common Stock
at a price per share less than the conversion price in the future, the
conversion price would be decreased so that it would equal the
conversion price of the new security or the price at which shares of
Common Stock are sold, as the case may be. As more fully described
below, the conversion price of the Series B Preferred Stock and the
Series C Preferred Stock were reduced from higher levels to $0.76 upon
the issuance of the Series D Preferred Stock as a result of these
anti-dilution provisions.
VOTING RIGHTS
All of the shares of Outstanding Preferred Stock vote with the Common
Stock on an as-converted basis, and the Company is prohibited from
taking certain actions without the approval of a majority of each of the
separate classes of Outstanding Preferred Stock. In addition, the
holders of the Series A Preferred Stock have the right to appoint a
designee to the Company's Board of Directors (the "Series A Designee"),
and the holders of the Series B Preferred Stock similarly have the right
to appoint such a designee (the "Series B Designee"), with both the
Series A Designee and the Series B Designee being entitled to seven
votes on any issue that comes before the Board of Directors (other than
issues relating to the redemption of the Outstanding Preferred Stock, as
described below).
REDEMPTION
The Company is entitled, subject to certain conditions, to redeem the
shares of Outstanding Preferred Stock for cash at prices ranging,
depending upon the date of such redemption, from 4 times, 4.5 times or 5
times the conversion price. The directors designated by the holders of
the Preferred Stock are not entitled to vote on issues relating to the
redemption of the Outstanding Preferred Stock.
F-14
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
MISCELLANEOUS RIGHTS
The holders of the Outstanding Preferred Stock have registration rights
with respect to the Common Stock issuable upon conversion of the
Outstanding Preferred Stock and pre-emptive rights with respect to
future issuance of capital stock of the Company.
SOROS FINANCINGS DURING 2002 AND 2003
MARCH 2002 STANDBY AGREEMENT
In March 2002, the Company entered into an agreement (the "March 2002
Standby Agreement") with Soros, pursuant to which Soros agreed to
provide the Company with up to $4 million (the "March 2002 Standby
Commitment Amount") of additional financing on a standby basis at any
time prior to January 1, 2003, all of which was subsequently funded as
described below.
JUNE 2002 FINANCING
In June 2002, Soros invested $1.9 million in the Company through the
purchase of Common Stock and warrants, thereby reducing its March 2003
Standby Commitment Amount to $2.1 million. Under the terms of the
transaction, the Company issued to Soros 1,186,573 shares of Common
Stock at $1.57 per share, and warrants to purchase 296,644 shares of
Common Stock at any time during the next five years at an exercise price
of $1.88 per share for a purchase price of $0.125 per warrant (the "June
2002 Financing").
As a result of the June 2002 Financing, the conversion price of the
Series B Preferred Stock decreased from $2.34 to $1.57. In accordance
with EITF 00-27, this reduction in the conversion price of the Company's
Series B Preferred Stock resulted in the Company recording a beneficial
conversion feature in the approximate amount of $10.2 million as part of
its financial results for the second quarter of 2002. This non-cash
charge, which is analogous to a dividend, also resulted in an adjustment
to the Company's computation of Loss Per Share.
AUGUST 2002 FINANCING
In August 2002, Soros invested an additional $2.1 million in the
Company, thereby reducing its March 2002 Standby Commitment Amount to
zero. Under the terms of the transaction, the Company issued to Soros
2,100 shares of newly-designated Series 2002 Convertible Preferred Stock
at a price of $1,000 per share. The Series 2002 Convertible Preferred
Stock had a liquidation preference of $1,000 per share and was
convertible in whole or in part, at the holder's option, into the type
of equity securities sold by the Company in any subsequent round of
equity financing, at the lowest price per share paid by any participant
in such financing and upon such other terms and conditions as such
securities are sold in such financing. The Series 2002 Convertible
Preferred Stock did not have any fixed dividend rate, and did not
provide the holders thereof with any voting rights, other than with
respect to transactions or actions that would adversely affect the
rights, preference, powers and privileges of the Series 2002 Convertible
Preferred Stock. The Series 2002 Convertible Preferred Stock was
converted into Series D Convertible Preferred Stock in connection with
the March 2003 Financing described below.
SEPTEMBER 2002 FINANCING
In September 2002, the Company and Soros entered into an agreement
pursuant to which Soros purchased 1,000 shares of the Series C Preferred
Stock and promissory notes convertible into Series C Preferred Stock
("Series C Notes") in the aggregate principal amount of $2,000,000, all
for the aggregate purchase price of $3,000,000 (the "September 2002
Financing"). The material terms of the Series C Preferred Stock are
described above. The Series C Notes bore interest at a rate of 3% per
annum and had a maturity date of March 26, 2003. Interest on the Series
C Notes was payable only upon repayment of the principal amount, whether
at maturity or upon a mandatory or optional prepayment. The principal
amount, together with accrued interest, was convertible into Series C
F-15
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
Preferred Stock, at the holder's option, at the rate of $1,000 per share
of Series C Preferred Stock. The Series C Notes were repaid in
connection with the March 2003 Financing described below.
As a result of the September 2002 Financing, the conversion price of the
Series B Preferred Stock automatically decreased from $1.57 to $0.93. In
accordance with EITF 00-27, this reduction in the conversion price of
the Company's Series B Preferred Stock resulted in the Company recording
a beneficial conversion feature in the approximate amount of $5.1
million as part of its financial results for the third quarter of 2002.
This non-cash charge, which is analogous to a dividend, resulted in an
adjustment to the Company's computation of Loss Per Share.
CONVERSION OF PREFERRED STOCK
In January 2003, the holders of 40,000 shares of the Company's Series A
Convertible Preferred Stock and 21,368 shares of the Company's Series B
Convertible Preferred Stock exercised their conversion rights with
respect thereto. The shares of Series A Convertible Preferred Stock were
converted into an aggregate of 341,880 shares of the Company's Common
Stock. In addition, as permitted under the Company's Certificate of
Incorporation, the Company elected to pay the $213,216 in accrued and
unpaid dividends on such shares of Series A Preferred Stock through the
issuance of additional shares of Common Stock at a price per share of
$0.93 (the 30-day trailing average closing price as of the date of
conversion). Accordingly, an additional 229,265 shares of the Company's
Common Stock were issued as payment in full of the accrued and unpaid
dividends on the converted shares of Series A Convertible Preferred
Stock, in accordance with the Company's Certificate of Incorporation.
The shares of Series B Convertible Preferred Stock were converted into
an aggregate of 53,765 shares of the Company's Common Stock. In
addition, as permitted under the Company's Certificate of Incorporation,
the Company elected to pay the $7,211 in accrued and unpaid dividends on
such shares of Series B Preferred Stock through the issuance of
additional shares of Common Stock at a price per share of $0.93 (the
30-day trailing average closing price as of the date of conversion).
Accordingly, an additional 7,754 shares of the Company's Common Stock
were issued as payment in full of the accrued and unpaid dividends on
the converted shares of Series B Convertible Preferred Stock, in
accordance with the Company's Certificate of Incorporation.
JANUARY 2003 FINANCING
In January 2003, the Company issued to Soros $1 million of demand
convertible promissory notes that bore interest at a rate of 8% per
annum and had a maturity date of July 28, 2003, and warrants to purchase
25,000 shares of its common stock, exercisable at any time on or prior
to January 28, 2007 at $1.12 per share (the "January 2003 Financing").
Interest on the notes was payable only upon repayment of the principal
amount, whether at maturity or upon a mandatory or optional prepayment.
The principal amount, together with accrued interest, was convertible
into equity securities that the Company might issue in any subsequent
round of financing, at the holder's option, at a price that was equal to
the lowest price per share accepted by any investor in such subsequent
round of financing. These notes were converted into Series D Preferred
Stock in connection with the March 2003 Financing described below.
MARCH 2003 FINANCING
In March 2003, the Company entered into an agreement with Soros pursuant
to which Soros: (i) provided $2 million of new capital by purchasing
2,000 shares of Series D Preferred Stock, (ii) converted the promissory
notes issued to it in the January 2003 Financing and all of its Series
2002 Preferred Stock into 3,109.425 shares of Series D Preferred Stock
and (iii) purchased 2,027.123 shares of Series D Preferred Stock, with
the proceeds from this sale being retained by Soros as payment in full
of the Company's obligations under the Series C Notes (the "March 2003
Financing"). The material terms of the Series D Preferred Stock are
described above.
F-16
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
Additionally, Soros agreed to provide the Company with up to $1 million
in additional financing (the "2003 Standby Commitment Amount") on a
standby basis at any time prior to January 1, 2004, provided that the
Company's cash balances were less than $1 million at that time (the
"2003 Standby Commitment.") Such financing was to be made in one or more
tranches as determined by the members of the Company's Board of
Directors (other than the Series A Designee and the Series B Designee),
and any and all draws against the 2003 Standby Commitment Amount were to
be effected through the purchase of newly-designated shares of Series E
Preferred Stock. Subject to certain limitations, the 2003 Standby
Commitment Amount was to be reduced on a dollar-for-dollar basis by the
gross cash proceeds received by the Company or any of its subsidiaries
from the issuance of any equity or convertible securities after March
12, 2003.
As a result of the March 2003 Financing, the conversion price of the
Series B Preferred Stock and the Series C Preferred Stock automatically
decreased from $0.93 to $0.76 per share. In accordance with EITF 00-27,
the reduction in the conversion price of the Series C Preferred Stock
resulted in the Company recording a beneficial conversion feature in the
approximate amount of $225,000 as part of its financial results for the
first quarter of 2003. This non-cash charge, which is analogous to a
dividend, resulted in an adjustment to the Company's computation of Loss
Per Share.
MAY 2003 FINANCING
In accordance with the terms of the 2003 Standby Commitment, in May 2003
Soros invested an additional $1.0 million in the Company through the
purchase of 1,000 shares of Series E Preferred Stock and thereby
fulfilled the 2003 Standby Commitment in full. The terms of the Series E
Preferred Stock are described above.
JULY 2003 FINANCING
In July 2003, Soros invested an additional $2.0 million in the Company.
Under the terms of the transaction, the Company issued $2.0 million of
convertible promissory notes that bear interest at a rate of 12% per
annum and had a maturity date of January 12, 2004 (which, was
subsequently extended to May 1, 2005). Interest on the notes is payable
only upon repayment of the principal amount, whether at maturity or upon
a mandatory or optional prepayment. The principal amount, together with
accrued interest, is convertible into equity securities of the Company
sold in any subsequent round of financing, at the holder's option, at a
price that is equal to the lowest price per share accepted by any
investor in such subsequent round of financing (the "July 2003
Financing"). The conversion of the notes is subject to certain
limitations until such time as the conversion provisions are approved by
the Company's stockholders.
OCTOBER 2003 FINANCING
In October 2003 Soros invested an additional $2.0 million in the
Company. Under the terms of the transaction, the Company issued $2.0
million of convertible promissory notes. These notes were on
substantially the same terms as the notes issued in the July 2003
Financing, except that the maturity date of these notes was April 14,
2004. Subsequent to year end, the maturity date of these notes was
extended to May 1, 2005.
WARRANTS
WARRANTS TO SOROS
The Company has issued warrants to Soros in connection with past and
recent financings as well as in connection with the Loan Facility.
Warrants issued in connection with the Company's Loan Facility are
included in the table below and are described more fully in Note 10
below.
F-17
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
In connection with the January 2003 Financing, the Company issued
warrants to purchase 25,000 shares of its common stock, exercisable at
any time on or prior to January 28, 2007 at $1.12 per share to Soros.
The Company valued the warrants using the Black Scholes option pricing
model using the following assumptions: risk free interest rate: 3.54%,
volatility 113%, expected life 4 years, zero dividend yield. Using these
factors the warrants were valued at $21,000 and were expensed over the
life of the note. The full amount was expensed in the first quarter of
2003.
In connection with the June 2002 Financing, Soros purchased warrants to
purchase 296,644 shares of common stock at an exercise price of $1.88
per share. These warrants are exercisable at any time on or prior to May
24, 2007.
In exchange for the March 2002 Standby Agreement, the Company issued to
Soros warrants to purchase 100,000 shares of Common Stock at an exercise
price of $1.68 per share (the 20 day trailing average of the closing
sale price of the Company's Common Stock on the date of issuance),
exercisable at any time until March 27, 2007. The Company valued the
warrants using the Black Scholes option pricing model using the
following assumptions: risk free interest rate: 5.22%, volatility 183%,
expected life 3 years, zero dividend yield. The Company accounted for
the warrants by crediting additional paid in capital for approximately
$157,000 and capitalizing the amount on the balance sheet. This amount
was then netted against the proceeds from the subsequent May 2003
Financing and July 2003 Financing described above, on a pro rata basis.
WARRANTS TO SUPPLIER
On December 22, 2003 the Company issued warrants to purchase 250,000
shares of Common Stock at an exercise price of $2.34 per share to a
supplier of inventory in exchange for reduced pricing. The warrants are
fully vested and expire on December 22, 2006. The Company valued the
warrants using the Black-Scholes option pricing model (key assumptions:
risk free interest rate: 3.75%, volatility 85%, expected life 2 years,
zero dividend yield). The total value of $502,500 has been capitalized
and classified as prepaid inventory, $251,000 of which has been
classified within current assets and the remaining $251,000 has been
classified as non current, based on the Company's projected inventory
purchases. The Company will reclassify the prepaid inventory when the
inventory is purchased as a component of the inventory cost. The Company
will compare actual utilization vs. budgeted utilization. If actual
utilization is less than budgeted utilization the Company will consider
the asset for impairment.
The following table represents warrants issued to purchase Common Stock
as of December 31, 2003:
NUMBER OF
PARTY WARRANTS EXERCISE PRICE RANGE EXPIRATION DATES
----------- -------------- -------------------- -------------------------------
Soros 981,644 $0.88 - $9.08 January 2007 - March 2013
Supplier 300,000 $2.34 - $3.72 September 2005 - December 2006
Others 37,500 $1.34 March 2006
--------------
Total 1,319,144
--------------
STOCK OPTION PLAN
The Company's Board of Directors has adopted two stock option plans, one
in July 2000 (the "2000 Plan") and the other in May 1997 (the "1997
Plan"). The Plans were adopted for the purpose of encouraging key
employees, consultants and directors who are not employees to acquire a
proprietary interest in the growth and performance of the Company.
Options are granted in terms not to exceed ten years and become
exercisable as specified when the option is granted. Vesting terms of
the options range from immediately to a ratable vesting period of four
years. The 2000 Plan has 1,500,000 shares
F-18
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
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 12,200,000.
The following table summarizes the Company's stock option activity:
NUMBER WEIGHTED
OF AVERAGE
SHARES EXCERCISE PRICE
--------------- ---------------
Balance at January 1, 2001 4,750,885 $ 4.61
Options granted 321,750 $ 1.72
Options canceled (729,432) $ 5.26
Options exercised -
---------------
Balance at December 31, 2001 4,343,203 $ 4.28
Options granted 5,239,000 $ 0.94
Options canceled (1,073,791) $ 5.26
Options exercised - $ -
---------------
Balance at December 31, 2002 8,508,412 $ 2.27
Options granted 2,561,000 $ 1.34
Options canceled (705,030) $ 3.49
Options exercised (1,856,012) $ 1.59
---------------
Balance at December 31, 2003 8,508,370 $ 2.04
===============
Eligible for exercise at December 31, 2001 2,069,120 $ 4.78
Eligible for exercise at December 31, 2002 3,612,420 $ 3.59
Eligible for exercise at December 31, 2003 4,523,606 $ 1.30
The stock options are exercisable in different periods through 2013. Additional
information with respect to the outstanding options as of December 31, 2003, 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
---------------- -------------- ---------------- ------------ ------------- ------------
$0.69 - $1.66 6,140,541 8.7 Years $ 1.08 2,259,589 $ 0.98
$1.66 - $3.32 1,903,679 6.7 Years 2.90 1,854,870 2.93
$3.32 - $4.98 54,500 10.0 Years 4.07 - -
$4.98 - $6.64 29,750 4.7 Years 5.08 29,750 5.08
$6.64 - $9.96 62,250 5.6 Years 9.13 61,873 9.14
$9.96 - $11.62 129,500 5.9 Years 11.19 129,374 11.19
$11.62 - $13.28 50,000 6.0 Years 12.34 50,000 12.34
$13.28 - $14.94 7,250 5.9 Years 14.09 7,250 14.09
$14.94 - $16.60 130,900 5.1 Years 15.71 130,900 15.71
$0.69 - $16.60 8,508,370 8.1 Years $ 2.04 4,523,606 $ 2.78
F-19
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
The Company does not recognize compensation expense for stock options
granted to employees and directorswith an exercise price at or above
fair market value at the date pf the grant, in accordance with APB No.
25. The fair value of options granted during 2003, 2002 and 2001 was
approximately $2.9 million, $4.0 million and $448,000, 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,
--------------------------------------
2003 2002 2001
---------- ----------- -----------
Risk-free interest rates 3.59% 4.38% 4.85%
Expected life (in years) 6 6 6
Dividend yield 0% 0% 0%
Expected volitility 113% 164% 119%
As of December 31, 2003, the Company has reserved an aggregate of
53,150,944 shares of Common Stock for the conversion of Preferred Stock
and the exercise of Stock Options and Warrants.
9. NOTES PAYABLE TO RELATED PARTY SHAREHOLDERS
In addition to the $4,000,000 of promissory notes issued in connection
with the July 2003 Financing and October 2003 Financing (see Note 8
above), on December 15, 2001, the Company issued a promissory note in
the amount of $182,000 to affiliates of Soros in exchange for legal
services provided during the course of the year. The Note bears interest
at 9% per annum and has a maturity date of December 15, 2004.
Interest on the Series C Notes (See Note 8 above) accrued at an annual
rate equal to 3% on a cumulative, compounding basis and was payable only
upon repayment of the principal amount, whether at maturity or upon a
mandatory or optional prepayment. The outstanding principal amount of
the Series C Notes and all accrued and unpaid interest was payable in
full no later than March 26, 2003. The principal amount and interest
accrued on the Series C Notes were convertible into Series C Preferred
Stock, at the option of the holder and at any time at the rate of $1,000
per share. The Company's obligations under the Series C Notes were
subordinated to its obligations under the Rosenthal Financing Agreement
although such subordination does not effect Soros's conversion rights
with respect to the Series C Notes. In March 2003, the Series C Notes
were repaid.
10. FINANCING AGREEMENT
The Company has a financing agreement (the "Financing Agreement") with
Rosenthal & Rosenthal, Inc. ("Rosenthal") pursuant to which Rosenthal
provides the Company with certain credit accommodations, including loans
and advances, factor-to-factor guarantees or letters of credit in favor
of suppliers or factors or purchases of payables owed to the Company's
suppliers (the "Loan Facility"). During fiscal 2003, the maximum amount
available under the Loan Facility did not exceed $4.5 million.
The Financing Agreement was amended in December 2002 and March 2003 to:
(i) extend the term until June 30, 2004; (ii) increase the maximum
amount available under the Loan Facility (subject to an existing $10
million cap) to an amount equal to the Soros Guarantee plus the lower of
(x) $2 million (instead of the prior $1 million), (y) 20% of the book
value of the Company's inventory or (z) the full liquidation value of
the Company's inventory; (iii) increased the tangible net worth
requirement to
F-20
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
$5,000,000 from $1,500,000; (iv) redefine the working capital definition
to exclude short-term debt held by affiliates (effective as of December
19, 2002); (v) increase the working capital requirement to $4,000,000
from $3,500,000; (vi) increase the annual fee the Company pays Rosenthal
for the Loan Facility to $30,000 from $10,000, (vii) require the Company
to maintain a cash balance of at least $250,000 and; (viii) require
Soros to increase from $1.5 million to $2.0 million the amount of the
standby letter of credit that Soros is maintaining (the "Soros
Guarantee") to help collateralize the Loan Facility and extend the term
of the Soros Guarantee to November 15, 2004 from November 15, 2003. The
Financing Agreement was further amended in the fourth quarter to allow
Rosenthal, in its sole discretion, to increase the amount available
under the Loan Facility (subject to the existing $10 million cap) by
$500,000.
As of December 31, 2003, the Company had approximately $4.4 million
available under the Loan Facility. Of the total amount available under
the Loan Facility as of December 31, 2003, approximately $2.3 million
had been committed, leaving approximately $2.1 million available against
the Loan Facility. The Company pays interest monthly on the average
daily amount outstanding under the Loan Facility during the preceding
month at a per annum rate equal to the prime rate plus 1% (at December
31, 2003 - 5.00%). For the period ended December 31, 2003, 2002 and 2001
interest expense and fees totaled approximately $77,000, $91,000 and
$26,000 respectively.
In addition to the annual facility fee of $30,000, Rosenthal also
charges fees to open letters of credit and guarantees in an amount equal
to a certain percentage of the face amount of the letter of credit for
each thirty (30) days such letter of credit, or a portion thereof,
remains open.
ROSENTHAL WARRANTS
In consideration for the Loan Facility, among other things, the Company
granted to Rosenthal a first priority lien on substantially all of its
assets, including control of all of its cash accounts upon an event of
default and certain of its cash accounts in the event that the total
amount of monies loaned to the Company under the Loan Facility exceed
90% of the maximum amount available under the Loan Facility for more
than 10 days. Upon inception of the Loan Facility in March 2001, the
Company issued to Rosenthal a warrant to purchase 50,000 shares of
Common Stock at an exercise price of $2.34, per share exercisable for
five years. The Company valued the warrant using the Black-Scholes
option pricing model (key assumptions: risk free interest rate: 4.86%,
volatility 117%, expected life 4 years, zero dividend yield) and
amortized the fair value of the warrants of $45,000 amount over the life
of the Loan Facility. In March 2002, when the agreement was amended and
as partial consideration for the amendment, the Company extended the
termination date of the warrant it issued to Rosenthal from March 30,
2006 to March 30, 2007. The Company revalued the warrant as of the new
measurement date, using the Black-Scholes option pricing model (key
assumptions: risk free interest rate: 5.25%, volatility 184%, expected
life 3 years, zero dividend yield) and credited additional paid in
capital for $80,000. This amount was amortized in full in fiscal 2002.
In November 2003, Rosenthal exercised all their 50,000 warrants.
SOROS WARRANTS IN CONNECTION WITH LOAN FACILITY
In consideration for the Soros Guarantee, the Company agreed to
reimburse Soros for any amounts it pays to Rosenthal pursuant to the
Soros Guarantee and granted to Soros a lien (the "Soros Lien"),
subordinated to the Rosenthal Lien, on substantially all of the
Company's assets, including its cash balances, in order to collateralize
its reimbursement obligations.
In connection with the Reimbursement Agreement, the Company issued to
Soros warrants (the "Soros Upfront Warrants") and then issued subsequent
warrants for Soros' agreement to maintain and increase
F-21
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
the Soros Guarantee. The following table represents the warrants issued
in connection with the Loan Facility:
NUMBER OF EXERCISE ASSUMPTIONS UNDER
WARRANTS DATE ISSUED PRICE EXPIRATION DATE BLACK-SCHOLES REASON
--------- ----------- ---------- --------------- ------------------------ ----------------
100,000 March 31, $0.88/(1)/ September 11, Risk Free Rate - 4.86% As consideration
2001 2011 Volatility - 117% for Soros
Term - 5 years establishing the
Soros Guarantee
60,000 March 22, $1.66/(1)/ March 22, 2007 Risk Free Rate - 5.25% In consideration
2002 Volatility - 184% for Soros
Term - 3 years extending the
Soros Guarantee
until 11/15/2003
25,000 March 17, $0.78/(2)/ March 17, 2013 Risk Free Rate - 3.31% In consideration
2003 Volatility - 123% for Soros
Term - 4 years extending the
Soros Guarantee
until 11/15/2004
(1) represents the 20 day trailing average of the closing sale price
of the Company's Common Stock on the date of issuance
(2) represents the 10 day trailing average of the closing sale price
of the Company's Common Stock on the date of issuance
The Company accounted for the warrants in accordance with Accounting
Principles Board Opinion No. 14 ("APB No. 14") by valuing the warrants
using the Black-Scholes option pricing model and crediting additional
paid in capital for $74,000, $98,000 and $21,000, during the years 2001,
2002 and 2003, respectively. These amounts were amortized to interest
expense over the life of the Loan Facility.
Subject to certain conditions, if the Company defaults on any of its
obligations under the Loan Facility, Rosenthal has the right to draw
upon the Soros Guarantee to satisfy any such obligations. If and when
Rosenthal draws on the Soros Guarantee, pursuant to the terms of the
Reimbursement Agreement, the Company would have the obligation to, among
other things, reimburse Soros for any amounts drawn under such Soros
Guarantee plus interest accrued thereon. In addition, to the extent that
Rosenthal draws on the Soros Guarantee during the continuance of a
default under the Loan Facility or at any time that the total amount
outstanding exceeds 90% of the Soros Guarantee, the Company will be
required to issue to Soros warrants (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 its Common Stock on the ten days preceding the date of
issuance of such warrants. 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
ten days preceding the ten days after the date of issuance.
Under the terms of the Loan Facility, Soros has the right to purchase
all of the Company's obligations from Rosenthal at any time during its
term (the "Buyout Option"). With respect to such Buyout Option, Soros
has the right to request that Rosenthal make a draw under the Soros
Guarantee as consideration to Soros for the purchase of such obligation.
F-22
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Amounts in thousands, except per share data:
QUARTER ENDED
------------------------------------------------------------------------
2003 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------------------------------------------- --------------- --------------- --------------- ---------------
Net Sales $ 8,257 $ 7,468 $ 8,210 $ 13,993
--------------- --------------- --------------- ---------------
Gross Profit $ 1,857 $ 2,315 $ 1,748 $ 5,405
--------------- --------------- --------------- ---------------
Net Income (Loss) $ (1,840) $ (2,123) $ (2,517) $ 111
--------------- --------------- --------------- ---------------
Deemed dividend related to
beneficial conversion feature
on Series B and C Preferred Stock $ (225) $ - $ - $ -
--------------- --------------- --------------- ---------------
Preferred stock dividends $ (638) $ (845) $ (871) $ (871)
--------------- --------------- --------------- ---------------
Net loss available to common shareholders $ (2,703) $ (2,968) $ (3,388) $ (760)
--------------- --------------- --------------- ---------------
(Loss) per common share - basic and diluted $ (0.25) $ (0.27) $ (0.31) $ (0.07)
--------------- --------------- --------------- ---------------
QUARTER ENDED
------------------------------------------------------------------------
2002 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------------------------------------------- --------------- --------------- --------------- ---------------
Net Sales $ 7,646 $ 6,799 $ 6,305 $ 9,856
--------------- --------------- --------------- ---------------
Gross Profit $ 2,500 $ 2,407 $ 2,073 $ 3,055
--------------- --------------- --------------- ---------------
Net (Loss) $ (1,065) $ (1,519) $ (2,235) $ (1,660)
--------------- --------------- --------------- ---------------
Deemed dividend related to beneficial
conversion feature on Series B Preferred Stock $ - $ (10,226) $ (5,069) $ -
--------------- --------------- --------------- ---------------
Preferred stock dividends $ (609) $ (615) $ (622) $ (643)
--------------- --------------- --------------- ---------------
Net loss available to common shareholders $ (1,674) $ (12,360) $ (7,926) $ (2,303)
--------------- --------------- --------------- ---------------
(Loss) per common share - basic and diluted $ (0.18) $ (1.27) $ (0.76) $ (0.22)
--------------- --------------- --------------- ---------------
F-23
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
12. SUBSEQUENT EVENTS
On January 12, 2004, the Company completed a private placement (the "January
2004 Financing") pursuant to which the Company raised gross proceeds of
$5,000,000 through the sale of 1,543,209 shares of its common stock and warrants
to purchase an additional 385,801 shares of its common stock at an exercise
price of $3.96 per share.
In January 2004, the Company extended the maturity dates on the $4.0 million of
convertible promissory notes issued to Soros in July and October 2003 (the
"Notes"). The maturity dates of the Notes, which were originally January and
April 2004, respectively, were each extended to March 1, 2005. In February 2004,
the maturity dates of each of the Notes was further extended to May 1, 2005.
F-24
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 2003
Column A Column B Column C Column D Column E
----------------------------
(1) (2)
- ---------------------------------- --------------- ---------------------------- ----------- ------------------
Beginning Charged to Charged to Balance end
Balance at Costs and other of Period
Description January 1, 2003 Expenses Accounts Deductions December 31, 2003
- ---------------------------------- --------------- ------------- ----------- ----------- ------------------
Allowance for Sales Returns (1,725,000) (21,589,000) - 20,786,000 (2,528,000)
Allowance for Doubtful Accounts (50,000) (131,000) - 141,000 (40,000)
Inventory Reserves (560,000) (440,000) - 327,000 (673,000)
Deferred Tax Valuation Allowance (22,501,000) (2,299,000) (2,072,000) - (26,872,000)
Column A Column B Column C Column D Column E
----------------------------
(1) (2)
- ---------------------------------- --------------- ---------------------------- ----------- ------------------
Beginning Charged to Charged to Balance end
Balance at Costs and other of Period
Description January 1, 2002 Expenses Accounts Deductions December 31, 2002
- ---------------------------------- --------------- ------------- ----------- ----------- ------------------
Allowance for Sales Returns (1,375,000) (16,265,000) 15,915,000 (1,725,000)
Allowance for Doubtful Accounts (55,000) (241,000) 246,000 (50,000)
Inventory Reserves (455,000) (113,000) - 8,000 (560,000)
Deferred Tax Valuation Allowance (19,707,000) (2,794,000) - - (22,501,000)
Column A Column B Column C Column D Column E
----------------------------
(1) (2)
- ---------------------------------- --------------- ---------------------------- ----------- ------------------
Beginning Charged to Charged to Balance end
Balance at Costs and other of Period
Description January 1, 2001 Expenses Accounts Deductions December 31, 2001
- ---------------------------------- --------------- ------------- ----------- ----------- ------------------
Allowance for Sales Returns (1,044,000) (10,513,000) 10,182,000 (1,375,000)
Allowance for Doubtful Accounts (90,000) (198,000) 233,000 (55,000)
Inventory Reserves (465,000) (370,000) - 380,000 (455,000)
Deferred Tax Valuation Allowance (14,798,000) (4,909,000) - - (19,707,000)
S - 1
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this Form 10-K, we carried out an
evaluation, under the supervision and with the participation of our management,
including out Chief Executive Officer along with our Chief Financial Officer, of
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon
that evaluation, our Executive Officer along with our Chief Financial Officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company (including its
consolidated subsidiaries) required to be included in our periodic SEC filings.
There have been no significant changes in our internal control over financial
reporting that occurred during the Company's most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers and directors, and their ages and positions are as
follows:
NAME AGE POSITION
---- --- --------
E. Kenneth Seiff 40 Chairman of the Board of Directors, Chief
Executive Officer, and Treasurer
Melissa Payner-Gregor 45 President and Director
Patrick C. Barry 41 Chief Financial Officer and Chief Operating
Officer
Josephine Esquivel 48 Director
Alan Kane 62 Director
Martin Miller 73 Director
Neal Moszkowski 38 Director
Robert G. Stevens 50 Director
David Wassong 33 Director
E. Kenneth Seiff, our founder, has served as our Chairman of the Board, Chief
Executive Officer and Treasurer since our inception in April 1991. He also
served as our President from October 1996 to September 2003.
Melissa Payner-Gregor, has served as our President since September 2003. From
December 2000 to March 2003, Ms. Payner-Gregor served as CEO and President of
Spiegel Catalog. She was also a board member of The Spiegel Group, Inc.
("Spiegel") from December 2000 to March 2003. Spiegel filed a plan of
reorganization under Chapter 11 of the Federal Bankruptcy code in March 2003.
From 1995 to 1997, Ms. Payner-Gregor was President and a board member of Chico
FAS, Inc. Ms. Payner-Gregor has also held senior executive positions with
Guess?, Inc., Pastille (a Division of Neiman Marcus) and Henri Bendel.
Patrick C. Barry served as an Executive Vice President from July 1998 to
September 2000 and as our Chief Financial Officer since August 1998. In
September 2000, Mr. Barry assumed the role of Chief Operating Officer and has
served us in that capacity since such time. 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
30
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.
Josephine Esquivel was appointed as a director in June 2001. Ms. Esquivel was a
senior apparel, textiles, footwear and luxury goods equity analyst with Morgan
Stanley Dean Witter from February 1995 until April 2001. From June 1987 to
February 1995, Ms. Esquivel was a Senior Vice President at Lehman Brothers, and
from August 1983 to June 1987, she was a Business Manager for the textile
Company J.P. Stevens & Co.
Alan Kane was appointed a director in August 2002. Since September 1997, Mr.
Kane has been the professor of retailing at the Columbia University Graduate
School of Business. Before joining the Columbia Business School, Mr. Kane spent
28 years in the retailing industry. His experience in the retailing industry
includes the following: President and Chief Executive Officer of Grossman's
Eastern Division, a building materials retailer, from 1993 to 1994, President
and Chief Executive Officer of Pergament Home Centers, a home center retailer,
from 1991 to 1993, Private Consultant in the retailing industry from 1987 to
1991, and President and Chief Executive Officer of Hahne & Company, a department
store chain and division of May Company, from 1979 to 1987. He has also served
as a member of the Board of Directors of Circuit City Stores, Inc. an
electronics retailer, since 2003.
Martin Miller has served as a director since July 1991. Since July 1999, Mr,
Miller has served as the President of The Terbell Group, Inc., a consulting
company. From October 1997 to April 2003, 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 since August 1999 and is the Series A
Preferred Stock designee. Mr. Moszkowski is the Co-head of Soros Private Equity
Partners LLC ("Soros Private Equity") and has been a partner of Soros Private
Equity since August 1998. Prior to joining Soros Private Equity, Mr. Moszkowski
was an Executive Director of Goldman Sachs International and a Vice President of
Goldman, Sachs & Co., an investment banking firm, in its Principal Investment
Area. He joined Goldman, Sachs & Co. in August 1993. Mr. Moszkowski is also a
Director of Integra Life Sciences Holdings, Inc., a medical products Company,
and Jet Blue Airways Corporation, a low-fare airline.
Robert G. Stevens has served as a director since December 1996. From December
1999 to May 2002, Mr. Stevens also served as an Executive Vice President. Since
May 2002, Mr. Stevens has been the President of Growth Insight, Inc. ("Growth
Insight"), a consulting firm that specializes in developing growth strategies.
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.
David Wassong has served as a director since February 2001 and is the Series B
Preferred Stock designee. Mr. Wassong has been a partner of Soros Private Equity
since June 1998. Prior to joining Soros Private Equity, from July 1997 to June
1998, Mr. Wassong was Vice President, and previously Associate, at Lauder Gaspar
Ventures, LLC, a media, entertainment and telecommunications-focused venture
capital fund. From September 1995 to June 1997, Mr. Wassong attended the Wharton
School, The University of Pennsylvania, and received his Masters in Business
Management.
The Board of Directors has established an Audit Committee ("Audit Committee")
comprised of Martin Miller, Alan Kane and Josephine Esquivel. The Audit
Committee is responsible for the appointment of our outside
accountants/auditors, examining the results of audits, reviewing internal
accounting controls and reviewing related party transactions. The Board has
determined that Ms. Esquivel and Mr. Kane are each "audit committee financial
experts" within the meaning of the Securities and Exchange Commission's rules
and that each member of the Audit Committee is "independent," as that term is
used in Item 7(d)(3)(iv) of Schedule 14A promulgated under the Securities
Exchange Act of 1934, as amended.
The Board of Directors has also established an Option Plan/Compensation
Committee ("Compensation Committee") consisting of Neal Moszkowski and Martin
Miller. The Compensation Committee administers our 1997 Stock Option Plan (the
"Plan") and our 2000 Stock Option Plan (the "2000 Plan" and, together with the
Plan, the "Plans"), establishes the compensation levels for executive officers
and key personnel and oversees our bonus plans.
31
Our executive officers are appointed annually by, and serve at the discretion
of, the Board of Directors. Each director holds office as a director until our
next annual meeting of stockholders or until his or her successor has been duly
elected and qualified. There are no family relationships among any of our
executive officers or directors.
We maintain 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 our directors and executive officers and persons who
beneficially own more than ten percent of our 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 our knowledge, based solely on a review of copies of such
reports furnished to us, we believe that during the 2003 fiscal year all
Reporting Persons complied with all applicable Section 16(a) reporting
requirements.
CODE OF ETHICS
We have adopted a code of ethics that applies to our principal executive
officer, principal financial officer, principal accounting officer, controller
and persons performing similar functions. A copy of such code of ethics is
available on our Web site at www.bluefly.com/codeofethics. Any amendment to or
waiver of a provision of the code of ethics that applies to one of such persons
and relates to elements of the code specified in the rules of the Securities and
Exchange Commission will be posted on the Web site.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Our independent, outside non-employee directors are paid a cash stipend of $500
for each board or committee meeting attended in person and are reimbursed for
expenses incurred on our behalf. 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.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth information concerning the compensation paid by
us during the fiscal years ended December 31, 2003, 2002 and 2001 to our Chief
Executive Officer and our three other executive officers who received total
compensation from us in excess of $100,000 in the year 2003 (the "Named
Executive Officers").
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------- ------------
SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS
- --------------------------- ---- --------- -------- ------------ ------------
E. Kenneth Seiff 2003 $ 274,999 $ 75,000 $ 2,926 1,000,000/(1)/
Chief Executive Officer and 2002 $ 274,999 $ 50,000/(4)/ $ 3,782 1,000,000/(1)/
Treasurer 2001 $ 267,308 $ 81,750 $ 1,000 --
Patrick C. Barry 2003 $ 225,000 -- $ 590 --
Chief Financial Officer and Chief 2002 $ 224,999 $ 35,000/(4)/ $ 590 1,000,000/(1)/
Operating Officer 2001 $ 249,039/(2)/ $ 44,000/(5)/ $ 590 --
Melissa Payner-Gregor 2003 $ 112,500 -- $ -- 1,200,000/(1)/
President
Jonathan B. Morris/(3)/ 2003 $ 225,000 -- $ 320 --
Executive Vice President 2002 $ 224,369 $ 35,000/(4)/ $ 330 1,000,000/(2)/
2001 $ 249,039/(2)/ $ 40,000/(5)/ $ 330 --
32
(1) Options granted at an exercise price equal to 100% of the fair market value
on the date of grant.
(2) Includes amounts paid pursuant to retroactive salary adjustments.
(3) Mr. Morris resigned as an executive officer of the Company in November
2003.
(4) Represents amounts earned in 2002, but paid in fiscal 2003.
(5) Represents amounts earned in 2001, but paid in fiscal 2002 and 2003.
EMPLOYMENT AGREEMENTS
We have entered into employment agreements with each of the Named Executive
Officers who is currently employed by us. Each such employment agreement
provides for a base salary, subject to increase by the Compensation Committee,
and an annual bonus to be determined by the Compensation Committee. Ms.
Payner-Gregor's annual bonus for each fiscal year during her agreement, cannot
be less than 3% of our net income for such fiscal year, subject to a cap equal
to 200% of her base salary. Her bonus for 2004 is subject to a minimum floor of
$100,000. In the event that Ms. Payner-Gregor relocates herself and her family
to the New York City area on or before August 31, 2004 she is also entitled to
an additional bonus of $75,000 and an additional stock option grant to purchase
100,000 shares of Common Stock at $1.56 per share. Mr. Seiff's annual base
salary is $275,000, Ms. Payner-Gregor's annual base salary is $450,000, and the
annual base salary of Mr. Barry is $225,000. The employment agreement for each
of Messrs. Seiff and Barry terminates on June 30, 2005, and Ms. Payner-Gregor's
terminates on March 1, 2007, unless both parties fail to provide notice of their
desire not to renew such agreement at least 90 days prior to the end of the term
of such agreement in which case the employment agreement shall automatically
renew for a successive one-year term. Each such employment agreement obligates
the Company to make certain severance payments equal to six months' salary in
connection with a termination by the Company of such Named Executive Officer's
employment, other than for cause, and also provides for the immediate vesting of
any stock options held by such Named Executive Officer under such circumstances.
Each such employment agreement also provides for the immediate vesting of any
stock options held by such Named Executive Officer upon the occurrence of
certain events classified as a "Change In Control". In addition, each such
employment agreement provides that upon the occurrence of certain events
classified as a "Change of Control" in which cash, securities or other
consideration is paid or payable, or otherwise to be distributed directly to the
Company's stockholders, each such Named Executive shall receive a bonus equal to
a percentage of the proceeds received by the Company's stockholders.
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the grant of stock options
under the Plan to the Named Executives Officers during the fiscal year ended
December 31, 2003:
INDIVIDUAL GRANTS
-----------------
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR OPTION
TERM
----
% OF TOTAL OPTIONS
NUMBER OF SECURITIES GRANTED TO EXERCISE OR
UNDERLYING OPTIONS EMPLOYEES IN BASE EXPIRATION
NAME GRANTED (#) FISCAL YEAR (%) PRICE ($) DATE 5% 10%
- ---- ----------- --------------- --------- ---- -- ---
E. Kenneth Seiff 1,000,000 39.65% $ 0.98 1/24/13 $ 1,134,473 $ 1,304,380
Melissa Payner-Gregor 1,200,000 (1) 47.58% $ 1.56 9/19/13 $ 2,167,074 $ 2,491,632
(1) Of this total amount, options to purchase 200,000 shares of Common Stock
are subject to stockholder approval.
The Company does not currently grant stock appreciation rights.
33
OPTION HOLDINGS
The following table sets forth information with respect to the Named Executive
Officers concerning the number and value of unexercised options held at December
31, 2003.
SHARES VALUE
ACQUIRED ON REALIZED SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
EXERCISE # $ OPTIONS AT DECEMBER 31, 2003 (#) OPTIONS AT DECEMBER 31, 2003 ($)/(1)/
------------ ---------- ---------------------------------- -------------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
E. Kenneth Seiff -- -- 2,105,000 1,000,000 $ 8,120,250 $ 4,050,000
Patrick C. Barry -- -- 1,144,912 500,000 $ 4,232,299 $ 2,025,000
Melissa Payner-Gregor -- -- -- 1,200,000 -- $ 4,860,000
Jonathan B. Morris /(2)/ 1,525,000 $3,877,510 20,000 -- $ 81,000 --
/(1)/ Represents the value of unexercised, in-the-money stock options at
December 31, 2003, using the $4.05 closing price of the Common Stock on
that date.
/(2)/ Mr. Morris resigned as an executive officer of the Corporation in
November 2003.
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 February 19, 2004,
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 2,714,324/(3)//(4)/ 16.27%
Josephine Esquivel 7,500/(5)/ *
Alan Kane 3,750/(6)/ *
Martin Miller 27,500/(7)//(8)/ *
Neal Moszkowski /(9)/ 15,000/(10)/ *
Melissa Payner-Gregor 200,000/(11)/ 1.36%
David Wassong /(9)/ 7,500/(12)/ *
Robert G. Stevens 221,189/(13)/ 1.51%
Patrick C. Barry 1,212,412/(14)/ 7.73%
Jonathan B. Morris 100 *
Longview Equity Fund, LP/(15)/ 771,605/(16)/ 5.28%
SFM Domestic Investments LLC 1,576,833/(17)//(21)/ 9.93%
Quantum Industrial Partners LDC 48,188,318/(18)//(21)/ 83.99%
George Soros 49,765,151/(19)//(21)/ 84.67%
All directors and executive officers as a group (9 persons) 4,409,175/(20)/ 24.05%
- ----------
*Less than 1%.
34
(1) Except as otherwise indicated, the address of each of the individuals
listed is c/o Bluefly, Inc., 42 West 39th Street, New York, New York
10018.
(2) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with
respect to securities. Shares of Common Stock issuable upon the exercise
of options or warrants currently exercisable or exercisable within 60
days are deemed outstanding for computing the percentage ownership of
the person holding such options or warrants but are not deemed
outstanding for computing the percentage ownership of any other person.
(3) Includes 3,000 shares of Common Stock held by Nicole Seiff, the wife of
E. Kenneth Seiff, as to which Mr. Seiff disclaims beneficial ownership.
(4) Includes 2,209,167 shares of Common Stock issuable upon exercise of
options granted under the Plan.
(5) Includes 7,500 shares of Common Stock issuable upon exercise of options
granted under the Plan.
(6) Includes 3,750 shares of Common Stock issuable upon exercise of options
granted under the Plan.
(7) Includes 24,500 shares of Common Stock issuable upon exercise of options
granted under the Plan.
(8) Includes 3,000 shares of Common Stock held by Madge Miller, the wife of
Martin Miller, as to which Mr. Miller disclaims beneficial ownership.
(9) Messrs. Moszkowski and Wassong's address is c/o Soros Private Equity
Partners LLC, 888 Seventh Avenue, 28th floor, New York, New York 10106.
Messrs. Moszkowski and Wassong are the designees of the holders of the
Series A and B Preferred Stock, respectively. Messrs. Moszkowski and
Wassong disclaim beneficial ownership of the shares of Common Stock
beneficially owned by George Soros, SFMDI and QIP (as defined in notes
(18) and (19) below) and none of such shares are included in the table
above as being beneficially owned by them.
(10) Includes 15,000 shares of Common Stock issuable upon exercise of options
granted under the Plan.
(11) Includes 200,000 shares of Common Stock issuable upon exercise of
options granted under the Plan.
(12) Includes 7,500 shares of Common Stock issuable upon exercise of options
granted under the Plan.
(13) Includes 188,250 shares of Common Stock issuable upon exercise of
options granted under the Plan.
(14) Includes 1,207,412 shares of Common Stock issuable upon exercise of
options granted under the Plan.
(15) Longview Equity Fund, LP's address is 25 Longview Ct, Hillsborough,
California 94010. Wayne H. Coleson is the Chief Executive Officer of
Redwood Grove Capital Management, LLC, the investment advisor of the
Longview Equity Fund, LP and, accordingly may be deemed to have voting
and dispositive power over securities held for the account of the
Longview Equity Fund, LP.
(16) Includes 154,321 shares of Common Stock issuable upon exercise of
warrants issued to the holder.
(17) Represents: 124,700 shares of Common Stock issuable upon conversion of
14,590 shares of Series A Preferred Stock; 866,942 shares of Common
Stock issuable upon conversion of 281,571 shares of Series B Preferred
Stock; 41,710 shares of Common Stock issuable upon conversion of 31.7
shares of Series C Preferred Stock; 297,669 shares of Common Stock
issuable upon conversion of 226.229 shares of Series D Preferred Stock;
41,710 shares of Common Stock issuable upon conversion of 31.7 shares of
Series E Preferred Stock; 172,995 shares of Common Stock; 31,107 shares
of Common Stock issuable upon exercise of warrants (collectively, the
"SFMDI Shares") held in the name of SFM Domestic Investments LLC
("SFMDI"). SFMDI is a Delaware limited liability company. As sole
managing member of SFMDI, George Soros ("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.
(18) Represents: 3,806,923 shares of Common Stock issuable upon conversion of
445,410 shares Series A Preferred Stock; 26,503,095 shares of Common
Stock issuable upon conversion of 8,607,843 shares of Series B Preferred
Stock; 1,274,078 shares of Common Stock issuable upon conversion of
968.3 shares of Series C Preferred Stock; 9,092,525 shares of Common
Stock issuable upon conversion of 6,910.319 shares of Series D Preferred
Stock; 1,274,078 shares of Common Stock issuable upon conversion of
968.3 shares of Series E Preferred Stock; 5,287,082 shares of Common
Stock; 950,537 shares of Common Stock issuable upon exercise of warrants
(collectively, the "QIP Shares") held in the name of Quantum Industrial
Partners LDC ("QIP").QIP is an exempted limited duration company formed
under the laws of the Cayman Islands. QIH Management Investor, L.P.
("QIHMI"), an investment advisory firm organized as a Delaware limited
partnership, is a minority shareholder of, and is vested with investment
discretion with respect to portfolio assets held for the account of QIP.
The sole general partner of QIHMI is QIH Management LLC, a Delaware
limited liability company ("QIH Management"). Soros Fund Management LLC,
a Delaware limited liability company ("SFM"), is the sole managing
member of QIH Management. George Soros is the Chairman of SFM and, in
such capacity, may be deemed to have voting and dispositive power over
securities held for the account of QIP QIP is a Cayman Islands limited
duration company with its principal address at Kaya Flamboyan 9,
Willemstad, Curacao, Netherlands Antilles. QIH Management Investor L.P.,
a Delaware limited partnership ("QIHMI"), is a minority shareholder of
QIP and is vested with investment discretion with respect to portfolio
assets held for the account of QIP. The sole general partner of QIHMI is
QIH Management, LLC., a Delaware limited liability company ("QIH
Management"). 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"),
35
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
QIP, 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.
(19) See (17) and (18) above
(20) Includes 3,863,079 shares of Common Stock issuable upon exercise of
options granted under the Plan.
(21) See "Risk Factors - Soros Owns a Majority of Our 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
February 19, 2004, for (i) each person who is known by the Company to own
beneficially more than 5% of the Series A Preferred Stock of the Company, (ii)
each of the Company's directors, (iii) the Named Executive Officers, and (iv)
all directors and executive officers as a group.
NUMBER OF SHARES
NAME (1) BENEFICIALLY OWNED PERCENTAGE (2)
---------------- ------------------ -------------
E. Kenneth Seiff - -
Josephine Esquivel - -
Alan Kane - -
Martin Miller - -
Neal Moszkowski (3) - -
David Wassong (3) - -
Robert G. Stevens - -
Patrick C. Barry - -
Jonathan B. Morris - -
Melissa Payner-Gregor - -
Quantum Industrial Partners LDC 445,410(4)(6) 96.8%
George Soros 460,000(5)(6) 100.0%
All directors and executive officers as a group (9 persons) - -
- ----------
*Less than 1%.
(1) Except as otherwise indicated, the address of each of the individuals
listed is c/o Bluefly, Inc., 42 West 39th Street, New York, New York
10018.
(2) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with
respect to securities. Shares of Common Stock issuable upon the exercise
of options or warrants currently exercisable or exercisable within 60
days are deemed outstanding for computing the percentage ownership of
the person holding such options or warrants but are not deemed
outstanding for computing the percentage ownership of any other person.
(3) Messrs. Moszkowski's and Wassong's address is c/o Soros Private Equity
Partners LLC, 888 Seventh Avenue, 28th Floor, New York, New York 10106.
Messrs. Moszkowski and Wassong are the designees of the holders of the
Series A and B Preferred Stock. Messrs. Moszkowski and Wassong disclaim
beneficial ownership of the Series A Preferred Stock beneficially owned
by George Soros and QIP and none of such shares are included in the
table above as being beneficially owned by them.
(4) Represents the shares of Series A Preferred Stock held in the name of
QIP (the "QIP A Shares").QIP is an exempted limited duration company
formed under the laws of the Cayman Islands. QIH Management Investor,
L.P. ("QIHMI"), an investment advisory firm organized as a Delaware
limited partnership, is a minority shareholder of, and is vested with
investment discretion with respect to portfolio assets held for the
account of QIP. The sole
36
general partner of QIHMI is QIH Management LLC, a Delaware limited
liability company ("QIH Management"). Soros Fund Management LLC, a
Delaware limited liability company ("SFM"), is the sole managing member
of QIH Management. George Soros is the Chairman of SFM and, in such
capacity, may be deemed to have voting and dispositive power over
securities held for the account of QIP QIP is a Cayman Islands limited
duration company with its principal address at Kaya Flamboyan 9,
Willemstad, Curacao, Netherlands Antilles. QIHMI is a minority
shareholder of QIP and is vested with investment discretion with respect
to portfolio assets held for the account of QIP. The sole general
partner of QIHMI is QIH Management. Mr. Soros, the sole shareholder of
QIH Management, has entered into an agreement with SFM LLC, pursuant to
which Mr. Soros has agreed to use his best efforts to cause QIH
Management to act at the direction of SFM LLC. Mr. Soros, as Chairman of
SFM LLC, may be deemed to have sole voting power and sole investment
power with respect to the QIP A 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) 14,590 shares of Series A Preferred Stock held in
the name of SFMDI (the "SFMDI A Shares") and (ii) the QIP A Shares
referenced in Note 4 above. As sole managing member of SFMDI, Mr. Soros
also may be deemed the beneficial owner of the SFMDI A Shares. The
principal office of SFMDI is at 888 Seventh Avenue, 33rd Floor, New
York, New York 10106.
(6) See "Risk Factors - Change of Control Covenant and Liquidation
Preference of 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
February 19, 2004, for (i) each person who is known by the Company to own
beneficially more than 5% of the Series B Preferred Stock of the Company, (ii)
each of the Company's directors, (iii) the Named Executive Officers, and (iv)
all directors and executive officers as a group.
NUMBER OF SHARES
NAME (1) BENEFICIALLY OWNED PERCENTAGE (2)
---------------- ------------------ -------------
E. Kenneth Seiff - -
Josephine Esquivel - -
Alan Kane - -
Martin Miller - -
Neal Moszkowski (3) - -
David Wassong (3) - -
Robert G. Stevens - -
Patrick C. Barry - -
Melissa Payner-Gregor - -
Jonathan B. Morris - -
Quantum Industrial Partners LDC 8,607,843(4)(6) 96.8%
George Soros 8,889,414(5)(6) 100.0%
All directors and executive officers as a group (9 persons) - -
- ----------
*Less than 1%.
(1) Except as otherwise indicated, the address of each of the individuals
listed is c/o Bluefly, Inc., 42 West 39th Street, New York, New York
10018.
(2) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with
respect to securities. Shares of Common Stock issuable upon the exercise
of options or warrants currently exercisable or exercisable within 60
days are deemed outstanding for computing the percentage ownership of
the person holding such options or warrants but are not deemed
outstanding for computing the percentage ownership of any other person.
37
(3) Messrs. Moszkowski's and Wassong's address is c/o Soros Private Equity
Partners LLC, 888 Seventh Avenue, 28th 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 shares of Series B Preferred Stock held in the name of
QIP (the "QIP B Shares").QIP is an exempted limited duration company
formed under the laws of the Cayman Islands. QIH Management Investor,
L.P. ("QIHMI"), an investment advisory firm organized as a Delaware
limited partnership, is a minority shareholder of, and is vested with
investment discretion with respect to portfolio assets held for the
account of QIP. The sole general partner of QIHMI is QIH Management LLC,
a Delaware limited liability company ("QIH Management"). Soros Fund
Management LLC, a Delaware limited liability company ("SFM"), is the
sole managing member of QIH Management. George Soros is the Chairman of
SFM and, in such capacity, may be deemed to have voting and dispositive
power over securities held for the account of QIP 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 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 B 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) 281,571 shares of Series B Preferred Stock held in
the name of SFMDI (the "SFMDI B Shares") and (ii) the QIP B 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 - Change of Control Covenant and Liquidation
Preference of Preferred Stock."
SERIES C PREFERRED STOCK
The following table sets forth certain information with respect to the
beneficial ownership of the Series C Preferred Stock of the Corporation as of
February 19, 2004, for (i) each person who is known by the Corporation to own
beneficially more than 5% of the Series C Preferred Stock of the Corporation,
(ii) each of the Corporation's directors, (iii) the Named Executives, and (iv)
all directors and executive officers as a group.
NUMBER OF SHARES
NAME (1) BENEFICIALLY OWNED PERCENTAGE (2)
---------------- ------------------ -------------
E. Kenneth Seiff - -
Josephine Esquivel - -
Alan Kane - -
Martin Miller - -
Neal Moszkowski /(3)/ - -
David Wassong /(3)/ - -
Robert G. Stevens - -
Patrick C. Barry - -
Melissa Payner-Gregor - -
Jonathan B. Morris - -
Quantum Industrial Partners LDC 968.3/(4)//(6)/ 96.8%
George Soros 1,000.0/(5)//(6)/ 100.0%
All directors and executive officers as a group (9 persons) - -
38
- ----------
*Less than 1%.
(1) Except as otherwise indicated, the address of each of the individuals
listed is c/o Bluefly, Inc., 42 West 39th Street, New York, New York 10018.
(2) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect to
securities. Shares of Common Stock issuable upon the exercise of options or
warrants currently exercisable or exercisable within 60 days are deemed
outstanding for computing the percentage ownership of the person holding such
options or warrants but are not deemed outstanding for computing the percentage
ownership of any other person.
(3) Messrs. Moszkowski's and Wassong's address is c/o Soros Private Equity
Partners LLC, 888 Seventh Avenue, 28th 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 C 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 shares of Series C Preferred Stock held in the name of
QIP (the "QIP C Shares").QIP is an exempted limited duration company formed
under the laws of the Cayman Islands. QIH Management Investor, L.P. ("QIHMI"),
an investment advisory firm organized as a Delaware limited partnership, is a
minority shareholder of, and is vested with investment discretion with respect
to portfolio assets held for the account of QIP. The sole general partner of
QIHMI is QIH Management LLC, a Delaware limited liability company ("QIH
Management"). Soros Fund Management LLC, a Delaware limited liability company
("SFM"), is the sole managing member of QIH Management. George Soros is the
Chairman of SFM and, in such capacity, may be deemed to have voting and
dispositive power over securities held for the account of QIP 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
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 C 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) 31.7 shares of Series C Preferred Stock held in the
name of SFMDI (the "SFMDI C Shares") and (ii) the QIP C Shares referenced in
Note 4 above. As managing member of SFMDI, Mr. Soros also may be deemed the
beneficial owner of the SFMDI C Shares. The principal office of SFMDI is at 888
Seventh Avenue, 33rd Floor, New York, New York 10106.
(6) See "Risk Factors - Change of Control Covenant and Liquidation
Preference of Preferred Stock."
SERIES D PREFERRED STOCK
The following table sets forth certain information with respect to the
beneficial ownership of the Series D Preferred Stock of the Corporation as of
February 19, 2004, for (i) each person who is known by the Corporation to own
beneficially more than 5% of the Series D Preferred Stock of the Corporation,
(ii) each of the Corporation's directors, (iii) the Named Executives, and (iv)
all directors and executive officers as a group.
NUMBER OF SHARES
NAME (1) BENEFICIALLY OWNED PERCENTAGE (2)
---------------- ------------------ -------------
E. Kenneth Seiff - -
Josephine Esquivel - -
Alan Kane - -
Martin Miller - -
Neal Moszkowski /(3)/ - -
David Wassong /(3)/ - -
Robert G. Stevens - -
Patrick C. Barry - -
Melissa Payner-Gregor - -
Jonathan B. Morris - -
39
NUMBER OF SHARES
NAME (1) BENEFICIALLY OWNED PERCENTAGE (2)
---------------- ------------------ -------------
Quantum Industrial Partners LDC 6,910,319/(4)//(6)/ 96.8%
George Soros 7,136.548/(5)//(6)/ 100.0%
All directors and executive officers as a group (9 persons) - -
- ----------------
*Less than 1%.
(1) Except as otherwise indicated, the address of each of the individuals
listed is c/o Bluefly, Inc., 42 West 39th Street, New York, New York 10018.
(2) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect to
securities. Shares of Common Stock issuable upon the exercise of options or
warrants currently exercisable or exercisable within 60 days are deemed
outstanding for computing the percentage ownership of the person holding such
options or warrants but are not deemed outstanding for computing the percentage
ownership of any other person.
(3) Messrs. Moszkowski's and Wassong's address is c/o Soros Private Equity
Partners LLC, 888 Seventh Avenue, 28th 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 D 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 shares of Series D Preferred Stock held in the name of
QIP (the "QIP D Shares").QIP is an exempted limited duration company formed
under the laws of the Cayman Islands. QIH Management Investor, L.P. ("QIHMI"),
an investment advisory firm organized as a Delaware limited partnership, is a
minority shareholder of, and is vested with investment discretion with respect
to portfolio assets held for the account of QIP. The sole general partner of
QIHMI is QIH Management LLC, a Delaware limited liability company ("QIH
Management"). Soros Fund Management LLC, a Delaware limited liability company
("SFM"), is the sole managing member of QIH Management. George Soros is the
Chairman of SFM and, in such capacity, may be deemed to have voting and
dispositive power over securities held for the account of QIP 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
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 D 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) 226.229 shares of Series D Preferred Stock held in
the name of SFMDI (the "SFMDI D Shares") and (ii) the QIP D Shares referenced in
Note 4 above. As managing member of SFMDI, Mr. Soros also may be deemed the
beneficial owner of the SFMDI D Shares. The principal office of SFMDI is at 888
Seventh Avenue, 33rd Floor, New York, New York 10106.
(6) See "Risk Factors - Change of Control Covenant and Liquidation
Preference of Preferred Stock."
SERIES E PREFERRED STOCK
The following table sets forth certain information with respect to the
beneficial ownership of the Series D Preferred Stock of the Corporation as of
February 19, 2004, for (i) each person who is known by the Corporation to own
beneficially more than 5% of the Series D Preferred Stock of the Corporation,
(ii) each of the Corporation's directors, (iii) the Named Executives, and (iv)
all directors and executive officers as a group.
NUMBER OF SHARES
NAME (1) BENEFICIALLY OWNED PERCENTAGE (2)
---------------- ------------------ -------------
E. Kenneth Seiff - -
Josephine Esquivel - -
Alan Kane - -
Martin Miller - -
40
NUMBER OF SHARES
NAME (1) BENEFICIALLY OWNED PERCENTAGE (2)
---------------- ------------------ -------------
Neal Moszkowski /(3)/ - -
David Wassong /(3)/ - -
Robert G. Stevens - -
Patrick C. Barry - -
Melissa Payner-Gregor - -
Jonathan B. Morris - -
Quantum Industrial Partners LDC 968.3/(4)//(6)/ 96.8%
George Soros 1,000/(5)//(6)/ 100.0%
All directors and executive officers as a group (9 persons) - -
- ----------------
*Less than 1%.
(1) Except as otherwise indicated, the address of each of the individuals
listed is c/o Bluefly, Inc., 42 West 39th Street, New York, New York 10018.
(2) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect to
securities. Shares of Common Stock issuable upon the exercise of options or
warrants currently exercisable or exercisable within 60 days are deemed
outstanding for computing the percentage ownership of the person holding such
options or warrants but are not deemed outstanding for computing the percentage
ownership of any other person.
(3) Messrs. Moszkowski's and Wassong's address is c/o Soros Private Equity
Partners LLC, 888 Seventh Avenue, 28th 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 D 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 shares of Series E Preferred Stock held in the name of
QIP (the "QIP E Shares").QIP is an exempted limited duration company formed
under the laws of the Cayman Islands. QIH Management Investor, L.P. ("QIHMI"),
an investment advisory firm organized as a Delaware limited partnership, is a
minority shareholder of, and is vested with investment discretion with respect
to portfolio assets held for the account of QIP. The sole general partner of
QIHMI is QIH Management LLC, a Delaware limited liability company ("QIH
Management"). Soros Fund Management LLC, a Delaware limited liability company
("SFM"), is the sole managing member of QIH Management. George Soros is the
Chairman of SFM and, in such capacity, may be deemed to have voting and
dispositive power over securities held for the account of QIP 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
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 E 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) 31.7 shares of Series E Preferred Stock held in the
name of SFMDI (the "SFMDI E Shares") and (ii) the QIP E Shares referenced in
Note 4 above. As managing member of SFMDI, Mr. Soros also may be deemed the
beneficial owner of the SFMDI ED Shares. The principal office of SFMDI is at 888
Seventh Avenue, 33rd Floor, New York, New York 10106.
(6) See "Risk Factors - Change of Control Covenant and Liquidation
Preference of Preferred Stock."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH SOROS RELATING TO THE LOAN FACILITY
In connection with the Loan Facility, we entered into a Reimbursement Agreement
with Soros pursuant to which Soros issued the Soros Guarantee (as of December
31, 2002, in the amount of $1.5 million) in favor of Rosenthal to guarantee a
portion of the Company's obligations under the Loan Facility, we agreed to
reimburse Soros for any amounts it pays to Rosenthal pursuant
41
to such guarantee and we granted Soros a subordinated lien on substantially all
of our assets, including our cash balances, in order to secure our reimbursement
obligations.
In consideration for the issuance of the Soros Guarantee in March 2001, pursuant
to the Reimbursement Agreement we issued to Soros a warrant to purchase 100,000
shares of our Common Stock at an exercise price equal to $0.88 per share,
exercisable at any time prior to September 15, 2011. In consideration for Soros'
agreement to maintain the $1.5 million standby letter of credit until initially
August 15, 2003 and subsequently until November 15, 2003, we issued to Soros, in
March 2002, a warrant to purchase 60,000 shares of our Common Stock at an
exercise price equal to $1.66 per share (the 20 day trailing average of the
closing sale price of our Common Stock on the date of issuance), exercisable at
any time prior to March 30, 2007.
By amendment to the Reimbursement Agreement, on March 17, 2003, the amount of
the Soros Guarantee was increased to $2 million and Soros agreed to maintain the
Soros Guarantee until November 15, 2004. In consideration for Soros' agreement
to maintain the Soros Guarantee until November 15, 2004, we issued to Soros a
warrant to purchase 25,000 shares of our Common Stock at an exercise price equal
to $0.78 per share (the 10 day trailing average of the closing sale price of our
Common Stock on the date of issuance), exercisable at any time prior to March
17, 2013.
Subject to certain conditions, if we default on any of our obligations under the
Loan Facility, Rosenthal has the right to draw upon the Soros Guarantee to
satisfy any such obligations. If and when Rosenthal draws on the Soros
Guarantee, pursuant to the terms of the Reimbursement Agreement, we would have
the obligation to, among other things, reimburse Soros for any amounts drawn
under the Soros Guarantee plus interest accrued thereon. In addition, to the
extent that Rosenthal draws on the Soros Guarantee during the continuance of a
default under the Loan Facility or at any time that the total amount outstanding
under the Loan Facility exceeds 90% of the Soros Guarantee, we will be required
to issue to Soros a Contingent Warrant to purchase a number of shares of Common
Stock equal to the quotient of (a) any amounts drawn under the Soros Guarantee
and (b) 75% of the average of the closing price of our Common Stock on the ten
days preceding the date of issuance of such warrant. Each Contingent Warrant
will be exercisable for ten years from the date of issuance at an exercise price
equal to 75% of the average closing price of our Common Stock on the ten days
preceding the ten days after the date of issuance.
Under the Loan Facility, Soros has the right to purchase all of our obligations
from Rosenthal at any time during its term. With respect to such Buyout Option,
Soros has the right to request that Rosenthal make a draw under the Soros
Guarantee as consideration to Soros for the purchase of such obligations.
FINANCING TRANSACTIONS WITH SOROS
January 2003 Convertible Promissory Note Financing. In January 2003, we issued
to Soros $1 million of demand convertible promissory notes that bore interest at
a rate of 8% per annum and had a maturity date of July 28, 2003, and warrants to
purchase 25,000 shares of our Common Stock, exercisable at any time on or prior
to January 28, 2007 at $1.12 per share (the "January 2003 Financing"). The
promissory notes together with any accrued interest were convertible into equity
securities that we might issue in any subsequent round of financing, at the
holder's option, at a price that was equal to the lowest price per share
accepted by any investor (including Soros, or any of its affiliates) in such
subsequent round of financing. Interest on the notes was payable only upon
repayment of the principal amount, whether at maturity or upon a mandatory or
optional prepayment. The outstanding principal amount of the notes and all
accrued and unpaid interest was payable in full no later than July 28, 2003. The
notes were subject to (i) mandatory prepayment upon the occurrence of certain
bankruptcy events, whether voluntary or involuntary, (ii) prepayment at the
option of the holder upon the occurrence of certain events of default, the sale
of all or substantially all of our assets, the merger or consolidation of the
Company into another entity or any change of control of the Company and (iii)
prepayment at our option, at any time or from time to time, upon five days
notice to the holder. Our obligations under the notes were subordinated to our
obligations under the Rosenthal Financing Agreement although such subordination
did not effect Soros' conversion rights with respect to the notes. As part of
the March 2003 Financing, these notes were converted into Series D Preferred
Stock.
March 2003 Series D Preferred Stock Financing. In March 2003, we entered into an
agreement with Soros pursuant to which Soros: (i) provided $2 million of new
capital by purchasing 2,000 shares of Series D Preferred Stock, (ii) converted
the promissory notes issued to it in the January 2003 Financing and all of its
Series 2002 Preferred Stock into 3,109.425 shares of Series D Preferred Stock
and (iii) purchased 2,027.123 additional shares of Series D Preferred Stock for
approximately $2 million, with such $2 million in additional proceeds being
retained by Soros as payment in full of the Company's obligations under the
demand promissory notes issued to Soros in September 2002 (the "March 2003
Financing").
42
Each share of Series D Preferred Stock has a face value of $1,000 and a
liquidation preference equal to the greater of (i) $1,000 plus accrued and
unpaid dividends or (ii) the amount the holder of such shares would receive if
it were to convert such shares into Common Stock immediately prior to the
liquidation of the Company. The Series D Preferred Stock ranks pari passu with
our other classes of Preferred Stock, and senior to our 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 Series D
Preferred Stock is convertible, at any time and from time to time at the option
of the holder into Common Stock at the rate of $0.76 per share of face value per
share of Common Stock. The conversion price of the Series D Preferred Stock is
subject to an anti-dilution adjustment, pursuant to which, subject to certain
exceptions, to the extent that the Company issues Common Stock or securities
convertible into Common Stock at a price per share less than the Series D
Preferred Stock conversion price in the future (including Soros, or any of its
affiliates), the conversion price of the Series D Preferred Stock would be
decreased so that it would equal the conversion price of the new security or the
price at which shares of Common Stock are sold, as the case may be.
Beginning on November 13, 2004, we are entitled to redeem all, but not less than
all, of the outstanding Series D Preferred Stock for cash at the price of,
depending upon the date of such redemption, four times, four and one-half times
or five times the market price of the Common Stock on the date of the initial
issuance of the Series D Preferred Stock. Dividends accrue on the Series D
Preferred Stock at an annual rate equal to 12% of the face value and are payable
only upon conversion or redemption of the Series D Preferred Stock or upon our
liquidation. The Series D Preferred Stock votes on an as converted basis, and we
are prohibited from taking certain actions without the approval of a majority of
the shares of Series D Preferred Stock. In addition, Soros received registration
rights with respect to the Common Stock issuable upon conversion of the Series D
Preferred Stock and pre-emptive rights with respect to future issuances of our
capital stock.
As part of the March 2003 Financing, Soros agreed to provide us with up to $1
million in additional financing (the "2003 Standby Commitment Amount") on a
standby basis at any time prior to January 1, 2004, provided that our cash
balances were less than $1 million at that time (the "2003 Standby Commitment").
Such financing was to be made in one or more tranches as determined by the
members of our Board of Directors who are not Soros designees, and any and all
draws against the 2003 Standby Commitment Amount were to be effected through the
purchase of newly-designated shares of Series E Preferred Stock on terms and
conditions substantially identical to the Series D Preferred Stock. Subject to
certain limitations, the 2003 Standby Commitment Amount was to be reduced on a
dollar-for-dollar basis by the gross cash proceeds received by the Company or
any of its subsidiaries from the issuance of any equity or convertible
securities after March 12, 2003.
As a result of the March 2003 Financing, the conversion price of the Series B
Preferred Stock and the Series C Preferred Stock, all of which is held by Soros,
automatically decreased from $0.93 to $0.76. In accordance with EITF 00-27, the
reduction in the conversion price of the Series C Preferred Stock resulted in us
recording a beneficial conversion feature in the approximate amount of $225,000.
This non-cash charge, which is analogous to a dividend, resulted in an
adjustment to our computation of Loss Per Share in the first quarter of 2003.
May 2003 Series E Preferred Stock Financing.
In accordance with the terms of the 2003 Standby Commitment, in May 2003 Soros
invested an additional $1.0 million in the Company through the purchase of 1,000
shares of Series E Convertible Preferred Stock and thereby fulfilled the 2003
Standby commitment in full. The terms of the Series E Preferred Stock are
substantially similar to the terms of the Series D Preferred Stock.
July 2003 Convertible Promissory Note Financing. In July 2003 Soros invested
$2.0 million in the Company. Under the terms of the transaction, the Company
issued $2 million of convertible promissory notes that bear interest at a rate
of 12% per annum and had a maturity date of January 12, 2004 (the "July Notes").
In January 2004, Soros agreed to extend the maturity date on the July Notes to
March 1, 2005 and in February 2004, agreed to further extend the maturity date
to May 1, 2005. Interest on the notes is payable only upon repayment of the
principal amount, whether at maturity or upon a mandatory or optional
prepayment. The July Notes together with any interest that has accrued are
convertible into equity securities of the Company sold in any subsequent round
of financing, at the holder's option, at a price that is equal to the lowest
price per share accepted by any investor (including Soros, or any of its
affiliates) in such subsequent round of financing. The conversion of the July
Notes is subject to certain limitations until such time as the conversion
provisions are approved by the Company's stockholders.
October 2003 Convertible Promissory Note Financing. In October 2003, Soros
invested an addition $2.0 million in the
43
Company. Under the terms of the transaction, the Company issued $2 million of
convertible promissory notes with substantially the same terms as the July
Notes, except that the maturity date of these notes was April 14, 2004 (the
"October Notes"). In January 2004, Soros agreed to extend the maturity date on
the October Notes to March 1, 2005 and in February 2004, agreed to further
extend the maturity date to May 1, 2005.
OTHER RELATED PARTY TRANSACTIONS.
In December 2003, Jonathan Morris, a former Executive Vice President of the
company, was retained as a consultant at a rate of $4,500 per week. Under the
terms of Mr. Morris' consulting agreement, either party can terminate the
consulting contract at any time upon written notice to the other. In February
2004, Mr. Morris notified us of his intention to terminate his consulting
agreement with the company effective March 12, 2004.
We believe that each of the transactions described above was on terms fair to us
and our stockholders, and at least as favorable to us as those available from
unaffiliated third parties.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
The aggregate fees billed for professional services rendered by
Pricewaterhouse Coopers, LLP ("PwC"), our independent accountants, for the audit
of our consolidated financial statements, including the reviews of our condensed
consolidated financial statements included in its quarterly reports on Form
10-Q, for fiscal 2003 and 2002 were approximately $106,000 and $67,000,
respectively.
AUDIT RELATED FEES
Other than the fees described under the caption "Audit Fees" above, PwC
did not bill any fees for services rendered to us during fiscal 2003 and 2002
for assurance and related services in connection with the audit or review of our
consolidated financial statements.
TAX FEES
PwC did not bill us for any professional services rendered to us during
fiscal 2003 and 2002 for tax compliance, tax advice or tax planning.
OTHER FEES
PwC did not bill us for any other professional services rendered during
fiscal 2003 and 2002 other than those described under the caption "Audit Fees."
AUDIT COMMITTEE PRE-APPROVAL POLICIES
Our policy is that, before PwC is engaged by us to render audit or
non-audit services, the engagement is approved by the Audit Committee.
ITEM 15. EXHIBITS AND REPORTS ON FORM 8-K
The following is a list of exhibits filed as part of this Annual Report on Form
10-K:
EXHIBIT
NO. DESCRIPTION
- ------------ -----------
3.1 (f) Certificate of Incorporation of the Company.
3.2 (f) By-Laws of the Company.
3.3 (h) Certificate of Powers, Designations, Preferences and Rights of Series 2002 Preferred Stock of the Registrant
3.4 (i) Certificate of Powers, Designations, Preferences and Rights of Series C Preferred Stock of the Registrant
44
3.5 (j) Certificate of Powers, Designations, Preferences and Rights of Series D Preferred Stock of the Registrant
3.6 (k) Certificate of Powers, Designations, Preferences and Rights of Series E Preferred Stock of the Registrant
10.1 (c) Amended and Restated 1997 Stock Option Plan.
10.2 (a) Lease Agreement by and between the Company and John R. Perlman, et al., dated as of May 5, 1997.
10.3 (b) Investment Agreement among the Company, Quantum Industrial Partners LDC, SFM Domestic Investments LLC and Pilot
Capital Corp., dated July 27, 1999.
10.4 (b) Lease by and between the Company and Adams & Co. Real Estate, Inc., dated March 22, 1999.
10.5 (c) 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.
10.6 (d) Lease by and between the Company and Adams & Co. Real Estate, Inc., dated May 4, 2000.
10.7 (d) Note and Warrant Purchase Agreement, dated as of May 16, 2000, by and among the Company, Quantum Industrial
Partners LDC and SFM Domestic Investments LLC.
10.8 (d) 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.
10.9 (e) Bluefly, Inc. 2000 Stock Option Plan.
+10.10 (e) Service Agreement by and between the Company and Distribution Associates, Inc., dated July 27, 2000.
10.11 (e) 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.
10.12 (e) 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.
10.13 (e) Investment Agreement, dated November 13, 2000, by and among the Company, Bluefly Merger Sub, Inc., Quantum
Industrial Partners LDC and SFM Domestic Investments LLC.
10.14 (f) Financing Agreement, dated March 30, 2001, between the Company and Rosenthal & Rosenthal, Inc.
10.15 (f) Reimbursement Agreement, dated March 30, 2001, between the Company, Quantum Industrial Partners LDC and SFM
Domestic Investment LLC.
10.16 (f) Warrant, dated March 30, 2001, issued to Rosenthal & Rosenthal, Inc.
10.17 (f) Warrant, dated March 30, 2001, issued to Quantum Industrial Partners LDC.
10.18 (f) Warrant, dated March 30, 2001, issued to SFM Domestic Investments LLC.
10.19 (g) Demand Promissory Note, dated as of December 15, 2001, issued to Quantum Industrial Partners LDC.
10.20 (g) Demand Promissory Note, dated as of December 15, 2001, issued to SFM Domestic Investments LLC.
10.21 (g) EBusiness Hosting Agreement, dated January 9, 2002 between the Company and International Business Machines
Corporation.
10.22 (g) Standby Commitment Agreement, dated March 27, 2002, by and among the Company, Quantum Industrial Partners LDC and
SFM Domestic Investments LLC.
+10.23 (g) Software License and Services Agreement, dated March 12, 2002, by and among the Company and Blue Martini Software,
Inc.
10.24 (g) Amendment No. 1 to Financing Agreement, dated April 30, 2001, between the Company and Rosenthal & Rosenthal, Inc.
10.25 (g) Amendment No. 2 to Financing Agreement, dated February 14, 2002 between the Company and Rosenthal & Rosenthal,
Inc.
10.26 (g) Amendment No. 3 to Financing Agreement, dated March 22, 2002, between the Company and Rosenthal &
45
Rosenthal, Inc.
10.27 (g) Amendment No. 1 to Reimbursement Agreement, dated March 22, 2002, between the Company and Quantum Industrial
Partners LDC.
10.28 (g) Amendment to warrant dated March 22, 2002, issued to Rosenthal & Rosenthal, Inc.
10.29 (g) Warrant No. 1 dated March 27, 2002, issued to Quantum Industrial Partners LDC.
10.30 (g) Warrant No. 2 dated March 27, 2002, issued to SFM Domestic Investments LLC.
10.31 (g) Warrant No. 3 dated March 30, 2002, issued to Quantum Industrial Partners LDC.
10.32 (g) Warrant No. 4 dated March 30, 2002, issued to SFM Domestic Investments LLC.
10.33 (h) Common Stock and Warrant Purchase Agreement, dated May 24, 2002, by and between the Registrant and the investors
listed on Schedule 1 thereto.
10.34 (h) Series 2002 Preferred Stock Purchase Agreement, dated August 12, 2002, by and between the Registrant and the
investors listed on Schedule 1 thereto.
10.35 (i) Series C Preferred Stock and Note Purchase Agreement, dated September 27, 2002, by and between the Registrant and
the investors listed on Schedule 1 thereto.
10.36 (j) Employment Agreement, dated as of July 31, 2002, by and between the Company and Patrick Barry.
10.37 (j) Employment Agreement, dated as of July 31, 2002, by and between the Company and Jonathan Morris.
10.38 (j) Amendment No. 4 to Financing Agreement, dated December 19, 2002, between the Company and Rosenthal & Rosenthal,
Inc.
10.39 (j) Employment Agreement, dated as of December 31, 2002, by and between the Company and E. Kenneth Seiff.
10.40 (j) Convertible Demand Promissory Note, dated as of January 28, 2003, issued to Quantum Industrial Partners LDC.
10.41 (j) Convertible Demand Promissory Note, dated as of January 28, 2003, issued to SFM Domestic Investments LLC.
10.42 (j) Note and Warrant Purchase Agreement, dated January 28, 2003, by and between the Registrant and the investors
listed on Schedule 1 thereto.
10.43 (j) Warrant No. 1 dated January 28, 2003, issued to Quantum Industrial Partners LDC.
10.44 (j) Warrant No. 2 dated January 28, 2003, issued to SFM Domestic Investments LLC.
10.45 (j) Series D Preferred Stock Purchase Agreement, dated March 12, 2003, by and between the Registrant and the investors
listed on Schedule 1 thereto.
10.46 (j) Amendment No. 5 to Financing Agreement, dated March 17, 2003, between the Company and Rosenthal & Rosenthal, Inc.
10.47 (j) Amendment No. 2 to Reimbursement Agreement, dated March 10, 2003, between the Company and Quantum Industrial
Partners LDC.
10.48 (j) Warrant No. 4 dated March 17, 2003, issued to Quantum Industrial Partners LDC.
10.49 (j) Warrant No. 5 dated March 17, 2003, issued to SFM Domestic Investments LLC.
10.50 (k) Series E Preferred Stock Purchase Agreement, dated May 21, 2003, by and between the Registrant and the investors
listed on Schedule 1 thereto.
46
10.51 (l) Note Purchase Agreement, dated as of July 16, 2003, by and between the Registrant and the investors listed on
Schedule 1 thereto.
10.52 (l) Demand Promissory Note, dated as of July 16, 2003, issued to Quantum Industrial Partners LDC.
10.53 (l) Demand Promissory Note, dated as of July 16, 2003, issued to SFM Domestic Investments LLC.
10.54 (m) Note Purchase Agreement, dated as of October 17, 2003, by and between the Registrant and the investors listed on
Schedule 1 thereto.
10.55 (m) Demand Promissory Note, dated as of October 17, 2003, issued to Quantum Industrial Partners LDC.
10.56 (m) Demand Promissory Note, dated as of October 17, 2003, issued to SFM Domestic Investments LLC.
10.57 (n) Employment Agreement dated as of September 22, 2003 by and between Bluefly, Inc. and Melissa Payner-Gregor.
10.58 (n) Amendment to Financing Agreement dated October 2, 2003.
10.59 (o) Agreement of Termination of Employment dated November 21, 2003 by and between Jonathan Morris and Bluefly.
10.60 (p) Common Stock and Warrant Purchase Agreement dated January 9, 2004 by and among the Company and the Investors
listed on Schedule 1 thereto.
10.61 (q) Amendment to Promissory Notes, dated as of January 12, 2004, by and among the Company, Quantum Industrial Partners
LDC and SFM Domestic Investments LLC.
23.1 Consent of PricewaterhouseCoopers LLP.
21.1 Subsidiaries of the Registrant.
31.1 Certification Pursuant to Rule 13a-14(a)/15d-14(a)
31.2 Certification Pursuant to Rule 13a-14(a)/15d-14(a)
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
(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 June 30, 1999.
(c) Incorporated by reference to the Company's Annual report filed on Form
10-KSB for the year ended December 31, 1999.
(d) Incorporated by reference to the Company's Quarterly report filed on
Form 10-Q for the quarterly period ended June 30, 2000.
(e) Incorporated by reference to the Company's Quarterly report filed on
Form 10-Q for the quarterly period ended September 30, 2000.
(f) Incorporated by reference to the Company's Annual report filed on Form
10-K for the year ended December 31, 2000.
(g) Incorporated by reference to the Company's Annual report filed on Form
10-K for the year ended December 31, 2001.
(h) Incorporated by reference to the Company's Quarterly report filed on
Form 10-Q for the quarterly period ended June 30, 2002.
(i) Incorporated by reference to the Company's report on Form 8-K, dated
October 1, 2002.
(j) Incorporated by reference to the Company's Annual Report filed on Form
10-K for the year ended December 31, 2002.
(k) Incorporated by reference to the Company's Quarterly report filed on
Form 10-Q for the quarterly period ended June 30, 2003.
(l) Incorporated by reference to the Company's report on Form 8-K, dated
July 17, 2003.
(m) Incorporated by reference to the Company's report on Form 8-K, dated
October 20, 2003.
(n) Incorporated by reference to the Company's Quarterly report filed on
Form 10-Q for the quarterly period ended September 30, 2003.
(o) Incorporated by reference to the Company's report on Form 8-K, dated
November 21, 2003.
(p) Incorporated by reference to the Company's report on Form 8-K, dated
January 13, 2004.
47
(q) Incorporated by reference to the Company's report on Form 8-K, dated
January 16, 2004.
+ Confidential treatment has been requested as to certain portions of
this Exhibit. Such portions have been redacted.
(d) Reports on Form 8-K.
Form 8-K filed on November 21, 2003 regarding the resignation of
Jonathan B. Morris of his position as Executive Vice President of the
Company.
Form 8-K filed on October 20, 2003 regarding the issuance of the
October Notes.
48
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 2, 2004
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ E. Kenneth Seiff
- ----------------------------
E. Kenneth Seiff Chairman of the Board of Directors, Chief March 2, 2004
Executive Officer
and Treasurer (Principal Executive Officer)
/s/ Melissa Payner-Gregor President and Director March 2, 2004
- ----------------------------
Melissa Payner-Gregor
/s/ Patrick C. Barry
- ----------------------------
Patrick C. Barry Chief Financial Officer and Chief Operating March 2, 2004
Officer (Principal Accounting Officer)
/s/ Josephine R. Esquivel
- ----------------------------
Josephine R. Esquivel Director March 2, 2004
/s/ Alan Kane
- ----------------------------
Alan Kane Director March 2, 2004
/s/ Martin Miller
- ----------------------------
Martin Miller Director March 2, 2004
/s/ Neal Moszkowski
- ----------------------------
Neal Moszkowski Director March 2, 2004
/s/ Robert G. Stevens
- ----------------------------
Robert G. Stevens Director March 2, 2004
/s/ David Wassong
- ----------------------------
David Wassong Director March 2, 2004
49