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UNITED STATES
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, 2005
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 001-14498
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BLUEFLY, INC.
(Name of registrant as specified in its charter)
Delaware 13-3612110
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
42 West 39th Street, New York, NY 10018
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (212) 944-8000
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Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange on
Title of Each Class Which Registered
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Common Stock, par value $.01 per share The Nasdaq Stock Market LLC
Boston Stock Exchange
Securities registered under Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
Indicate by check mark if the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes [ ] No [X]
As of February 24, 2006, there were 21,202,009 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, 2005, based
upon the last sale price of such equity reported on the Nasdaq Capital Market,
was approximately $16,424,000.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Bluefly, Inc. is a leading online retailer of designer brands, fashion trends
and superior value. During 2005, we offered over 37,000 different styles for
sale in categories such as men's, women's and accessories as well as house and
home accessories from over 350 brands at discounts up to 75% off retail value.
We launched the Bluefly.com Web site (the "Web site") in September 1998. Since
its inception, www.bluefly.com has served over 785,000 customers and shipped to
over 17 countries.
Our common stock is listed on the Nasdaq Capital 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
In February 2006, we extended the maturity dates on the Convertible Promissory
Notes issued in July and October 2003 (the "Notes") to affiliates of Soros
Private Equity Partners, LLC (collectively, the "Soros Funds") that collectively
own a majority of our capital stock. The maturity dates of the Notes were each
extended for one year, from May 1, 2006 to May 1, 2007.
BUSINESS STRATEGY
Our goal is to offer our customers the best designer brands and latest fashion
trends at superior values. We offer the same types of on-trend and in-season
designer merchandise as are sold in luxury department stores at discounts
normally found only at outlet stores and off-price stores. We are able to
acquire our products at significantly lower prices than a luxury department
store (and pass these discounts on to our customers) because we purchase our
inventory slightly later in the season than a typical full price retailer. For
example, we purchase much of our Spring line in January for March delivery. This
allows us to have our best assortment of on trend merchandise at a discount when
the customer is ready to shop for a new season. Similarly, we are able to offer
an upscale shopping experience not available at off-price stores or outlet malls
because of our merchandise selection and the presentation and product search
capabilities offered by our Web site. The frequent addition of new on-trend
products to our site is also key to our marketing strategy as it gives our
shoppers reason to visit the site and keeps our customer file loyal and active.
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. Because we work with our suppliers both at the beginning
and throughout the season we are able to help them manage inventory and cash
flow. We also create an environment that is respectful of the brands we sell.
Our buyers all have backgrounds in a full price branded retail environment. Our
Web site creates a high-end retail environment that offers only the best
designer brands and the most current trends. In doing so, we support our
vendors' brands, rather than diluting them as traditional off-price channels do.
We do not believe that we can accomplish these goals without using the Internet
as a platform. The direct marketing of products that are available in limited
quantities and sizes, and that are not replenishable, requires a cost-effective
medium that can display a large number of products. 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.
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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 using a real-time inventory database, we can create a
personalized shopping environment and allow our customers to search for the
products that specifically interest them and 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
merchandise offering 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. Our customer
research suggests that this strategy has been acceptable. For example,
respondents to a recent third party study that we commissioned rated us at the
level of, or higher than, luxury department stores for assortment, quality and
service and rated us much higher than discounters for value.
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 ComScore Networks, online sales grew in 2005 to
$143.2 billion over the $117.2 billion spent in 2004. During the holiday
shopping season alone, consumers spent $28.2 billion, a 22% increase over the
$23.1 billion spent in the previous year, according to ComScore. 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.
Online sales of apparel and accessories was one of the fastest growing
categories in 2005. According to ComScore, apparel and accessories as a product
category grew by 36% above 2004 sales of $12.2 billion, which makes it and
computer software the two largest categories of merchandise sold online.
According to Forrester Research ("Forrester"), the percentage of US households
shopping online is expected to grow from 39% in 2005 to 48% in 2010. In
addition, Forrester estimates that 11% of all apparel sales will be made online
by 2010. 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.
MARKETING
Our marketing efforts are focused both on acquiring new customers and retaining
existing customers. Active Bluefly customers visit the site frequently and
purchase from one season to the next at high levels with great predictability. A
significant portion of our sales to existing customers are driven by our
customer emails, which highlight new promotions and products and provide special
previews to customers who have asked to be included in our email list. In
addition, we believe that our sales to existing customers are driven by all
aspects of our customer experience, including our Web site design, packaging,
delivery and customer service.
During the past several years, we have acquired new customers primarily through
online advertising, word-of-mouth, sweepstakes and our affiliate program.
Although we had not allocated significant resources to branding or to more
traditional advertising channels such as print during this time, our customer
file continued to grow. In September 2005, we began a national advertising
campaign that featured both print and television. Consumer response was positive
as evidenced in our fourth quarter results. The campaign will continue for the
first half of 2006.
MERCHANDISING
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
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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. 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.
During 2004, we re-focused our merchandising strategy to offer more in-season
merchandise and to cover the latest trends, while continuing to offer a premium
selection of brands. During 2005, we further refined this strategy. As a result
of this merchandise strategy, we were able to increase our gross margins to
their highest levels ever - 39.1% in 2005, from 37.5% and 29.9% in 2004 and
2003, respectively.
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 2005,
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. We
utilize customer representatives from a third party call center that has a team
dedicated to our business. We also maintain a team of premiere representatives
in our New York office, who provide special services and assist in the training
and management of the other representatives. To ensure 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. We were recently rated by
the e-tailing group, inc. as one of the top 10 merchants that excelled at online
customer service.
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. The computer and
communications equipment on which our Web site is hosted are currently located
at a third party co-location facility in New York.
COMPETITION
Electronic commerce generally, and, in particular, the online retail apparel and
fashion accessories market, is a relatively new, dynamic, high-growth market.
Our competition for online customers comes from a variety of sources, including
existing land-based retailers that are using the Internet to expand their
channels of distribution, established Internet companies and less established
companies. In addition, our competition for customers comes from traditional
direct marketers designer brands that may attempt to sell their products
directly to consumers through the Internet and land-based off-price retail
stores, 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.
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We believe that the principal competitive factors in our market include: brand
recognition, merchandise selection, price, convenience, customer service, order
delivery performance and site features. 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 17, 2006, we had 83 full-time employees and 2 part-time
employees, as compared to 73 full-time and 4 part-time employees as of February
17, 2005. None of our employees are represented by a labor union, and we
consider our relations with our employees to be good.
ITEM 1A. RISK FACTORS
We Have A History Of Losses And Expect That Losses Will Continue In The Future.
As of December 31, 2005, we had an accumulated deficit of $99,947,000. We
incurred net losses of $3,820,000, $3,791,000 and $6,369,000 for the years ended
December 31, 2005, 2004 and 2003, 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 may continue to incur substantial operating losses for
the next year. 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.
5
Certain Events Could Result In Significant Dilution Of Your Ownership Of Our
Common Stock. Stockholders could be subject to significant dilution to the
extent that we raise additional equity financing, as a result of both the
issuance of additional equity securities, the potential conversion of the Notes,
as described below, and the anti-dilution provisions of our Series B, C, D, E
and F 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 $2.32 (in the case of the Series F preferred stock) or
$0.76 per share (in the case of the Series B, C, D and E preferred stock).
Moreover, as of February 17, 2006, there were outstanding options to purchase
8,118,684 shares of our Common Stock issued under our Stock Option Plans,
warrants to purchase 606,644 shares of our Common Stock issued to the Soros
Funds, and additional warrants and options to purchase 1,376,749 shares of our
Common Stock. In addition, as of such date, our outstanding Preferred Stock was
convertible into an aggregate of 43,367,707 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 28% of
the outstanding Common Stock immediately after such conversion, excluding the
effect of accrued dividends on Preferred Stock. Accrued dividends aggregated
$18.6 million at December 31, 2005.
The Soros Funds also own the Notes, which bear interest at the rate of 12% per
annum and are convertible, at Soros Funds' 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 the Soros Funds or any of
their affiliates) in such subsequent round of financing.
We Need to Authorize Additional Shares of Common Stock. We have 92,000,000
shares of Common Stock authorized. As of December 31, 2005, we have 18,502,794
shares available for future issuance, after giving effect to the shares reserved
for shares issuable upon exercise of convertible securities, but without giving
effect to shares issuable in satisfaction of outstanding dividends on the
Preferred Stock, which the company has the right to pay in cash or in shares of
Common Stock. We intend to submit for approval by the holders of the Common
Stock an increase in the number of authorized shares of Common Stock at our next
annual meeting, which is scheduled for May 2006. The inability to obtain such
approval could constrain our future growth.
Anti-Dilution Provisions Relating To Our Preferred Stock Could Result In Further
Dilution To Your Ownership Of Our Common 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 conversion price of that preferred stock
would be decreased to the price at which such Common Stock or other new
securities are sold. In addition, our Series F Preferred Stock contains
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 $2.32 per share, but for $1.50
or more per share, the conversion price of the Series F Preferred Stock would be
decreased on a weighted average basis, taking into account the number of new
shares issued and the price at which such shares are issued. 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 $1.50 per share, the conversion price of the
Series F Preferred Stock would be decreased to the price at which such Common
Stock or other new securities are sold. The anti-dilution provisions of the
Series F Preferred Stock are subject to the approval of our stockholders. We
expect that approval to be obtained at our next shareholder meeting, as the
Soros Funds have agreed to vote all of their shares of our stock (which
represent a majority of the votes) in favor of such approval.
The Soros Funds Own A Majority Of Our Stock And Therefore Effectively Control
Our Management And Policies. As of February 17, 2006, through their holdings of
our common stock, as well as our preferred stock, and warrants convertible into
our common stock, the Soros Funds beneficially owned, in the aggregate,
approximately 76% 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
their ownership of our Series A and B Preferred Stock, the Soros Funds have the
right to appoint two designees to our Board of Directors, each of whom has seven
votes on any matter voted upon by our Board of Directors. Collectively, these
two designees have 14 out of 19 possible votes on each matter voted upon by our
Board of Directors. In addition, we are required to obtain the approval of
holders of our Series A, B, C, D and E preferred stock prior to taking certain
actions, and the Soros Funds own a majority of the outstanding shares of each of
these classes of stock. The holders of our Series A, B, C, D and E Preferred
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Stock have certain pre-emptive rights to participate in future equity financings
and, along with the holders of the Series F Preferred Stock, have certain
anti-dilution rights described above 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, the Soros Funds
effectively control our management and policies, such as the election of our
directors, the appointment of new management and the approval of any other
action requiring the approval of our stockholders, including any amendments to
our certificate of incorporation, a sale of all or substantially all of our
assets or a merger. In addition, the Soros Funds have demand registration rights
with respect to the shares of our common stock that they beneficially own. Any
decision by the Soros Funds 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 "Risk Factors - 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, our lender has a first priority lien on substantially all of our
assets, including our cash balances. In connection with the loan facility, we
entered into a reimbursement agreement with one of the Soros Funds, pursuant to
which it posted a $2.0 million letter of credit as additional collateral under
the loan facility, and we agreed to reimburse it for any amounts it paid to our
lender pursuant to such guarantee. We granted the Soros Fund 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, our
lender and/or the Soros Fund would be entitled, among other things, to foreclose
on our assets in order to satisfy our obligations under the loan facility.
Our Ability To Maintain Our Minimum Availability Requirement 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
and maintain minimum availability of $850,000. Assuming we meet our business
plan, we will be able to pay our interest and meet our minimum availability
requirement. 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 our minimum availability requirement throughout the term
of the agreement. 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, our lender 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. 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."
We Are Making A Substantial Investment In Our Business And May Need To Raise
Additional Funds. We may seek to raise additional capital in order to further
expand our customer acquisition efforts. Moreover, in the event that the
marketing effort is not successful it may be necessary for us to raise
additional capital in order to fund planned expenditures. 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 to the existing
holders of common stock. See "Risk Factors - Certain Events Could Result In
Significant Dilution Of Your Ownership Of Common Stock."
If We Are Not Accurate In Forecasting Our Revenues, We May Be Unable To Adjust
Our Operating Plans In A Timely Manner. Because our business has not yet reached
a mature stage, it is difficult for us to forecast our revenues accurately. We
base our current and future expense levels and operating plans on expected
revenues, but in the short-term a significant portion of our expenses are fixed.
Accordingly, we may be unable to adjust our spending in a timely manner to
compensate for any unexpected revenue shortfall. This inability could cause our
operating results in some future quarter to fall below the expectations of
securities analysts and investors. In that event, the trading price of our
common stock could decline significantly. In addition any such unexpected
revenue shortfall could significantly affect our short-term cash flow and our
net worth, which could require us to seek additional financing and/or cause a
default under our loan facility. See "Risk Factors - We Are Making A Substantial
Investment In Our Business And May Need To Raise Additional Funds" and "Risk
Factors - Our Ability To Comply With Our Financial Covenants And Pay Our
Indebtedness Under Our Loan Facility Is Dependent Upon Meeting Our Business
Plan."
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Our National Advertising Campaign and Other Marketing Initiatives May Not Be
Successful. Our success depends on our ability to attract customers on
cost-effective terms. We have relationships with online services, search
engines, and other Web sites and e-commerce businesses to provide other links
that direct customers to our Web site. In addition, during 2005 we launched our
first national television and advertising campaign. Such campaigns are expensive
and may not result in the cost effective acquisition of customers. We are
relying on the campaign as a significant source of traffic to our Web site and
new customers. If these campaigns and initiatives are not successful, our
results of operations will be adversely affected.
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. Economic downturns, 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 "Risk Factors - 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, Third Party Distribution Center Or Third Party Call
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 owned by a third party in
New York City. Primarily all of our inventory is held, and our customer orders
are filled, at a third party distribution center located in Virginia, and a
large majority of our customer service representatives are employees of a third
party call center in Ohio. These operations are vulnerable to damage or
interruption from fire, flood, storms, power loss, telecommunications failure,
terrorist attacks, acts of war, break-ins, earthquake and similar events. We do
not presently have redundant systems in multiple locations or a formal disaster
recovery plan. Accordingly, a failure at one of these facilities could interrupt
our business for a significant period of time, and our business interruption
insurance may be insufficient to compensate us for losses that may occur. Any
such interruption would negatively impact our sales, results of operations and
cash flows for the period in which it occurred, and could have a long-term
adverse effect on our relationships with our customers and suppliers.
Security Breaches To Our Systems And Database Could Cause Interruptions to Our
Business And Impact Our Reputation With Customers, And We May Incur Significant
Expenses to Protect Against Such Breaches. A fundamental requirement for online
commerce and communications is the secure transmission of confidential
information over public networks. There can be no assurance that advances in
computer capabilities, new discoveries in the field of cryptography, or other
events or developments will not result in a compromise or breach of the
algorithms we use to protect customer transaction and personal data contained in
our customer database. A party who is able to circumvent our security measures
could misappropriate proprietary information or cause interruptions in our
operations. If any such compromise of our security were to occur, it could have
a material adverse effect on our reputation with customers, thereby affecting
our long-term growth prospects. In addition, we may be required to expend
significant capital and other resources to protect against such security
breaches or to alleviate problems caused by such breaches.
8
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. Historically, our 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, third party call
center 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, third party
call center, 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:
o existing land-based, full price retailers, that are using the
Internet to expand their channels of distribution;
o less established online companies;
o internet sites;
o traditional direct marketers; and
o traditional off-price retail stores, which may or may not use the
Internet to grow their customer base.
9
Competition in our industry has intensified, and we expect this trend to
continue as the list of our competitors grows. Many of our competitors and
potential competitors have longer operating histories, significantly greater
resources, greater brand name recognition and more firmly established supply
relationships. We believe that the principal competitive factors in our market
include:
o brand recognition;
o merchandise selection;
o price;
o convenience;
o customer service;
o order delivery performance; and
o site features.
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 Our Vendors And Therefore The
Availability Of Merchandise Is At Risk. We do not have any 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. In addition, in order to
entice new vendors to open up relationships with us, we sometimes are required
to either make prepayments or agree to shortened payment 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 customers' 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 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
10
basis. 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. As a result, our reserve for returns and
credit card chargebacks for fiscal 2005, 2004 and 2003 has been 37.8%, 36.6% and
37.1%, respectively. 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. Our current employment agreements
with our Chief Executive Officer, Chief Financial Officer and Chief Marketing
Officer run through March 2007, July 2006 and September 2008 respectively,
however there can be no assurance that any of them will not terminate their
employment earlier. 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. Moreover, in the event that we expand upon our efforts to open
brick-and-mortar outlet stores, we will be required to devote significant
internal resources and capital to such efforts. There can be no assurance that
we would be able to expand our efforts and operations in a cost-effective or
timely manner or that any such efforts would increase overall market acceptance.
Furthermore, any new business or Web site that is not favorably received by
consumer or trade customers could damage our reputation.
We May Be Liable For Infringing The Intellectual Property Rights Of Others.
Third parties may assert infringement claims against us. From time to time in
the ordinary course of business we have been, and we expect to continue to be,
subject to claims alleging infringement of the trademarks and other intellectual
property rights of third parties. These claims and any resulting litigation, if
it occurs, could subject us to significant liability for damages. In addition,
even if we prevail, litigation could be time-consuming and expensive and could
result in the diversion of our time and attention. Any claims from third parties
may also result in limitations on our ability to use the intellectual property
subject to these claims unless we are able to enter into agreements with the
third parties making these claims.
We May Be Liable for Product Liability Claims. We sell products manufactured by
third parties, some of which may be defective. If any product that we sell were
to cause physical injury or injury to property, the injured party or parties
could bring claims against us as the retailer of the product. Our insurance
coverage may not be adequate to cover every claim that could be asserted. If a
successful claim were brought against 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
11
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, Ohio, New Jersey and New York. However, state
taxation laws and regulations may change in the future, and 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, Ohio, 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 the Soros Funds, that for so long as any shares of their Series
A, B, C, D or E Preferred Stock are outstanding, we will not take any action to
approve or otherwise facilitate any merger, consolidation or change of control,
unless provisions have been made for the holders of 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 such Preferred Stock is equal to the greater of (i) approximately
$48.3 million (plus any accrued and unpaid dividends) and (ii) the amount that
the holders of shares of such Preferred Stock would receive if they were to
convert such shares into Common Stock immediately prior to liquidation. While
the Series F Preferred Stock does not have a change of control covenant, it has
an aggregate liquidation preference of $5,300,000 Accordingly, the aggregate
liquidation preference of all outstanding Preferred Stock, including accrued and
unpaid preferred dividends at December 31, 2005 of $18.6 million, is $72.2
million.
12
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 15,479,250 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
it may deem necessary or appropriate. 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.
We Rely On The Effectiveness Of Our Internal Controls. Section 404 of the
Sarbanes-Oxley Act of 2002 requires that we establish and maintain an adequate
internal control structure and procedures for financial reporting and assess on
an on-going basis the design and operating effectiveness of our internal control
structure and procedures for financial reporting. Our independent registered
accounting firm may be required in the future to audit the design and operating
effectiveness of our internal controls and attest to management's assessment of
the design and the effectiveness of our internal controls. It is possible that,
as we prepare for this audit, we could discover certain deficiencies in the
design and/or operation of our internal controls that could adversely affect our
ability to record, process, summarize and report financial data. We have
invested and will continue to invest significant resources in this process.
Because management's assessment of internal controls has not been required to be
reported in the past, we are uncertain as to what impact a conclusion that
deficiencies exist in our internal controls over financial reporting would have
on the trading price of our common stock.
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 us or persons acting on our 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. We undertake 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 2005 was approximately
$450,000.
ITEM 3. LEGAL PROCEEDINGS
We currently, and from time to time, are involved in litigation incidental to
the conduct of our business. However, we are not party to any lawsuit or
proceeding which in the opinion of management is likely to have a material
adverse effect on us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of stockholders of the Company during the
fourth quarter of 2005.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
The Company's common stock, par value $.01 per share ("Common Stock"), is quoted
on The Nasdaq Capital 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 Capital Market:
FISCAL 2005 HIGH LOW
-------------- ------ ------
First Quarter $ 2.34 $ 1.22
Second Quarter $ 2.24 $ 1.20
Third Quarter $ 1.88 $ 1.40
Fourth Quarter $ 1.87 $ 0.97
FISCAL 2004 HIGH LOW
-------------- ------ ------
First Quarter $ 4.93 $ 3.07
Second Quarter $ 3.44 $ 1.92
Third Quarter $ 2.30 $ 1.40
Fourth Quarter $ 3.56 $ 1.75
HOLDERS
As of February 17, 2006, there were approximately 107 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. In addition,
the terms of our credit facility contain restrictions on our ability to declare
or pay dividends. 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.
14
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. The selected financial data for the
years ended December 31, 2002 and 2001 and at December 31, 2003, 2002 and 2001
are derived from our audited financial statements not included in this report.
All data is in thousands, except share data:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
2005 2004 2003 2002 2001
------------- ------------- ------------- ------------- -------------
Statement of Operations Data:
Net sales $ 58,811 $ 43,799 $ 37,928 $ 30,606 $ 22,950
Cost of sales 35,816 27,393 26,603 20,571 15,954
------------- ------------- ------------- ------------- -------------
Gross profit 22,995 16,406 11,325 10,035 6,996
Selling, marketing and fulfillment expenses 19,841 13,903 12,061 11,547 13,765
General and administrative expenses 6,299 6,408 5,207 4,686 5,098
------------- ------------- ------------- ------------- -------------
Total operating expenses 26,140 20,311 17,268 16,233 18,863
Operating loss (3,145) (3,905) (5,943) (6,198) (11,867)
Interest (expense)/other income (675) 114 (426) (281) (13,139)
------------- ------------- ------------- ------------- -------------
Net loss (3,820) (3,791) (6,369) (6,479) (25,006)
Basic and diluted loss per share: $ (0.54) $ (0.55) $ (0.88) $ (2.44) $ (3.41)
Basic and diluted weighted average number of
common shares outstanding available to
common stockholders 16,153,020 14,586,752 11,171,018 9,927,027 8,185,065
Balance Sheet Data:
AS OF DECEMBER 31,
-----------------------------------------------------------------------------
2005 2004 2003 2002 2001
------------- ------------- ------------- ------------- -------------
Cash and cash equivalents 9,408 $ 7,938(1)$ 7,721 $ 1,749 $ 5,419
Inventories, net 16,893 12,958 11,340 10,868 6,388
Other current assets 3,536 2,559 1,863 1,159 1,417
Total assets 33,045 25,541 22,998 16,595 14,572
Current liabilities 11,936 9,413 8,459 7,072 5,988
Long term liabilities 5,244 4,739 4,260 2,439 182
Shareholders' equity (deficit) 15,865 11,389 10,279 7,084 8,402
(1) Includes restricted cash of $1,253
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion and analysis of our financial condition and results of
operations contains forward-looking statements that involve risks and
uncertainties. We have based these forward-looking statements on our current
expectations and projections of future events. However, our actual results could
differ materially from those discussed herein as a result of the risks that we
face, including but not limited to those risks stated in "Risk Factors," or
faulty assumptions on our part. In addition, the following discussion should be
read in conjunction with the audited consolidated financial statements and the
related notes thereto included elsewhere in this report.
OVERVIEW
Bluefly, Inc. is a leading Internet retailer that sells over 350 brands of
designer apparel, accessories and home furnishings at discounts of up to 75% off
of retail value. We launched our Web site in September 1998. Over the past four
years our sales have grown at a compounded annual growth rate of more than 26%,
while our gross margin percentage has increased from 30.5% in 2001 to 39.1% in
2005.
The recent increase in our margin and sales is the direct result of a new
merchandise strategy that we began to implement in spring 2004. As part of that
strategy we are bringing current season merchandise and the latest fashion
trends to our customer for great value. While there will be some fluctuation in
our gross margin percentage from quarter to quarter as we further develop our
merchandising and marketing strategy, we believe that we will be able to
maintain margins well above our levels from 2003 and earlier.
Based on our improved merchandise strategy and recent customer research, we
believe that there is an opportunity to accelerate the growth of our business
while continuing to provide our customers with the great values that they have
become accustomed to. In an effort to take advantage of this opportunity, we
raised $7 million of equity financing in June and used approximately $3.2
million of the proceeds to launch a national advertising campaign, and expect to
continue to use the proceeds to fund the advertising campaign for the first half
of 2006. This campaign launched in September 2005. In addition, we secured a new
$7.5 million credit facility with Wells Fargo Retail Finance, LLC ("Wells
Fargo") in July 2005. This facility is primarily being used to help us obtain
the proper merchandising mix to support the anticipated growth in demand from
our national advertising campaign.
Our net sales increased over 34% to $58,811,000 for the year ended December 31,
2005 from $43,799,000 for the year ended December 31, 2004. Our gross margin
increased to 39.1% in 2005 from 37.5% in 2004, 29.9% in 2003 and 32.8% in 2002.
Our gross profit increased by more than 40% to $22,995,000 for the year ended
December 31, 2005 from $16,406,000 for the year ended December 31, 2004. This
growth in gross profit was driven by the increase in net sales, and by the
increase in gross margins. Our operating loss decreased by over 19%, to
$3,145,000 in 2005, from $3,905,000 in 2004.
We increased our spending in marketing (excluding staff related costs) by 331%
to $6,250,000 for the full year 2005, from $1,451,000 for the full year 2004. A
large portion of the increased marketing expense was a result of the costs
associated with our national advertising campaign, which was launched in
September 2005. For the first three quarters of 2005, our net sales increased by
approximately 21%, 27% and 39%, respectively, as compared to the same periods in
2004. For the fourth quarter of 2005, our net sales increased by approximately
46% to $21,235,000 from $14,515,000 in the fourth quarter of 2004. For the
fourth quarter of 2005, we had operating income of $131,000 as compared to
operating income of $140,000 in the fourth quarter of 2004. In general, we
intend to market our business more aggressively than we have in previous years.
This more aggressive growth strategy will cause our marketing expense as a
percentage of revenue to increase in the short-term; however, we believe that it
is a prudent investment in our business given that our margin structure and
average order size have historically resulted in a relatively high positive
contribution to overhead and marketing on a customer's first order.
Our reserve for returns and credit card chargebacks increased to 37.8% of gross
sales for the year ended December 31, 2005 compared to 36.6% in 2004. The
increase was primarily caused by a shift in our merchandise mix towards certain
product categories that historically have generated higher return rates.
However, we believe that this increase in return rates has been more than offset
by the higher gross margins and average order sizes that have been generated by
this shift in merchandise mix.
A portion of our inventory includes merchandise that we either purchased with
the intention of holding for the appropriate season or were unable to sell in a
prior season and have determined to hold for the next selling season, subject
(in some cases)
16
to appropriate mark-downs. In recent years we have increased the amount of
inventory purchased on a pack and hold basis in order to take advantage of
opportunities in the market.
At December 31, 2005, we had an accumulated deficit of $99,947,000. The net
losses and accumulated deficit resulted primarily from the costs associated with
developing and marketing our Web site and building our infrastructure, as well
as non cash beneficial conversion charges resulting from decreases in the
conversion price of our Preferred Stock. 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.
Therefore, we may continue to incur substantial operating losses. 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, recoverability of inventories, useful lives of
property and equipment and the realization of deferred tax assets. Actual
amounts could differ significantly from these estimates.
Revenue Recognition
We recognize revenue in accordance with Staff Accounting Bulletin ("SAB") No.
104 "Revenue Recognition". 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:
o A customer executes an order.
o The product price and the shipping and handling fee have been
determined.
o Credit card authorization has occurred and collection is reasonably
assured.
o 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
establish a reserve for such merchandise.
17
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 or loss 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:
2005 2004 2003
----------------------- ----------------------- -----------------------
As a % of As a % of As a % of
Net Sales Net Sales Net Sales
Net sales $ 58,811 100.0% $ 43,799 100.0% $ 37,928 100.0%
Cost of sales 35,816 60.9% 27,393 62.5% 26,603 70.1%
---------- ---------- ----------
Gross profit 22,995 39.1% 16,406 37.5% 11,325 29.9%
Selling, marketing and fulfillment expenses 19,841 33.7% 13,903 31.8% 12,061 31.8%
General and administrative expenses 6,299 10.7% 6,408 14.6% 5,207 13.8%
---------- ---------- ----------
Total operating expenses 26,140 44.4% 20,311 46.4% 17,268 45.6%
Operating loss (3,145) (5.3)% (3,905) (8.9)% (5,943) (15.7)%
Interest (expense) other income (675) (1.2)% 114 0.3% (426) (1.1)%
---------- ---------- ----------
Net loss $ (3,820) (6.5)% $ (3,791) (8.6)% $ (6,369) (16.8)%
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:
2005 2004 2003
------------ ------------ ------------
Average Order Size (including shipping & handling) $ 220.17 $ 188.51 $ 174.99
New Customers Added during the Year* 148,975 127,177 124,248
* Based on unique email addresses
FOR THE YEAR ENDED DECEMBER 31, 2005 COMPARED TO THE YEAR ENDED
DECEMBER 31, 2004
Net sales: Gross sales for the year ended December 31, 2005 increased by
approximately 37% to $94,586,000 from $69,032,000 for the year ended December
31, 2004. The provision for returns and credit card chargebacks and other
credits was approximately 38% for 2005 and 37% for 2004, resulting in a
provision of $35,775,000 for the year ended December 31, 2005 and $25,233,000
for the year ended December 31, 2004.
After the necessary provisions for returns, credit card chargebacks and
adjustments for uncollected sales taxes, our net sales for the year ended
December 31, 2005 were $58,811,000. This represents an increase of over 34%
compared to the year ended December 31, 2004, in which net sales totaled
$43,799,000. The growth in net sales was largely driven by the increase in gross
average order size (approximately 17% higher than the full year 2004) and an
increase in the number of new customers acquired
18
(approximately 17% higher than the full year 2004). Shipping and handling
revenue (which is included in net sales) increased by 16% to $3,874,000 for the
year ended December 31, 2005, from $3,353,000 for the year ended December 31,
2004. Revenue from shipping and handling increased at a lower rate than overall
revenue, due to the increase in our average order size.
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, 2005 totaled
$35,816,000, resulting in gross margin of approximately 39.1%. Cost of sales for
the year ended December 31, 2004 totaled $27,393,000, resulting in gross margin
of 37.5%. The increase in gross margin was driven by our focus on negotiating
better prices with vendors as well as our strategy of selling more in-season
product, which has more value to our customer and therefore demands higher
margins, and the timing of our promotions. As our inventory composition was
heavily weighted with newer higher margin product there was less lower margin
inventory to negatively effect the margins in the current year.
Gross Profit: As a result of the increases in net sales and gross margin, gross
profit increased by over 40%, to $22,995,000 for the year ended December 31,
2005, from $16,406,000 for the year ended December 31, 2004.
Selling, marketing and fulfillment expenses: Selling, marketing and fulfillment
expenses increased by approximately 42% for the year 2005 compared to the year
ended 2004. The selling, marketing and fulfillment expenses were comprised of
the following:
Year Ended Year Ended Percentage Difference
December 31, 2005 December 31, 2004 Increase (Decrease)
------------------ ------------------ ---------------------
Marketing $ 6,961,000 $ 2,120,000 228.3%
Operating 6,925,000 5,848,000 18.4%
Technology 3,567,000 4,086,000 (12.7)%
E-Commerce 2,388,000 1,849,000 29.1%
------------------ ------------------
$ 19,841,000 $ 13,903,000 42.7%
As a percentage of net sales, our selling, marketing and fulfillment expenses
increased to 33.7% for the year ended December 31, 2005 from 31.7% for the year
ended December 31, 2004. The increase in selling, marketing and fulfillment
expenses as a percentage of net sales resulted primarily from costs associated
with our national advertising campaign (which was launched in September 2005).
The increase was offset partially from economies of scale in our operations and
technology expenses, as some of the fixed costs involved in maintaining our Web
site and processing orders were allocated over a larger number of orders. One of
our goals is to achieve greater economies of scale as our business grows,
although there can be no assurance that we will be successful in doing so. We
plan to continue to invest in all of these areas in the near term in order to
grow our business.
Marketing expenses include expenses related to our national ad campaign, online
and print advertising, "sweepstakes" promotions as well as staff related costs.
Marketing expenses increased by a higher percentage than revenue as a result of
the costs associated with our national marketing campaign. Costs in connection
with this campaign are being recorded as the magazines and commercials are being
released. For the year ended December 31, 2005, approximately $3.2 million was
expensed in connection with this campaign. As a result we expect marketing
expense as a percentage of revenue to increase in the short-term. We believe
that this is a prudent investment in our business given that our margin
structure and average order size have historically resulted in a relatively high
positive contribution to overhead on a customer's first order.
Operating expenses include all costs related to inventory management,
fulfillment, customer service, and credit card processing. Operating expenses
increased in 2005 by over 18% compared to 2004 as a result of variable costs
associated with the increased sales volume (e.g., picking and packing orders,
processing returns and credit card fees), and was offset by costs associated
with our 2004 temporary clearance store, which closed in April 2005. Operating
costs as a percentage of sales decreased as a result of economies of scale.
Variable expenses related to picking and packing orders increased by 30% to $1.7
million from $1.3 million and credit card fees increased by over 29% to $1.8
million from $1.4 million. Both expenses remained relatively constant as a
percentage of gross sales at 2% for 2005 and 2004.
Technology expenses consist primarily of staff related costs, amortization of
capitalized costs and Web site hosting. For the year ended December 31, 2005,
technology expenses decreased by approximately 13% compared to the year ended
December 31, 2004. This decrease resulted from a decrease in headcount and
salary related expenses, a decrease in depreciation expense,
19
and a decrease in web hosting expense. These factors were partially offset by an
increase in the costs associated with software support. Depreciation expense for
the year ended December 31, 2005 was lower than depreciation for the year ended
December 31, 2004 due to the fact that costs associated with our current
platform as well as certain computer equipment was fully depreciated during
2004.
E-Commerce expenses include expenses related to our photo studio, image
processing, third party software and Web site design. For the year ended
December 31, 2005, this amount increased by approximately 29% as compared to the
year ended December 31, 2004, primarily due to an increase in salary related
expenses as well as an increase in expenses associated with third party
software, third party analytics services and our increased use of outside models
for photo shoots.
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, 2005 decreased slightly to $6,299,000 for the year ended December
2005 as compared to $6,408,000 for the year ended December 31, 2004. The slight
decrease in general and administrative expenses was the result of decreased
salary and benefit expenses, offset by an increase in public company expenses,
and increases in consulting and accounting fees.
As a percentage of net sales, general and administrative expenses decreased to
10.7% in 2005 from 14.6% in 2004.
Loss from operations: Operating loss decreased by over 19% in 2005, to
$3,145,000 from $3,905,000 in 2004 as a result of the increase in gross profit.
Interest expense and interest and other income, net: Interest and other income
for year ended December 31, 2005 decreased to $181,000 from $847,000 for the
year ended December 31, 2004. Interest and other income was higher in 2004
primarily because of $564,000 in non-cash income recognized in 2004 to adjust a
liability associated with warrants issued by us to their fair value as of June
17, 2004 (at which time the warrants were re-classified as equity as described
in Note 6 to our financial statements), as well as $169,000 realized in 2004 in
connection with the judgment we received in the Breider Moore litigation.
Interest expense for the year ended 2005 totaled $856,000 compared to $733,000
for the year ended 2004, and related primarily to fees paid in connection with
the Loan Facility and interest expense on Convertible Notes held by Soros.
FOR THE YEAR ENDED DECEMBER 31, 2004 COMPARED TO THE YEAR ENDED
DECEMBER 31, 2003
Net sales: Gross sales for the year ended December 31, 2004 increased by
approximately 15% to $69,032,000, from $60,279,000 for the year ended December
31, 2003. The provision for returns and credit card chargebacks and other
credits was approximately 37% for both 2004 and 2003, resulting in a provision
of $25,233,000 for the year ended December 31, 2004 and $22,351,000 for the year
ended December 31, 2003.
After the necessary provisions for returns, credit card chargebacks and
adjustments for uncollected sales taxes, our net sales for the year ended
December 31, 2004 were $43,799,000. This represents an increase of approximately
15% compared to the year ended December 31, 2003, in which net sales totaled
$37,928,000. The growth in net sales was largely driven by the increase in gross
average order size (approximately 8% higher than the full year 2003) and a
slight increase in the number of new customers acquired (approximately 2% higher
than the full year 2003). Shipping and handling revenue (which is included in
net sales) increased by 14% to $3,353,000 for the year ended December 31, 2004,
from $2,939,000 for the year ended December 31, 2003.
Cost of sales: Cost of sales for the year ended December 31, 2004 totaled
$27,393,000, resulting in gross margin of approximately 38%. Cost of sales for
the year ended December 31, 2003 totaled $26,603,000, resulting in gross margin
of 30%. The increase in gross margin was driven by our focus on negotiating
better prices with vendors as well as our strategy of selling more in-season
product, which has more value to our customer and therefore demands higher
margins. The gross margin in 2003 was impacted negatively by 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.
Gross Profit: As a result of the increases in net sales and gross margin, gross
profit increased by 45%, to $16,406,000 for the year ended December 31, 2004,
from $11,325,000 for the year ended December 31, 2003.
20
Selling, marketing and fulfillment expenses: Selling, marketing and fulfillment
expenses increased by approximately 15% for the year 2004 compared to the year
ended 2003. As a percentage of net sales, our selling, marketing and fulfillment
expenses remained relatively unchanged at approximately 32% for both 2004 and
2003. The selling, marketing and fulfillment expenses were comprised of the
following:
Year Ended Year Ended Percentage Difference
December 31, 2004 December 31, 2003 increase (decrease)
------------------ ------------------ ---------------------
Marketing $ 2,120,000 $ 1,898,000 11.7%
Operating 5,848,000 5,223,000 12.0%
Technology 4,086,000 3,420,000 19.5%
E-Commerce 1,849,000 1,520,000 21.6%
------------------ ------------------
$ 13,903,000 $ 12,061,000 15.3%
The increase in marketing expenses of approximately 12% was primarily driven by
the donation of the net proceeds from the sale of "hope." collection products to
St. Jude Children's Research Hospital ("St. Jude"). Pursuant to a charitable
program with St. Jude, we were the exclusive retailer of the "hope." t-shirt and
agreed to donate the net proceeds (i.e., the revenue less the cost of goods sold
and the costs of processing and filling the orders) from the sale of all "hope."
collection products on our Web site to St. Jude. For the year ended December 31,
2004, approximately $141,000 was donated and was recorded as a marketing expense
in our financial statements. A portion of the increase also resulted from
increased consulting expenses, which were offset slightly by a decrease in staff
related expenses.
Operating expenses increased in 2004 by approximately 12% compared to 2003 as a
result of variable costs associated with the increased sales volume (e.g.,
picking and packing orders, processing returns and credit card fees) as well as
the overhead costs associated with the store. Variable expenses related to
picking and packing orders remained relatively unchanged at $1.3 million for
2004 and 2003 and credit card fees increased by over 16% to $1.4 million from
$1.2 million. Both expenses remained constant as a percentage of gross sales at
2% for 2004 and 2003.
For the year ended December 31, 2004, technology expenses increased by
approximately 20% compared to the year ended December 31, 2003. This increase
was related to an increase in headcount, overall web hosting costs and
consulting costs and was slightly offset by a decrease in depreciation expense.
The department employed an average of 18 people per month in 2004 compared to 12
people per month in 2003.
For the year ended December 31, 2004, E-commerce expenses increased by
approximately 22% as compared to the year ended December 31, 2003. This increase
is to the result of an increase in staff related costs, temporary help and the
purchase of licenses for new search functionality and Web site analytics.
General and administrative expenses: General and administrative expenses for the
year ended December 31, 2004 increased by approximately 23% to $6,408,000 as
compared to $5,207,000 for the year ended December 31, 2003. As a percentage of
net sales, general and administrative expenses increased to 14.6% in 2004 from
13.8% in 2003. The increase in general and administrative expenses was the
result of increased salary and benefit expenses of approximately 45% (including
$325,000 of expenses incurred in connection with the Separation Agreement that
we entered into with our former CEO) as well as an increase in public company
fees. These increases were slightly offset by a reduction in consulting and
professional fees.
Loss from operations: Operating loss decreased by approximately 34% in 2004, to
$3,905,000 from $5,943,000 in 2003 as a result of the increase in gross profit.
Interest expense and Interest and other income, net: Interest and other income
for year ended December 31, 2004 increased to $847,000 from $38,000 for the year
ended December 31, 2003. The increase resulted from $564,000 recognized to
adjust a liability associated with warrants issued by us to their fair value as
of June 17, 2004 (at which time the warrants were re-classified as equity as
described in Note 6 to our financial statements), the $169,000 realized in
connection with the judgment we received in the Breider Moore litigation and an
increase in interest income earned on our cash balance.
21
Interest expense for the year ended 2004 totaled $733,000, and related primarily
to fees paid in connection with the Loan Facility and interest expense on
Convertible Notes held by Soros. Interest expense for the year ended December
31, 2003 totaled $464,000, and related to fees paid in connection with our Loan
Facility as well as amortization of warrants issued in connection with the
January 2003 Financing.
LIQUIDITY AND CAPITAL RESOURCES
General
At December 31, 2005, we had approximately $9.4 million in the form of cash and
cash equivalents. Working capital at December 31, 2005 and 2004 was $17.9
million and $12.8 million, respectively (the 2004 amount excludes the
approximately $1.25 million of restricted cash that we regained access to upon
refinancing the Rosenthal Facility). In addition, as of December 31, 2005, we
had approximately $2.9 million committed under the Credit Facility, leaving
approximately $3.75 million of availability, compared to availability of $1.2
million at December 31, 2004.
In June 2005 we completed a private placement (the "New Financing") pursuant to
which we raised $7,075,431 through the sale of 7,000 shares of newly designated
Series F Preferred Stock for an aggregate purchase price of $7,000,000 and
warrants to purchase an additional 603,448 shares of our common stock at an
exercise price of $2.87 per share. The purchase price for the warrants was
$75,431, or $0.125 per warrant.
In February 2006, Soros agreed to extend the maturity dates on the Convertible
Promissory Notes issued to Soros in July and October 2003. The maturity dates of
the Notes, which were originally January and April 2004, respectively, were each
extended for one year, from May 1, 2006 to May 1, 2007.
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 Credit Facility is based primarily
upon our inventory levels. In addition, both availability under the Credit
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 Wells Fargo to provide credit support under the Credit
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. In addition, newer vendors generally do not
provide us with payment terms that are as favorable as those we get from
existing relationships and, in some instances, new vendors may require
prepayments. During 2005, we have increased our prepayments in order to open up
new relationships and gain access to inventory that was not previously available
to us. As of December 31, 2005, we had approximately $485,000 of prepaid
inventory on our balance sheet.
In addition, our inventory levels as of December 31, 2005 were approximately
$3.9 million higher than at December 31, 2004. The increase in inventory
generally reflects a ramp up in connection with our sales growth as well as
opportunistic buying of fresh inventory that has not previously been available
to us. However, the increased inventory level could adversely affect our
flexibility in taking advantage of other buying opportunities that may become
available in the near term.
We believe that our current funds, together with working capital, will be
sufficient to enable us to meet our planned expenditures through at least
December 31, 2006. We may seek additional equity or debt financings to maximize
the growth of our business or if anticipated operating results are not achieved.
If such financings are not available on terms acceptable to us, and/or we do not
achieve our sales plan, future operations may need to be modified, scaled back
or discontinued.
Credit Facility
In July 2005, we entered into a new three year revolving credit facility with
Wells Fargo Retail Finance, LLC ("Wells Fargo"). Pursuant to the Credit
Facility, Wells Fargo provides the Company with a revolving loan and issues
letters of credit in favor of suppliers or factors. The Credit Facility is
secured by a lien on all of the Company's assets, as well as a $2,000,000 letter
of credit issued by Soros in favor of Wells Fargo (the "Soros LC"). Availability
under the Credit Facility is determined by a formula that takes into account the
amount of the Company's inventory and accounts receivable, as well as the Soros
LC.
22
The maximum availability is currently $7,500,000, but can be increased to
$12,500,000 at the Company's request, subject to certain conditions. As of
December 31, 2005, total availability under the Credit Facility, after giving
effect to the required $850,000 availability reserve, was approximately
$6,650,000 of which $2,900,000 was committed, leaving approximately $3,750,000
available for further borrowings.
Interest accrues monthly on the average daily amount outstanding under the
Credit Facility during the preceding month at a per annum rate equal to the
prime rate plus 0.75% or LIBOR plus 2.75%. We also pay a monthly commitment fee
on the unused portion of the facility (i.e., $7,500,000 less the amount of loans
outstanding) equal to 0.35%. We also pay Wells Fargo certain fees to open
letters of credit and guarantees in an amount equal to a certain specified
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.
Subject to certain conditions, if we default on any of our obligations under the
Credit Facility, Wells Fargo has the right to draw upon the Soros LC to satisfy
any such obligations. If Wells Fargo draws on the Soros LC, pursuant to the
terms of a reimbursement agreement between us and Soros, we would have the
obligation to, among other things, reimburse Soros for any amounts drawn under
the Soros LC plus interest accrued thereon. In addition, we are required to pay
Soros Fund Management LLC an annual fee in connection with the issuance and
maintenance of the Soros LC in an amount equal to the fee that we would be
required to pay in order to have a similar letter of credit issued under the
Credit Facility. For the year beginning on the date of the closing of the Credit
Facility this formula requires an annual fee of $55,000. We are also required to
reimburse Soros for any costs and expenses associated with the issuance and
maintenance of the Soros LC. In connection with the Soros LC we granted the
Soros Fund 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, our lender and/or the Soros Fund would be entitled,
among other things, to foreclose on our assets in order to satisfy our
obligations under the loan facility.
Under the terms of the Credit Facility, Soros has the right to purchase all of
our obligations from Wells Fargo at any time if we are then in default under the
Credit Facility.
Commitments and Long Term Obligations
As of December 31, 2005, we had the following commitments and long term
obligations:
More
Less Than 1-3 3-5 than 5
Total 1 year years years years
------------ ------------ ------------ -------- --------
Marketing and Advertising $ 1,350,000 1,350,000 -- -- --
Purchase Orders $ 6,185,000 6,185,000 -- -- --
Operating Leases $ 1,905,000 507,000 1,257,000 141,000 --
Capital Leases $ 67,000 40,000 27,000 -- --
Employment Contracts $ 3,189,000 1,671,000 1,518,000 -- --
Notes payable to shareholders, including interest payable $ 5,217,000 5,217,000 -- -- --
------------ ------------ ------------ -------- --------
Grand total $ 17,913,000 14,970,000 2,802,00 141,000 --
We believe that in order to grow the business, we will need to make additional
marketing and advertising commitments in the future. In addition, we expect to
hire and train additional employees for the operations and development of
Bluefly.com. However, our marketing budget and our ability to hire such
employees is subject to a number of factors, including our results of operations
as well as the amount of additional capital that we raise.
Off Balance Sheet Arrangements
Certain warrants issued in conjunction with our preferred stock financing are
equity linked derivatives and accordingly represent an off balance sheet
arrangement. Each of these warrants meet the scope exception in paragraph 11(a)
of FAS 133 and are accordingly not accounted for as derivatives for purposes of
FAS 133, but instead included as a component of equity. See Footnote 9 to the
financial statements and the Statement of Shareholders' Equity for more
information.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2005 the FASB issued SFAS No. 154 "Accounting Changes and Error
Corrections." SFAS No. 154 replaces APB Opinion No. 20 and SFAS No. 3. SFAS No.
154 provides guidance on the accounting for and reporting of accounting changes
and error corrections. SFAS No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
The Company will adopt this Statement beginning January 1, 2006.
In December 2004, the FASB issued Statement No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123R"), which replaces SFAS 123 and supersedes APB No. 25. Under
the new standard, companies will no longer be able to account for stock-based
compensation transactions using the intrinsic value method in accordance with
APB No. 25. Instead, companies will be
23
required to account for such transactions using a fair-value method and to
recognize the expense in the statements of income. The adoption of SFAS 123R
will also require additional accounting related to the income tax effects and
additional disclosure regarding the cash flow effects resulting from share-based
payment arrangements. SFAS 123R will be effective for annual periods beginning
after June 15, 2005 and allows, but does not require, companies to restate prior
periods. We are evaluating the impact of adopting SFAS 123R and expect that we
will record substantial non-cash stock compensation expenses. The adoption of
SFAS 123R is not expected to have a significant effect on our cash flows however
the non-cash charges associated therewith are expected to have a significant,
adverse effect on our results of operations. Based on the current number of
unvested options the effect of adopting SFAS 123R, assuming no change in the
assumptions set forth in Notes 2 and 9 of the financial statements, would be
approximately $2.7 million for the year ended December 31, 2006.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) Index to the Financial Statements
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets as of December 31, 2005 and 2004 F-2
Consolidated Statements of Operations for the three years
ended December 31, 2005, 2004 and 2003 F-3
Consolidated Statements of Changes in Shareholders' Equity
for the three years ended December 31, 2005,
2004 and 2003 F-4
Consolidated Statements of Cash Flows for the three years
ended December 31, 2005, 2004 and 2003 F-5
Notes to Consolidated Financial Statements F-6
Schedule II - Valuation and Qualifying Accounts S-1
24
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2005 and December 31, 2004, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2005 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 the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, 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 17, 2006
F-1
BLUEFLY, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2005 AND 2004
(dollars rounded to the nearest thousand)
2005 2004
-------------- --------------
ASSETS
Current assets
Cash and cash equivalents $ 9,408,000 $ 6,685,000
Restricted cash - 1,253,000
Inventories, net 16,893,000 12,958,000
Accounts receivable, net of allowance for doubtful accounts 1,717,000 1,206,000
Prepaid expenses and other current assets 1,819,000 1,353,000
-------------- --------------
Total current assets 29,837,000 23,455,000
Property and equipment, net 2,895,000 1,933,000
Other assets 313,000 153,000
-------------- --------------
Total assets $ 33,045,000 $ 25,541,000
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 5,662,000 $ 4,190,000
Allowance for Sales Returns 3,407,000 $ 2,174,000
Accrued expenses and other current liabilities 1,083,000 1,352,000
Deferred revenue 1,784,000 1,697,000
-------------- --------------
Total current liabilities 11,936,000 9,413,000
Notes payable to related party shareholders 4,000,000 4,000,000
Long-term interest payable to related party shareholders 1,217,000 658,000
Long-term obligations under capital lease 27,000 81,000
-------------- --------------
Total liabilities 17,180,000 14,152,000
============== ==============
Commitments and contingencies (Note 8)
Shareholders' equity
Series A Preferred Stock - $.01 par value; 500,000 shares
authorized, 460,000 shares issued and outstanding as of
December 31, 2005 and 2004, respectively (liquidation
preference: $9.2 million plus accrued dividends of $5.9 million) 5,000 5,000
Series B Preferred Stock - $.01 par value; 9,000,000 shares
authorized, 8,889,414 shares issued and outstanding as of
December 31, 2005 and 2004, respectively (liquidation preference:
$30 million plus accrued dividends of $9.5 million) 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, 2005 and 2004, respectively (liquidation preference:
$1 million plus accrued dividends of $286,000) - -
Series D Preferred Stock - $.01 par value; 7,150 shares authorized,
6,313.43 and 7,136.548 shares issued and outstanding as of
December 31, 2005 and 2004, respectively (liquidation preference:
$6.3 million plus accrued dividends of $2.4 million) - -
Series E Preferred Stock - $.01 par value; 1,000 shares authorized,
issued and outstanding as of December 31, 2005 and 2004,
respectively (liquidation preference: $1.0 million plus accrued
dividends of $347,000) - -
Series F Preferred Stock - $.01 par value; 7,000 shares authorized,
5,279.714 issued and outstanding as of December 31, 2005
(liquidation preference: $5.3 million plus accrued dividends of $192,000) - -
Common Stock - $.01 par value; 92,000,000 shares authorized, 19,059,166
and 15,241,756 shares issued and outstanding as of December 31, 2005
and 2004, respectively 191,000 152,000
Additional paid-in capital 115,527,000 107,270,000
Accumulated deficit (99,947,000) (96,127,000)
-------------- --------------
Total shareholders' equity 15,865,000 11,389,000
-------------- --------------
Total liabilities and shareholders' equity $ 33,045,000 $ 25,541,000
============== ==============
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
BLUEFLY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(dollars rounded to the nearest thousand)
2005 2004 2003
------------- ------------- -------------
Net sales $ 58,811,000 $ 43,799,000 $ 37,928,000
Cost of sales 35,816,000 27,393,000 26,603,000
------------- ------------- -------------
Gross profit 22,995,000 16,406,000 11,325,000
Selling, marketing and fulfillment expenses 19,841,000 13,903,000 12,061,000
General and administrative expenses 6,299,000 6,408,000 5,207,000
------------- ------------- -------------
Total operating expenses 26,140,000 20,311,000 17,268,000
------------- ------------- -------------
Operating loss (3,145,000) (3,905,000) (5,943,000)
Interest expense (856,000) (733,000) (464,000)
Interest income 181,000 114,000 38,000
Other income (Note 6) - 733,000 -
------------- ------------- -------------
Net loss (3,820,000) (3,791,000) (6,369,000)
------------- ------------- -------------
Preferred stock dividends (4,958,000) (4,275,000) (3,225,000)
Deemed dividend related to beneficial conversion feature
on Series C Preferred Stock - - (225,000)
------------- ------------- -------------
Net loss available to common shareholders $ (8,778,000) $ (8,066,000) $ (9,819,000)
============= ============= =============
Basic and diluted loss per common share $ (0.54) $ (0.55) $ (0.88)
============= ============= =============
Weighted average number of shares outstanding used in
calculating basic and diluted loss per common share 16,153,020 14,586,752 11,171,018
============= ============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
BLUEFLY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(Dollars rounded to the nearest thousand)
SERIES A SERIES B SERIES C SERIES D
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
$.01 PAR VALUE $.01 PAR VALUE $.01 PAR VALUE $.01 PAR VALUE
------------------- --------------------- -------------------- ------------------
NUMBER OF NUMBER OF NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- -------- ----------- -------- --------- -------- --------- --------
BALANCE AT JANUARY 1, 2003 500,000 5,000 8,910,782 89,000 1,000 - - -
--------- -------- ----------- -------- --------- -------- --------- --------
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) - - - - - - - -
Deemed dividend related to beneficial
conversion feature on Series C
Preffered 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
Series B Preferred Stock to Common Stock (40,000) - (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 460,000 5,000 8,889,414 89,000 1,000 - 7,136 -
--------- -------- ----------- -------- --------- -------- --------- --------
Sale of Common Stock and Warrants in
connection with the January 2004
financing (net of issuance costs
of $423,000) - - - - - - - -
Change in Value of Warrants - - - - - - - -
Exercise of Employee Stock Options - - - - - - - -
Expense recognized in connection with
Issuance of Options - - - - - - - -
Net loss - - - - - - -
--------- -------- ----------- -------- --------- -------- --------- --------
BALANCE AT DECEMBER 31, 2004 460,000 $ 5,000 8,889,414 $ 89,000 1,000 $ - 7,136 $ -
--------- -------- ----------- -------- --------- -------- --------- --------
Sale of Series F Preferred Stock
($1,000 per share net of expenses
of $249,000) - - - - - - - -
Shares Of Series D Preferred Stock
Converted into Common Stock - - - - - - (823) $ -
Shares Of Series F Preferred Stock
Converted into Common Stock - - - - - - - -
Expense recognized in connection with
Issuance of Options - - - - - - - -
Exercise of Employee Options - - - - - - - -
Net Loss - - - - - - -
--------- -------- ----------- -------- --------- -------- --------- --------
BALANCE AT DECEMBER 31, 2005 460,000 5,000 8,889,414 89,000 1,000 - 6,313 $ -
--------- -------- ----------- -------- --------- -------- --------- --------
SERIES E SERIES F SERIES 2002
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
$.01 PAR VALUE $.01 PAR VALUE $.01 PAR VALUE
----------------- ----------------- -----------------
NUMBER OF NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ------ --------- ------ --------- ------
BALANCE AT JANUARY 1, 2003 - - - - 2,100 -
--------- ------ --------- ------ --------- ------
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) 1,000 - - - - -
Deemed dividend related to beneficial
conversion feature on Series C
Preffered 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
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 1,000 - - - - -
--------- ------ --------- ------ --------- ------
Sale of Common Stock and Warrants in
connection with the January 2004
financing (net of issuance costs
of $423,000) - - - - - -
Change in Value of Warrants - - - - - -
Exercise of Employee Stock Options - - - - - -
Expense recognized in connection with
Issuance of Options - - - - - -
Net loss - - - - - -
--------- ------ --------- ------ --------- ------
BALANCE AT DECEMBER 31, 2004 1,000 $ - - $ - - $ -
--------- ------ --------- ------ --------- ------
Sale of Series F Preferred Stock
($1,000 per share net of expenses
of $249,000) - - 7,000 - - -
Shares Of Series D Preferred Stock
Converted into Common Stock - - - - - -
Shares Of Series F Preferred Stock
Converted into Common Stock - - (1,720) $ - - -
Expense recognized in connection with
Issuance of Options - - - - - -
Exercise of Employee Options - - - - - -
Net Loss - - - - - -
--------- ------ --------- ------ --------- ------
BALANCE AT DECEMBER 31, 2005 1,000 - 5,280 - - -
--------- ------ --------- ------ --------- ------
COMMON STOCK
$.01 PAR VALUE
---------------------- ADDITIONAL TOTAL
NUMBER OF PAID-IN ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
----------- --------- -------------- ------------- -------------
BALANCE AT JANUARY 1, 2003 10,391,904 104,000 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
Preffered Stock - - 225,000 (225,000) -
Exercise of Employee Stock Options
and Warrants 1,869,598 19,000 2,947,000 - 2,966,000
Conversion of Series 2002 Preferred Stock
to Series D Preferred Stock - - - - -
Conversion of Series A Preferred Stock
Series B Preferred Stock to Common Stock 632,664 6,000 (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 12,894,166 129,000 102,392,000 (92,336,000) 10,279,000
----------- --------- -------------- ------------- -------------
Sale of Common Stock and Warrants in
connection with the January 2004
financing (net of issuance costs
of $423,000) 1,543,209 15,000 4,562,000 - 4,577,000
Change in Value of Warrants - - (564,000) - (564,000)
Exercise of Employee Stock Options 804,381 8,000 733,000 - 741,000
Expense recognized in connection with
Issuance of Options - - 147,000 - 147,000
Net loss - - - (3,791,000) (3,791,000)
----------- --------- -------------- ------------- -------------
BALANCE AT DECEMBER 31, 2004 15,241,756 $ 152,000 $ 107,270,000 $ (96,127,000) $ 11,389,000
----------- --------- -------------- ------------- -------------
Sale of Series F Preferred Stock
($1,000 per share net of expenses
of $249,000) - - 6,751,000 - 6,751,000
Shares Of Series D Preferred Stock
Converted into Common Stock 1,454,645 15,000 (15,000) - -
Shares Of Series F Preferred Stock
Converted into Common Stock 765,481 8,000 (8,000) - -
Expense recognized in connection with
Issuance of Options - - 41,000 - 41,000
Exercise of Employee Options 1,597,284 16,000 1,488,000 - 1,504,000
Net Loss - - - (3,820,000) (3,820,000)
----------- --------- -------------- ------------- -------------
BALANCE AT DECEMBER 31, 2005 19,059,166 $ 191,000 $ 115,527,000 $ (99,947,000) $ 15,865,000
----------- --------- -------------- ------------- -------------
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
BLUEFLY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
2005 2004 2003
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (3,820,000) $ (3,791,000) $ (6,369,000)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 1,259,000 1,342,000 1,744,000
Loss on disposal of assets - 35,000 -
Non-cash expense related to warrants issued to supplier 347,000 264,000 -
Change in value of warrants - (564,000) -
Provision for returns 1,233,000 (354,000) 803,000
Allowance for doubtful accounts 270,000 237,000 131,000
Reserve for inventory obsolesence 659,000 100,000 484,000
Stock option expense 41,000 147,000 -
Changes in operating assets and liabilities
(Increase) decrease in
Inventories (4,941,000) (1,982,000) (956,000)
Accounts receivable (778,000) (289,000) (455,000)
Other current assets 554,000 (269,000) (124,000)
Prepaid expenses (1,020,000) (127,000) (5,000)
Other assets (187,000) - -
(Decrease) increase in:
Accounts payable 1,472,000 1,068,000 61,000
Accrued expenses (171,000) 186,000 (124,000)
Short term interest payable to related party
shareholders - 20,000 28,000
Deferred revenue 87,000 445,000 367,000
Long-term interest payable to related party
shareholders 559,000 499,000 159,000
------------- ------------- -------------
Net cash used in operating activities (4,436,000) (3,033,000) (4,256,000)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash collateral in connection with Rosenthal
Pledge Agreement 1,250,000 (1,250,000) -
Purchase of property and equipment (2,194,000) (1,486,000) (481,000)
------------- ------------- -------------
Net cash used in investing activities (944,000) (2,736,000) (481,000)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from June 2005 financing 6,751,000 - -
Net proceeds from January 2004 financing - 4,577,000 -
Net proceeds from exercise of Stock Options 1,504,000 741,000 2,966,000
Payments of capital lease obligation (152,000) (349,000) (257,000)
Repayment of related party notes - (236,000) -
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
------------- ------------- -------------
Net cash provided by financing activities 8,103,000 4,733,000 10,709,000
------------- ------------- -------------
Net increase (decrease) in cash and cash
equivalents 2,723,000 (1,036,000) 5,972,000
CASH AND CASH EQUIVALENTS
Beginning of year 6,685,000 7,721,000 1,749,000
------------- ------------- -------------
End of year $ 9,408,000 $ 6,685,000 $ 7,721,000
============= ============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest $ 147,000 $ 175,000 $ 85,000
Non-cash investing and financing activites
Equipment acquired under capital lease - 153,000 224,000
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
Warrants issued to related party shareholders - - 42,000
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
1. THE COMPANY
Bluefly, Inc., a Delaware corporation, (the "Company"), is a leading
Internet retailer that sells over 350 brands of designer apparel,
accessories and home products at discount prices. The Company's
e-commerce Web site ("Bluefly.com" or "Web site") 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. The Company believes that its
existing resources, together with working capital should be sufficient
to satisfy its cash requirements through December 31, 2006. 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:
o A customer executes an order.
o The product price and the shipping and handling fee have been
determined.
o Credit card authorization has occurred and collection is reasonably
assured.
o The product has been shipped and received by the customer.
Shipping and handling billed to customers is 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.
F-6
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
Accounts receivable is presented on the consolidated balance sheet net
of the allowance for doubtful accounts. As of December 31, 2005 and
2004, the allowance for doubtful accounts was $78,000 and $44,000,
respectively, and the allowance for sales returns was $3,407,000 and
$2,174,000, respectively.
Deferred revenue, which consists primarily of goods shipped to customers
but not yet received and customer credits, totaled approximately
$1,784,000 and $1,697,000 as of December 31, 2005 and 2004,
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 establishes a reserve for such 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, 2005 and 2004, inventories, net consists of the
following:
2005 2004
-------------- -------------
Inventory on hand $ 15,811,000 $ 12,433,000
Inventory to be received due to returns 1,864,000 1,360,000
Inventory reserves (782,000) (835,000)
-------------- -------------
Total inventories, net $ 16,893,000 $ 12,958,000
============== =============
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 are 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.
F-7
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
This evaluation is based on a number of factors, including expectations
for operating income and undiscounted cash flows that will result from
the use of such assets. The Company has not identified any such
impairment of assets.
INCOME TAXES
The Company recognizes deferred 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 or loss 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, 2005, the Company has three stock-based employee
compensation plans, which are described more fully in Note 9. The
Company applies Statement of Financial Accounting Standards ("SFAS") No.
148 "Accounting for Stock Based Compensation - Transition and
Disclosure, an amendment of FASB Statement No. 123," SFAS No. 123
"Accounting for Stock Based Compensation," and FASB Interpretation No.
44, "Accounting for Certain Transactions Involving Stock Compensation"
in accounting for its stock based compensation plan. In accordance with
SFAS No. 123, the Company applies Accounting Principles Board Opinion
No. 25 and related Interpretations for expense recognition. For the year
ended December 31, 2005, and 2004 compensation expense of $30,000 and
$17,000, respectively, was recorded in connection with certain options
issued below market value to the Company's Chief Executive Officer in
accordance with the terms of her employment agreement. In addition, for
the year ended December 31, 2004, $113,000 in compensation expense was
recorded in connection with certain options issued to the Company's
former Chief Executive Officer pursuant to his separation agreement.
Except for these options, no compensation expense has been recorded for
the year ended December 31, 2005 and December 31, 2004 in connection
with stock option grants to employees, because the exercise price of
employee stock options equals or exceeds the market price of the
underlying stock on the date of grant. Had compensation expense for the
Plan been determined consistent with the provisions of SFAS No. 123, the
effect on the Company's basic and diluted net loss per share would have
been as follows:
F-8
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
YEAR ENDED DECEMBER 31,
------------------------------------------------
2005 2004 2003
-------------- -------------- --------------
Net loss, as reported (3,820,000) $ (3,791,000) $ (6,369,000)
Deduct: total stock-based employee
compensation expense determined
under fair value based methods for all
awards, net of related tax effects (2,731,000) (4,617,000) (4,219,000)
Add: Stock-based employee compensation
expense included in reported net loss 30,000 130,000 -
Adjusted for Preferred Stock Dividends (4,958,000) (4,275,000) (3,450,000)
-------------- -------------- --------------
Pro forma net loss available to
common shareholders (11,479,000) (12,553,000) (14,038,000)
Loss per share
Basic and diluted, as reported $ (0.54) $ (0.55) $ (0.88)
Basic and diluted, pro forma $ (0.71) $ (0.86) $ (1.26)
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 Convertible Notes were not
included in the computation of diluted earnings per share because the
result of such inclusion would be antidilutive:
F-9
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
COMMON STOCK ISSUABLE
------------------------------------- EXERCISE
2005 2004 2003 PRICES
-------------- -------------- -------------- --------------
SECURITY
Options 8,038,528 9,813,379 8,508,370 $0.69 - $16.47
Warrants 1,883,393 1,704,945 1,319,144 $0.78 - $3.96
Preferred stock 44,516,119 (1) 43,323,430 (1) 43,323,430 (1)
Convertible Notes(2) - - -
(1) Excludes dividends on preferred stock, which are payable in
cash or common stock, at the Company's option, upon
conversion, redemption or liquidation
(2) Represents debt issued in connection with the July 2003
financing and October 2003 financing, which 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. Until such
financing occurs, such debt is not convertible into Common
Stock.
MARKETING EXPENSES
In addition to marketing salaries, marketing expenses consist primarily
of online advertising, print and media advertising, costs associated
with sweepstakes, 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, 2005 and 2004. Production costs
related to print and television are capitalized until they are released.
Marketing expenses (excluding marketing and public relations salaries
and related salary expenses of $711,000, $668,000 and $628,000) for the
years ended December 31, 2005, 2004 and 2003 amounted to approximately
$6,250,000, $1,452,000 and $1,270,000, 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, 2005,
2004 and 2003, fulfillment expenses totaled $3,642,000, $2,914,000 and
$2,776,000, 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 December 2004, the FASB issued Statement No. 123 (revised 2004),
"Share-Based Payment" ("SFAS 123R"), which replaces SFAS 123 and
supersedes APB No. 25. Under the new standard, companies will no longer
be able to account for stock-based compensation transactions using the
intrinsic value method in accordance with APB No. 25. Instead, companies
will be required to account for such transactions using a fair-value
method and to recognize the expense in the statements of income. The
adoption of SFAS 123R will also require additional accounting related to
the income tax effects and additional disclosure regarding the cash flow
effects resulting from share-based payment arrangements. SFAS 123R is
effective for periods beginning after June 15, 2005
F-10
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
and allows, but does not require, companies to restate prior periods.
The Company is evaluating the impact of adopting SFAS 123R and expects
that it will record substantial non-cash stock compensation expenses.
The adoption of SFAS 123R is not expected to have a significant effect
on the Company's financial condition or cash flows but is expected to
have a significant, adverse effect on its results of operations. Based
on the current number of unvested options the effect of adopting SFAS
123R, assuming no change in the assumptions set forth in Note 9, would
be approximately $2.7 million for the year ended December 31, 2006.
In May 2005, the FASB issued Statement No. 154 "Accounting Changes and
Error Corrections" ("SFAS No. 154"). This statement replaces APB Opinion
No. 20, Accounting Changes, and FASB Statement No. 3, Reporting
Accounting Changes in Interim Financial Statements, and changes the
requirements for the accounting for and reporting of a change in
accounting principle. This Statement applies to all voluntary changes in
accounting principle. It also applies to changes required by an
accounting pronouncement in the unusual instance that the pronouncement
does not include specific transition provisions. When a pronouncement
includes specific transition provisions, those provisions should be
followed. SFAS is effective for periods beginning after December 15,
2005. The adoption of SFAS no. 154 is not expected to have a significant
effect on the Company's financial condition, results of operations or
cash flows.
CONCENTRATION
During fiscal 2005, the Company acquired approximately 13.5% of its
inventory from one supplier.
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, recoverability
of inventories, useful lives of property and equipment and the
realization of deferred tax assets. Actual results could differ from
those estimates.
3. PROPERTY AND EQUIPMENT
As of December 31, 2005 and 2004, property and equipment consists of the
following:
2005 2004
------------ ------------
Leasehold improvements $ 1,658,000 $ 1,065,000
Office equipment 574,000 483,000
Computer equipment and software 7,129,000 5,619,000
------------ ------------
9,361,000 7,167,000
Less: Accumulated depreciation (6,466,000) (5,234,000)
------------ ------------
$ 2,895,000 $ 1,933,000
============ ============
F-11
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
Depreciation and amortization of property and equipment was
approximately $1,145,000, $1,331,000 and $1,650,000, for the years ended
December 31, 2005, 2004 and 2003, respectively.
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
As of December 31, 2005 and 2004, prepaid expenses and other current
assets consist of the following:
2005 2004
------------ ------------
Prepaid expenses $ 915,000 $ 296,000
Prepaid inventory 485,000 335,000
Other current assets 419,000 722,000
------------ ------------
$ 1,819,000 $ 1,353,000
============ ============
5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
As of December 31, 2005 and 2004, accrued expenses and other current
liabilities consist of the following:
2005 2004
------------ ------------
Salary, vacation and bonus accrual 574,000 721,000
Current portion of capital lease liability 40,000 139,000
Accrued expenses 141,000 354,000
Accrued media expenses 328,000 138,000
------------ ------------
$ 1,083,000 $ 1,352,000
============ ============
6. OTHER INCOME
In June 2002, the Company entered into an agreement with a third party
investor pursuant to which the investor committed to purchase
approximately $7 million of Common Stock and warrants from the Company.
The investor breached the contract by failing to consummate the
investment, although it did provide the Company with $169,000 as a good
faith deposit. In October 2002, the Company filed an action against the
investor based on its failure to consummate the investment, and in
December 2003, the court entered judgment in the Company's favor against
the third party investor in the amount of $3,793,688. In the first
quarter of 2004, following the expiration of all applicable appeal
periods, the Company recognized the good faith deposit of $169,000 as
other income, as a partial recognition of litigation settlement. Based
on the information currently available to it regarding the investor's
finances, the Company does not believe that it will be successful in
collecting a material amount of additional funds as a result of the
damages award.
In addition, as discussed in Note 9 below, the Company recognized
$564,000 of other income for the year ended December 31, 2004 to adjust
a liability associated with warrants issued by the Company to its fair
value as of June 17, 2004 (at which point the liability was reclassified
as equity in accordance with EITF 00-19 and described in Note 9).
F-12
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
7. INCOME TAXES
Significant components of the Company's deferred tax assets and
liabilities are summarized as follows:
2005 2004
------------ ------------
DEFERRED TAX ASSETS
Net operating losses $ 29,252,000 $ 27,328,000
Depreciation and amortization (137,000) (99,000)
Accounts receivable and inventory reserves 348,000 350,000
Accrued vacation 32,000 -
Accrued bonuses - 203,000
Deferred revenue 721,000 686,000
Other 496,000 270,000
------------ ------------
30,712,000 28,738,000
Valuation Allowance (30,712,000) (28,738,000)
------------ ------------
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 $72,388,000 at December
31, 2005 which have expiration dates from 2018 through 2024.
Approximately $6.4 million of these net operating loss carryforwards
relate to the exercise of employee stock options and any tax benefit
derived there from, 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 or that may occur in the future.
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.
The Company's effective tax rate differs from the U.S. Federal Statutory
income tax rate of 35% as follows:
2005 2004 2003
---------- ---------- ----------
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 0.27% 0.34% 0.16%
Valuation allowance on deferred tax asset 40.14% 40.07% 40.25%
---------- ---------- ----------
Effective tax rate 0.00% 0.00% 0.00%
========== ========== ==========
F-13
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
8. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT CONTRACTS
The Company has entered into certain employment contracts, which expire
through September 2008. As of December 31, 2005, the Company's aggregate
commitment for future base salary under these employment contracts is:
2006 $ 1,671,000
2007 1,195,000
2008 323,000
------------
$ 3,189,000
============
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:
CAPITAL OPERATING
LEASES LEASES
--------- -----------
2006 $ 40,000 $ 507,000
2007 27,000 481,000
2008 - 442,000
2009 - 334,000
Thereafter - 141,000
--------- -----------
Total minimum payments 67,000 $ 1,905,000
========= ===========
Obligations due within one year (40,000)
---------
Long-term obligations under capital leases $ 27,000
=========
Rent expense aggregated approximately $450,000, $442,000 and $427,000
for the years ended December 31, 2005, 2004 and 2003, respectively.
MARKETING COMMITMENTS
As of December 31, 2005, the Company has advertising and marketing
commitments in connection with email services, agency fees and costs in
connection with a national ad campaign of approximately $1,350,000
through December 31, 2006.
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.
F-14
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
9. 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"); 7,000
shares of Series F Convertible Preferred Stock (the "Series F Preferred
Stock"); and 15,479,250 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; 6,313.43 shares of Series D Preferred
Stock with a stated value of approximately $6.3 million; 1,000 shares of
Series E Preferred Stock with a stated value of approximately $1.0
million and 5,279.714 shares of Series F Preferred Stock with a stated
value of approximately $5.3 million. All of the Series A, B, C, and E,
4,821.090 shares of the D, and 3,000 shares of the F are held by
affiliates of Soros Private Equity Partners, LLC ("Soros") that
collectively own a majority of the Company's capital stock.
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 $53,600,000 plus accrued dividends of
$18.6 million at December 31, 2005) 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. The liquidation preference and accrued
dividends on each series of Preferred Stock at December 31, 2005 is as
follows:
F-15
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
ACCRUED
DIVIDENDS AT LIQUIDATION
STATED VALUE DECEMBER 31, 2005 PREFERENCE
------------------ ------------------ ------------
Series A Preferred Stock $ 9,200,000 $ 5,898,000 $ 15,098,000
Series B Preferred Stock 20,800,000 9,546,000 40,346,000(1)
Series C Preferred Stock 1,000,000 286,000 1,286,000
Series D Preferred Stock 6,300,000 2,361,000 8,661,000
Series E Preferred Stock 1,000,000 347,000 1,347,000
Series F Preferred Stock 5,300,000 192,000 5,492,000
------------------ ------------------ ------------
$ 43,600,000 $ 18,630,000 $ 72,230,000
================== ================== ============
(1) Includes $10 million of additional liquidation preference in
connection with Series B Preferred Stock
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, the Series D Preferred Stock and Series E Preferred Stock accrue
dividends at the rate of 12% per annum and the Series F Preferred Stock
accrues dividends at the rate of 7%.
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 and The Series F
Preferred Stock is convertible into Common Stock at the rate of $2.32 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 and F 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.
The Series F Preferred Stock contains anti-dilution provisions pursuant
to which, subject to certain exceptions, in the event that the Company
issues or sells its Common Stock or new securities convertible into its
Common Stock in the future for less than $2.32 per share, but for $1.50
or more per share, the conversion price of the Series F preferred stock
would be decreased on a weighted average basis, taking into account the
number of new shares issued and the price at which such shares are
issued. In the event that the Company issues or sell its Common Stock or
new securities convertible into its Common Stock in the future for less
than $1.50 per share, the conversion price
F-16
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
of the Series F preferred stock would be decreased to the price at which
such Common Stock or other new securities are sold. The anti-dilution
provisions of the Series F preferred stock are subject to the approval
of othe Company's stockholders. The Company expects that approval will
be obtained at its next shareholder meeting, as the Soros Funds have
agreed to vote all of their shares of the Company's stock (which
represent a majority of the votes) in favor of such approval.
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 (other than the Series F
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 (other than the Series F
Preferred Stock).
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 the holders of the outstanding
Preferred Stock (other than the Series F Preferred Stock) pre-emptive
rights with respect to future issuance of capital stock of the Company.
JUNE 2005 FINANCING
The Company raised over $7,000,000 in equity financing in June 2005. The
financing was effected through a private placement (the "June 2005
Financing") that closed on June 24, 2005. The Company raised $7,075,431
through the sale of 7,000 shares of newly designated Series F Preferred
Stock for an aggregate purchase price of $7,000,000 and warrants to
purchase an additional 603,448 shares of its common stock at an exercise
price of $2.87 per share. The warrants have an expiration date of June
24, 2008. The aggregate purchase price for the warrants was $75,431, or
$0.125 per warrant, and all of the warrants were purchased by the New
Investors described below. The investors participating in the June 2005
Financing included eight private equity funds that had not previously
participated in the Company's financing transactions (the "New
Investors"), and two private equity funds affiliated with Soros Fund
Management LLC ("Soros") that collectively own a majority of the
Company's capital stock. In connection with the June 2005 Financing, the
New Investors also purchased from Soros previously issued shares of the
Company's Series D Preferred Stock with an aggregate liquidation
preference and accrued dividends of $3,000,000. Both the Series D
Preferred Stock and the Series F Preferred Stock are convertible into
common stock. The number of shares to be issued upon a conversion is
determined by dividing the liquidation preference of the shares of
preferred stock to be converted by the conversion price. The conversion
price of the Series D Preferred Stock is $0.76 and the conversion price
of the Series F Preferred Stock is $2.32. As of December 31, 2005,
823.118 shares of Series D Preferred Stock (plus all
F-17
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
accrued and unpaid dividends payable on such shares) had been converted
into 1,454,645 shares of common stock and 1,720.286 shares of Series F
Preferred Stock (plus all accrued and unpaid dividends payable on such
shares) had been converted into 765,481 shares of common stock, leaving
6,313.43 and 5,279.714 shares of Series D Preferred Stock and Series F
Preferred Stock, respectively, issued and outstanding.
JANUARY 2004 FINANCING
In January 2004, the Company completed a private placement pursuant to
which it raised $5,000,000 (the "January 2004 Financing"). Under the
terms of the deal, the Company 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. The Company also issued to 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. After professional fees and
finders fees paid to brokers, the net proceeds from the transaction were
approximately $4,577,000.
SOROS FINANCINGS DURING 2003
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.
F-18
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
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.
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, 2006). 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
F-19
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
maturity date of these notes was April 14, 2004. Subsequent to year end,
the maturity date of these notes was extended to May 1, 2006.
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 Rosenthal Loan
Facility (which has since been refinanced). Warrants issued in
connection with the Company's Loan Facility are included in the table
below and are described more fully in Note 11 below.
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 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 was capitalized and
classified as prepaid inventory. The Company reclassified the prepaid
inventory when inventory was purchased as a component of the inventory
cost. As of December 31, 2005 and 2004 approximately $0, and $251,000,
respectively, of this asset remained on the balance sheet and was
included in other current assets.
WARRANTS ISSUED TO INVESTORS
The Company used the Black-Scholes option pricing method (assumption:
volatility 79%, risk free rate 3.86% one and a half year expected life
and zero dividend yield) to calculate the value of the 603,448 warrants
issued in connection with the June 2005 Financing. Using those
assumptions a value of approximately $423,000 was assigned to the
warrant. In accordance with EITF 00-27, Application of EITF Issue No.
98-5, "Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios" the Company
evaluated the total value ascribed to the warrants under Black-Scholes
and compared that to the total proceeds
F-20
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
raised. In connection with that the Company recognized a beneficial
conversion feature of approximately $87,000.
In accordance with EITF 00-19, the Company accounted for the 385,801
warrants issued in connection with the January 2004 Financing at fair
market value and classified the warrants as a liability because the
Company may have been required to make cash payments to the investors
who purchased the warrants in the event that the registration statement
covering the offer and sale of the shares underlying the warrants were
to no longer be effective. The Company used the Black-Scholes option
pricing method (assumption: volatility 147%, risk free rate 3.76% two
year expected life and zero dividend yield) to calculate the value of
the warrants. At January 12, 2004, the date of transaction (the
"Transaction Date"), the warrants had a value of $1,096,000. The value
of the warrants was marked to market in each subsequent reporting period
as a derivative gain or loss until June 17, 2004 (the "End Date"), at
which time EITF 00-19 called for the warrants to be re-classified as
equity because the maximum potential cash amount payable to the
investors had decreased to the point where it was no longer considered
significant.
During the period beginning on the Transaction Date and ending on the
End Date, the value of the warrants decreased from $1,096,000 to
$532,000, and, accordingly the Company recognized $564,000 of other
income for the year ended December 31, 2004.
The following table represents warrants issued to purchase Common Stock
as of December 31, 2005:
NUMBER OF
PARTY WARRANTS EXERCISE PRICE RANGE EXPIRATION DATES
--------- ---------- -------------------- -------------------------
Investors 989,249 $2.87 - $3.96 June 2008 - January 2009
Soros 606,644 $0.78 - $2.34 January 2007 - March 2013
Supplier 250,000 $2.34 December 2006
Others 37,500 $1.34 March 2006
----------
1,883,393
==========
STOCK OPTION PLANS
The Company's Board of Directors has adopted three stock option plans,
one in April 2005, one in July 2000 and the other in May 1997
(collectively the "Plans"). 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 Plans have an aggregate of
15,700,000 shares authorized for issuance.
The following table summarizes the Company's stock option activity:
F-21
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
WEIGHTED
NUMBER AVERAGE
OF EXERCISE
SHARES PRICE
------------ ------------
BALANCE AT JANUARY 1, 2003 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
Options granted 2,629,750 $ 2.74
Options canceled (534,360) $ 2.57
Options exercised (790,381) $ 0.95
------------
BALANCE AT DECEMBER 31, 2004 9,813,379 $ 2.28
------------
Options granted 2,039,000 $ 1.39
Options canceled (2,216,567) $ 3.56
Options exercised (1,597,284) $ 0.94
------------
BALANCE AT DECEMBER 31, 2005 8,038,528 $ 1.97
------------
Eligible for exercise at December 31, 2003 4,523,606 $ 1.30
Eligible for exercise at December 31, 2004 6,512,125 $ 2.44
Eligible for exercise at December 31, 2005 4,969,929 $ 2.15
The stock options are exercisable in different periods through 2014.
Additional information with respect to the outstanding options as of
December 31, 2005, 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
--------------- ------------ ------------------ ------------ ------------ ------------
$ 0.00 - $ 1.66 4,975,616 8.0 Years $ 1.23 3,187,903 $ 1.17
$ 1.66 - $ 3.32 2,697,512 7.6 Years $ 2.32 1,471,055 $ 2.54
$ 3.32 - $ 4.98 101,000 8.1 Years $ 3.92 46,571 $ 3.92
$ 4.98 - $ 6.64 22,250 3.0 Years $ 5.11 22,250 $ 5.11
$ 6.64 - $ 9.96 52,750 3.6 Years $ 9.17 52,750 $ 9.17
$ 9.96 - $11.62 104,250 4.0 Years $ 11.20 104,250 $ 11.20
$11.62 - $14.94 6,250 3.9 Years $ 14.04 6,250 $ 14.04
$14.94 - $16.60 78,900 3.1 Years $ 15.13 78,900 $ 15.13
$ 0.69 - $16.60 8,038,528 7.6 Years $ 1.97 4,969,929 $ 2.15
The Company does not recognize compensation expense for stock options
granted to employees and directors with an exercise price at or above
fair market value at the date of the grant, in accordance with APB No.
25. The fair value of options granted during 2005, 2004 and 2003 was
approximately $2.5 million, $6.8 million and $2.9 million, respectively.
The Company calculated the fair value of each option grant on the date
of the grant using the Black-Scholes option pricing model as prescribed
by SFAS No. 123.
F-22
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
The following assumptions were used in applying the model:
YEAR ENDED DECEMBER 31,
------------------------------
2005 2004 2003
-------- -------- --------
Risk-free interest rates 4.22% 3.63% 3.59%
Expected life (in years) 6 6 6
Dividend yield 0% 0% 0%
Expected volatility 138% 139% 113%
As of December 31, 2005, the Company has reserved an aggregate of
54,438,040 shares of Common Stock for the conversion of Preferred Stock
and the exercise of Stock Options and Warrants.
10. 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 9
above), on December 15, 2001, the Company issued promissory notes in the
amount of $182,000 to affiliates of Soros in exchange for legal services
provided during the course of the year. The notes bore interest at 9%
per annum and had a maturity date of December 15, 2004. In December 2004
the Company repaid the notes with accrued interest of $54,000 for a
total of $236,000.
In January 2004, the Company also extended the maturity dates on the
Convertible Promissory Notes issued to Soros in July and October 2003
(the "Notes"). The maturity dates of the Notes, which were originally
January and April 2004, respectively, were each extended to March 1,
2005. In February 2006, the maturity date of the Notes was further
extended to May 1, 2007.
11. FINANCING AGREEMENT
In July 2005, the Company entered into a new three year revolving credit
facility ("Credit Facility") with Wells Fargo Retail Finance, LLC
("Wells Fargo"). The Credit Facility refinanced the Company's previous
credit facility (the "Rosenthal Facility") with Rosenthal & Rosenthal,
Inc. ("Rosenthal"). Under the terms of the Credit Facility, Wells Fargo
provides the Company with a revolving credit facility and issues letters
of credit in favor of suppliers or factors. The Credit Facility is
secured by a lien on all of the Company's assets, as well as a
$2,000,000 letter of credit issued by Soros in favor of Wells Fargo (the
"Soros LC"). Availability under the Credit Facility is determined by a
formula that takes into account the amount of the Company's inventory
and accounts receivable, as well as the Soros LC. The maximum
availability is currently $7,500,000, but can be increased to
$12,500,000 at the Company's request, subject to certain conditions. As
of December 31, 2005, total availability under the Credit Facility,
after giving effect to the required $850,000 availability reserve, was
approximately $6,650,000 of which $2,900,000 was committed, leaving
approximately $3,750,000 available for further borrowings. As a result
of the refinancing of the Rosenthal Facility, the Company also regained
access to approximately $1,250,000 of the cash that had previously been
restricted because it was being held as cash collateral by Rosenthal
under the terms of the Rosenthal Facility.
Interest accrues monthly on the average daily amount outstanding under
the Credit Facility during the preceding month at a per annum rate equal
to the prime rate plus 0.75% or LIBOR plus 2.75%.
F-23
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
The Company also pays a monthly commitment fee on the unused portion of
the facility (i.e., $7,500,000 less the amount of loans outstanding)
equal to 0.35%. We also pay Wells Fargo 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. For the years
ended December 31, 2005, 2004 and 2003 total interest expense and fees
related to the credit facilities totaled approximately $196,000,
$112,000 and $77,000, respectively.
Subject to certain conditions, if the Company defaults on any of its
obligations under the Credit Facility, Wells Fargo has the right to draw
upon the Soros LC to satisfy any such obligations. If Wells draws on the
Soros LC, pursuant to the terms of a reimbursement agreement between the
Company and Soros, the Company would have the obligation to, among other
things, reimburse Soros for any amounts drawn under the Soros LC plus
interest accrued thereon. In addition, the Company is required to pay
Soros Fund Management LLC an annual fee in connection with the issuance
and maintenance of the Soros LC in an amount equal to the fee that we
would be required to pay in order to have a similar letter of credit
issued under the Credit Facility. For the year beginning on the date of
the closing of the Credit Facility this formula requires an annual fee
of $55,000. The Company is also required to reimburse Soros for any
costs and expenses associated with the issuance and maintenance of the
Soros LC. In connection with the Soros LC we granted the Soros Fund 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, our lender and/or the Soros Fund would
be entitled, among other things, to foreclose on our assets in order to
satisfy our obligations under the loan facility.
Under the terms of the Credit Facility, Soros has the right to purchase
all of our obligations from Wells Fargo at any time if we are then in
default under the Credit Facility.
SOROS WARRANTS IN CONNECTION WITH ROSENTHAL LOAN FACILITY
Prior to April 2004, Soros guaranteed repayment of the Rosenthal Loan
Facility (the "Soros Guarantee"). The Company issued warrants to Soros
in consideration for the establishment and continuance of the Soros
Guarantee as described below.
The following table represents the warrants issued to Soros in
connection with the Loan Facility:
NUMBER OF DATE EXERCISE ASSUMPTIONS UNDER
WARRANTS ISSUED PRICE EXPIRATION DATE BLACK-SCHOLES REASON
------------ --------- -------- --------------- ----------------------- --------------------
100,000 March 31, $ 0.88(1) September 11, Risk Free Rate - 4.86% As consideration for
2001 2011 Volatility - 117% Soros establishing
Term - 5 years the Soros Guarantee
60,000 March 22, $ 1.66(1) March 22, 2007 Risk Free Rate - 5.25% In consideration for
2002 Volatility - 184% Soros extending the
Term - 3 years Soros Guarantee
until 11/15/2003
25,000 March 17, $ 0.78(2) March 17, 2013 Risk Free Rate - 3.31% In consideration for
2003 Volatility - 123% Soros extending the
Term - 4 years Soros Guarantee
until 11/15/2004
F-24
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(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.
12. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Amounts in thousands, except per share data:
QUARTER ENDED
---------------------------------------------------------
2005 March 31 June 30 September 30 December 31
------------------------------------------- ------------ ------------ ------------ ------------
Net Sales $ 13,502 $ 12,029 $ 12,045 $ 21,235
============ ============ ============ ============
Gross Profit $ 4,885 $ 4,651 $ 4,575 $ 8,884
============ ============ ============ ============
Net loss $ (893) $ (1,169) $ (1,703) $ (55)
============ ============ ============ ============
Preferred stock dividends $ (1,115) $ (1,169) $ (1,387) $ (1,287)
============ ============ ============ ============
Net loss available to common shareholders $ (2,008) $ (2,338) $ (3,090) $ (1,342)
============ ============ ============ ============
(Loss) per common share - basic and diluted $ (0.13) $ (0.15) $ (0.20) $ (0.07)
============ ============ ============ ============
QUARTER ENDED
---------------------------------------------------------
2004 March 31 June 30 September 30 December 31
------------------------------------------- ------------ ------------ ------------ ------------
Net Sales $ 11,114 $ 9,495 $ 8,675 $ 14,515
============ ============ ============ ============
Gross Profit $ 3,782 $ 3,807 $ 2,966 $ 5,851
============ ============ ============ ============
Net Income (Loss) $ (1,130) $ (708) $ (1,960) $ 7
============ ============ ============ ============
Preferred stock dividends $ (1,024) $ (1,062) $ (1,090) $ (1,099)
============ ============ ============ ============
Net loss available to common shareholders $ (2,154) $ (1,770) $ (3,050) $ (1,092)
============ ============ ============ ============
(Loss) per common share - basic and diluted $ (0.15) $ (0.12) $ (0.21) $ (0.07)
============ ============ ============ ============
13. RELATED PARTY TRANSACTIONS
In August 2004, the Company entered into a Separation Agreement with its
former Chief Executive Officer in connection with his resignation. Under
the terms of the agreement, he agreed to remain employed by the Company
in a non-executive capacity through November 30, 2004 (the "Termination
Date") at his then-current salary and to extend the period of the
non-competition and non-solicitation covenants contained in his
employment agreement from one year to two years after
F-25
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
the Termination Date. In consideration for these agreements, the
Company, among other things, agreed to (i) to make salary continuation
payments equal to his salary until June 30, 2005, (ii) to continue to
provide his then-current employee benefits for a period of one year
following the Termination Date, and (iii) to issue him an option to
purchase 100,000 shares of Common Stock at an exercise price equal to
the fair market value of the Common Stock on the date of grant and (iv)
that all outstanding stock options held by him would vest upon the
Termination Date. The Company valued the warrants using the Black
Scholes option pricing model using the following assumptions: risk free
interest rate: 3.88%, volatility 137%, expected life 1 year, zero
dividend yield, and charged $113,000 for the options and $212,000
related to severance and benefits to general and administrative expense
in the third quarter of 2004.
In December 2003, the Company retained a former Executive Vice President
of the Company as a consultant. For the year ended December 31, 2004,
payments made to the individual were $58,000.
F-26
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 2005
Column A Column B Column C Column D Column E
----------------------------------
(1) (2)
-------------------------------- --------------- --------------- --------------- --------------- ---------------
Balance end
Beginning Charged Charged of Period
Balance at to Costs to other December 31,
Description January 1, 2005 and Expenses Accounts Deductions 2005
-------------------------------- --------------- --------------- --------------- --------------- ---------------
Allowance for Sales Returns (2,174,000) (34,820,000) - 33,587,000 (3,407,000)
Allowance for Doubtful Accounts (44,000) (270,000) - 236,000 (78,000)
Inventory Reserves (835,000) (659,000) - 712,000 (782,000)
Deferred Tax Valuation Allowance (28,738,000) (1,533,000) (441,000) - (30,712,000)
Column A Column B Column C Column D Column E
----------------------------------
(1) (2)
-------------------------------- --------------- --------------- --------------- --------------- ---------------
Balance end
Beginning Charged Charged of Period
Balance at to Costs to other December 31,
Description January 1, 2004 and Expenses Accounts Deductions 2004
-------------------------------- --------------- --------------- --------------- --------------- ---------------
Allowance for Sales Returns (2,528,000) (24,186,000) - 24,540,000 (2,174,000)
Allowance for Doubtful Accounts (40,000) (237,000) - 233,000 (44,000)
Inventory Reserves (673,000) (100,000) - (62,000) (835,000)
Deferred Tax Valuation Allowance (26,872,000) (1,518,000) (348,000) - (28,738,000)
Column A Column B Column C Column D Column E
----------------------------------
(1) (2)
-------------------------------- --------------- --------------- --------------- --------------- ---------------
Balance end
Beginning Charged Charged of Period
Balance at to Costs to other December 31,
Description January 1, 2003 and Expenses Accounts Deductions 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)
S-1
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES
DISCLOSURE 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 Chief Executive Officer along with our Chief Financial
Officer concluded that our disclosure controls and procedures are effective in
ensuring that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act are recorded, processed, summarized and
reported, within the time periods specified in the Commission's rules and forms.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no 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.
ITEM 9B. OTHER INFORMATION
None.
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
----------------------- --- ---------------------------------------------------
Alan Kane 63 Chairman of the Board of Directors
Melissa Payner-Gregor 46 Chief Executive Officer and President
Patrick C. Barry 43 Chief Financial Officer and Chief Operating Officer
Barry Erdos 60 Director
Ann Jackson 53 Director
Martin Keane 40 Senior Vice President of E-Commerce
Bradford Matson 48 Chief Marketing Officer
Christopher G. McCann 44 Director
Martin Miller 74 Director
Neal Moszkowski 39 Director
David Wassong 34 Director
Alan Kane has served as a director since August 2002 and became Chairman of the
Board in August 2004. Since September 2005, Mr. Kane has been the Dean of the
Business School at the Fashion Institute of Technology (FIT). In addition, 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
25
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.
Melissa Payner-Gregor, has served as our President since September 2003 and
became Chief Executive Officer in August 2004. 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. From 1997 to 2000, Ms. Payner-Gregor was the Senior Vice President of
Merchandising and Advertising of Spiegel. 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 has been our Chief Financial Officer since August 1998. In
September 2000, Mr. Barry assumed the role of Chief Operating Officer and has
also 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 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.
Barry Erdos has served as a director since February 2005. Since April 2004, Mr.
Erdos has served as President and Chief Operating Officer of Build a Bear
Workshop, Inc., a specialty retailer of plush animals and related products. Mr.
Erdo has been a Director of Build a Bear Workshop, Inc. since July 2005. Mr.
Erdos was the Chief Operating Officer and a director of Ann Taylor Stores
Corporation and Ann Taylor Inc., a women's apparel retailer, from November 2001
to April 2004. He was Executive Vice President, Chief Financial Officer and
Treasurer of Ann Taylor Stores Corporation and Ann Taylor Inc. from 1999 to
2001. Prior to that, he was Chief Operating Officer of J. Crew Group, Inc., a
specialty retailer of apparel, shoes and accessories, from 1998 to 1999.
Ann Jackson has served as a director since August 2005. Ms. Jackson is currently
the Chief Executive Officer of WRC Media, Inc. From 2003 to 2005 Ms. Jackson was
a partner at private equity fund Ripplewood Holdings. From 1980 to 2003, Ms.
Jackson worked in various departments and publications at Time, Inc. From 2002
to 2003, she served as Group President of InStyle, Real Simple, Parenting and
Essence Magazines. She was the founding publisher of InStyle, which launched in
1994. During her tenure at Time, Inc., Ms. Jackson also held positions in
corporate finance, direct mail for Time-Life Books Europe, served as business
manager for Money Magazine and general manager for Sports Illustrated and
People.
Martin Keane served as Vice President of Product Development and E-Commerce from
January 1999 through September 2004 when he assumed the role of Senior Vice
President of E-Commerce. From 1997 to 1999, Mr. Keane was the Design Director
for Music Boulevard, an E-Commerce site owned by N2K, Inc. From 1990 to 1997,
Mr. Keane served as Regional Manager for APCO Graphics, an architectural
graphics company.
Bradford Matson has served as our Chief Marketing Officer since September 2005.
Mr. Matson, was a marketing executive at Spiegel Catalog from 1981 to 2003,
where he held various senior level positions, including Senior Vice President of
Advertising and Brand Communications from 2001 to 2003, Vice President of
Advertising from 2000 to 2001 and Vice President of Advertising and Marketing
for Portfolio SBUs from 1997 to 1999. From 2004 to 2005, Mr. Matson served as
Director of Marketing and Communications for the Steppenwolf Theatre Co.
Christopher G. McCann has served as a director since February 2005. Since
September 2000, Mr. McCann has been the President of 1-800-flowers, a leading
retailer of floral products and other gifts, and prior to that was that
company's Senior Vice President. Mr. McCann has been a Director of 1-800-flowers
since inception. Mr. McCann serves on the board of directors of Neoware, Inc., a
provider of software, services and solutions to enable thin client appliance
computing, and is a member of the Board of Trustees of the Marist College.
26
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.
Neal Moszkowski has served as a director since August 1999 and is the Series A
Preferred Stock designee. Since April 2005 Mr. Moszkowski has been Co-CEO of
TowerBrook Capital Partners, L.P. ("TowerBrook"), a private equity investment
company, based in the New York office. Prior to the formation of TowerBrook and
since August 1998, Mr. Moszkowski was Co-Head of Soros Private Equity, a
division of Soros Fund Management LLC and was a member of the Management
Committee of Soros Fund Management LLC. 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, Wellcare Health Plans, Inc., a managed care services provider
and Jet Blue Airways Corporation, a low fare airline.
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.
CORPORATE GOVERNANCE
Our Board of Directors has reviewed the independence of each of our directors on
the basis of the standards adopted by Nasdaq. In this review, the Board
considered transactions and relationships between us, on the one hand, and each
director, members of his or her immediate family, and other entities with which
he or she is affiliated, on the other hand. As a result of this review, the
Board of Directors affirmatively determined that Messrs. Miller, Kane, Erdos and
McCann and Ms. Jackson are each "independent directors" within the meaning of
the Nasdaq rules. Because Soros owns a majority of the voting power of our
capital stock, the Board determined that it was appropriate for us to rely upon
the "Controlled Company" exemption provided by Nasdaq rules. Accordingly, Nasdaq
rules do not require that a majority of our Board of Directors be independent,
and, similarly, do not require that all of the members of the Nominating
Committee (as defined below) be independent.
The Board of Directors has established an Audit Committee ("Audit Committee") in
accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). The Audit Committee is comprised of Barry Erdos,
Chris McCann, Alan Kane and Martin Miller. Mr. Erdos is the Chairman of the
Audit Committee. The Audit Committee is responsible for the appointment of our
outside accountants, examining the results of audits, reviewing internal
accounting controls and reviewing related party transactions. The Board has
determined that Mr. Erdos is an "audit committee financial expert" 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 Exchange Act.
The Board of Directors also has established an Option Plan/Compensation
Committee ("Option Plan/Compensation Committee") consisting of Neal Moszkowski
and Martin Miller. The Option Plan/Compensation Committee administers the
Company's 1997 and 2000 Stock Option Plans, establishes the compensation levels
for executive officers and key personnel and oversees the Company's bonus plans.
In June 2004, the Board of Directors established a Nominating and Governance
Committee ("Nominating Committee"), consisting of Alan Kane and David Wassong.
Mr. Kane is an independent director under Nasdaq rules. While Mr. Wassong is not
an independent director under Nasdaq rules, he is permitted to sit on the
Nominating Committee pursuant to the "Controlled Company" exemption discussed
above. The purposes of the Nominating Committee are to assist the Board of
Directors by identifying individuals qualified to become directors, and setting
criteria for, and evaluating, candidates for director nominees, and to recommend
to the Board of Directors the director nominees for election at the annual
meetings of stockholders or for appointments to fill vacancies; recommend to the
Board of Directors nominees for each committee of the Board; advise the Board of
Directors about appropriate composition of the Board and its committees; advise
the Board of Directors about and recommend to the Board of Directors appropriate
corporate governance practices and to assist the Board of Directors in
implementing those practices; lead the Board of Directors in its annual review
of the performance of the Board and its committees; and perform such other
functions as the Board of Directors may assign to it from time to time.
27
We have adopted a Code of Ethics applicable to all directors, officers and
employees, which meets the requirements of a "code of ethics" as defined in Item
406 of Regulation S-K, and we maintain procedures for the confidential,
anonymous submission by employees of complaints regarding our accounting,
internal accounting controls, auditing matters and other issues. A copy of our
code of ethics is available on the Company's Web site at www.bluefly.com. Any
amendment to or waiver of a provision of the code of ethics that applies to our
principal executive officer, principal financial officer, principal accounting
officer, controller or persons performing similar functions and relates to
elements of the code specified in the rules of the Securities and Exchange
Commission will be posted on the Web site.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of 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 Securities and Exchange
Commission initial reports of beneficial ownership and reports of changes in
beneficial ownership of the Common Stock. Reporting Persons are required to
furnish us with copies of all such reports. During 2005, Martin Keane, our
Senior Vice President of E-Commerce, was late in filing a Form 4 relating to a
stock option grant, but did file the required form. To our knowledge, based
solely on a review of copies of such reports furnished to us, we believe that
during the 2005 fiscal year all Reporting Persons complied with all applicable
Section 16(a) reporting requirements except as noted above.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Our independent, outside non-employee directors are paid a cash stipend of
$1,500 for each board or committee meeting attended in person (and, in the case
of the Audit Committee Chairman, $2,000 per meeting) and are reimbursed for
expenses incurred on our behalf. In addition, each such director is paid an
annual retainer of $10,000 at the first regularly scheduled Board meeting of
each fiscal year. The maximum aggregate stipend and retainer paid to any such
director in a year is $16,000 (or, in the case of the Audit Committee Chairman,
$18,000).
Each non-employee director receives an option to purchase 15,000 shares of
Common Stock (25,000 shares in the case of the Chairman of the Board and 20,000
shares in the case of the Chairman of the Audit Committee) at the time of the
first regularly scheduled Board meeting after such director is appointed to the
Board and an annual grant of an option to purchase 10,000 shares of Common Stock
(20,000 shares in the case of the Chairman of the Board and 12,500 shares in the
case of the Chairman of the Audit Committee) at the first regularly scheduled
Board meeting of each fiscal year (even if such director is receiving an option
in connection with his or her appointment at such meeting).
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth information concerning the compensation paid by
us during the fiscal years ended December 31, 2005, 2004 and 2003 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 2005 (the "Named
Executive Officers").
LONG TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------------- --------------
SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS
------------------------------------- ---- --------- --------- ------------ --------------
Melissa Payner-Gregor 2005 $ 488,462 $ 100,000(4) $ 655 450,000(1)
Chief Executive Officer and President 2004 $ 466,960 $ 295,000(3) $ 655 700,000(2)
2003 $ 112,500 -- $ -- 1,200,000(1)
Patrick C. Barry 2005 $ 300,000 $ 50,000(4) $ 590 300,000(1)
Chief Financial Officer and Chief 2004 $ 260,429 $ 170,000 $ 590 300,000(1)
Operating Officer 2003 $ 225,000 -- $ 590 --
Bradford Matson 2005 100,962 $ 20,000(4) $ -- 500,000(1)
Chief Marketing Officer
Martin Keane 2005 $ 182,500 $ 25,000(4) -- 70,000(1)
Senior Vice President of E-Commerce 2004 $ 171,538 $ 25,000 $ -- --
2003 $ 152,308 $ 20,000 $ -- --
28
(1) Options granted at an exercise price equal to 100% of the fair market value
on the date of grant.
(2) Options granted at an exercise price equal to 100% of the fair market value
on the date of grant, except for 100,000 options that, pursuant to Ms.
Payner-Gregor's employment agreement, were granted at an exercise price of
$1.56 (the fair market value of the Common Stock on the date of Ms.
Payner-Gregor's employment agreement). The fair market value of the common
stock on the date of grant of such options was $2.49 per share.
(3) Includes $75,000 paid to Ms. Payner-Gregor in connection with her relocation
to New York in accordance with her employment agreement.
(4) Earned in 2005 but will be paid in 2006.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Option Plan/Compensation Committee are Neal Moszkowski and
Martin Miller. No member of our Option Plan/Compensation Committee has at any
time been an employee of ours. None of our executive officers serves as a member
of the board of directors or compensation committee of any entity that has one
or more executive officers serving as a member of our board of directors or
Option Plan/Compensation Committee.
EMPLOYMENT AGREEMENTS
We currently have employment agreements with Ms. Payner-Gregor, Mr. Barry, Mr.
Matson and Mr. Keane. 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. Currently, their annual salaries are
$500,000, $300,000, $350,000 and $190,000, respectively. 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 is subject to a minimum floor of $100,000. Mr. Matson is
entitled to receive a minimum bonus of $50,000 for the year ended December 31,
2006.
The employment agreements for Ms. Payner-Gregor, Mr. Barry, Mr. Matson and Mr.
Keane terminate on March 1, 2007, June 30, 2006, September 19, 2008 and March 1,
2008, respectively. The employment agreements with Ms. Payner-Gregor and Mr.
Barry include provisions pursuant to which the agreement is automatically
renewed for successive one year terms unless one party provides notice to the
other of such party's desire not to renew such agreement at least 90 days prior
to the end of the then-current term of such agreement.
Each of these employment agreements obligates the Company to make severance
payments equal to up 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 them
under such circumstances. Ms. Payner-Gregor's and Mr. Barry's employment
agreements also provide 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, Ms. Payner-Gregor's and Mr. Barry's
employment agreements provide 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
to the Named Executives Officers during the fiscal year ended December 31, 2005:
29
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------------------------------------------------------- VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF STOCK
OPTIONS PRICE APPRECIATION
NUMBER OF SECURITIES GRANTED TO EXERCISE OR FOR OPTION TERM
UNDERLYING OPTIONS EMPLOYEES IN BASE EXPIRATION ---------------------
NAME GRANTED (#) FISCAL YEAR (%) PRICE ($) DATE 5% 10%
-------------------- -------------------- --------------- ----------- ---------- ---------- ---------
Melissa Payner-Gregor 200,000 10.46% $ 1.26 3/23/15 $ 291,722 $ 335,412
250,000 13.07% $ 1.20 12/27/15 $ 347,288 $ 399,300
Patrick C. Barry 100,000 5.23% $ 1.26 3/23/15 $ 145,861 $ 167,706
200,000 10.46% $ 1.20 12/27/15 $ 277,830 $ 319,440
Bradford Matson 400,000 20.92% $ 1.69 9/19/15 $ 782,555 $ 899,756
100,000 5.23% $ 1.20 12/27/15 $ 138,915 $ 159,720
Martin Keane 50,000 2.61% $ 1.26 3/23/15 $ 72,930 $ 83,853
20,000 1.05% $ 1.54 9/30/15 $ 35,655 $ 40,995
The Company does not currently grant stock appreciation rights.
OPTION HOLDINGS
The following table sets forth information with respect to the Named Executive
Officers concerning the number and value of unexercised options held at December
31, 2005.
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES AT DECEMBER 31, 2005 (#) AT DECEMBER 31, 2005 ($)(1)
ACQUIRED ON VALUE ----------------------------- -----------------------------
NAME EXERCISE # REALIZED $ EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------------------- ------------- ------------- ------------- ------------- ------------- -------------
Melissa Payner-Gregor -- -- 1,280,247 1,069,753 -- --
Patrick C. Barry -- -- 1,805,322 439,590 $ 210,000 --
Bradford Matson -- -- -- 500,000 -- --
Martin Keane -- -- 410,622 59,378 $ 63,000 --
(1) Represents the value of unexercised, in-the-money stock options at December
30, 2005, using the $1.12 closing price of the Common Stock on that date.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
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 17, 2006,
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)
---------------------------------------- -------------------- ----------------
Patrick C. Barry 1,816,572(3) 8.1%
Barry Erdos 32,500(4) *
Ann Jackson -- *
30
NUMBER OF SHARES
NAME (1) BENEFICIALLY OWNED PERCENTAGE (2)
---------------------------------------- -------------------- ----------------
Alan Kane 52,500(5) *
Martin Keane 440,017(6) 2.1%
Bradford Matson 8,333(7) *
Martin Miller 45,000(8)(9) *
Neal Moszkowski (10) 32,500(11) *
Christopher G. McCann 25,000(12) *
Melissa Payner-Gregor 1,479,341(13) 6.7%
David Wassong (14) 25,000(15) *
SFM Domestic Investments LLC 1,509,486(16)(20) 6.9%
Quantum Industrial Partners LDC 46,127,113(17)(20) 75.2%
George Soros 47,636,602(18)(20) 76.0%
All directors and executive
officers as a group (11 persons) 3,956,763(19) 16.2%
----------
*Less than 1%.
(1) Except as otherwise indicated, the address of each of the individuals
listed is c/o Bluefly, Inc., 42 West 39th Street, New York, New York 10018.
(2) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect
to securities. Shares of Common Stock issuable upon the exercise of options
or warrants currently exercisable or exercisable within 60 days are deemed
outstanding for computing the percentage ownership of the person holding
such options or warrants but are not deemed outstanding for computing the
percentage ownership of any other person.
(3) Includes 1,811,572 shares of Common Stock issuable upon exercise of options
granted under the Plan.
(4) Includes 32,500 shares of Common Stock issuable upon exercise of options
granted under the Plan.
(5) Includes 52,500 shares of Common Stock issuable upon exercise of options
granted under the Plan.
(6) Includes 440,017 shares of Common Stock issuable upon exercise of options
granted under the Plan.
(7) Includes 8,333 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) Includes 42,000 shares of Common Stock issuable upon exercise of options
granted under the Plan.
(10) Mr. Moszkowski's address is c/o, TowerBrook Capital Partners, L.P., 430
Park Avenue New York, New York, 10022. Mr. Moszkowski is the designee of
the holders of the Series A Preferred Stock. Mr. Moszkowski disclaims
beneficial ownership of the shares of Common Stock beneficially owned by
George Soros, SFMDI and QIP (as defined in notes (15) and (16) below) and
none of such shares are included in the table above as being beneficially
owned by him.
(11) Includes 32,500 shares of Common Stock issuable upon exercise of options
granted under the Plan. Certain of the options are held for the benefit of
QIP.
(12) Includes 25,000 shares of Common Stock issuable upon exercise of options
granted under the Plan.
(13) Includes 1,479,341 shares of Common Stock issuable upon exercise of options
granted under the Plan.
(14) Mr. Wassong's address is c/o Soros Fund Management LLC, 888 Seventh Avenue,
33rd floor, New York, New York 10106. Mr. Wassong is the designee of the
holders of the Series B Preferred Stock. Mr. Wassong disclaims beneficial
ownership of the shares of Common Stock beneficially owned by George Soros,
SFMDI and QIP (as defined in notes (15) and (16) below) and none of such
shares are included in the table above as being beneficially owned by him.
(15) Includes 25,000 shares of Common Stock issuable upon exercise of options
granted under the Plan. Certain of the options are held for the benefit of
QIP.
(16) 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; 201,091 shares of Common Stock issuable upon
conversion of 152.829 shares of Series D Preferred Stock; 41,710 shares of
Common
31
Stock issuable upon conversion of 31.7 shares of Series E Preferred Stock;
41,121 shares of Common Stock issuable upon conversion of 95.4 shares of
Series F Preferred Stock; 172,995 shares of Common Stock; 19,220 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.
(17) 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; 6,142,450 shares of Common Stock issuable upon
conversion of 4,668.262 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; 1,251,983 shares of Common Stock issuable upon conversion
of 2,904.6 shares of Series F Preferred Stock; 5,287,082 shares of Common
Stock; 587,424 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 with its principal address at Kaya
Flamboyan 9, Willemstad, Curacao, Netherlands Antilles. 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 Mr. Soros, as Chairman of SFM, may be
deemed to have shared voting power and sole investment power with respect
to the QIP Shares. Accordingly, each of QIP, QIHMI, QIH Management, SFM 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.
(18) See (16) and (17) above.
(19) Includes 3,948,763 shares of Common Stock issuable upon exercise of
options.
(20) 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 17, 2006, 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)
---------------------------------------- -------------------- ----------------
Patrick C. Barry - -
Barry Erdos - -
Ann Jackson - -
Alan Kane - -
Martin Keane - -
Bradford Matson - -
Martin Miller - -
Neal Moszkowski (3) - -
Christopher G. McCann - -
Melissa Payner-Gregor - -
David Wassong (3) - -
Quantum Industrial Partners LDC 445,410(4)(6) 96.8%
George Soros 460,000(5)(6) 100.0%
32
NUMBER OF SHARES
NAME (1) BENEFICIALLY OWNED PERCENTAGE (2)
---------------------------------------- -------------------- ----------------
All directors and executive officers
as a group (11 persons) - -
----------
*Less than 1%.
(1) Except as otherwise indicated, the address of each of the individuals
listed is c/o Bluefly, Inc., 42 West 39th Street, New York, New York 10018.
(2) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect
to securities. Shares of Common Stock issuable upon the exercise of options
or warrants currently exercisable or exercisable within 60 days are deemed
outstanding for computing the percentage ownership of the person holding
such options or warrants but are not deemed outstanding for computing the
percentage ownership of any other person.
(3) Mr. Moszkowski's address is c/o TowerBrook Capital Partners, L.P., 430 Park
Avenue New York, New York 10022 and Mr. Wassong's address is c/o Soros Fund
Management LLC, 888 Seventh Avenue, 33rd Floor, New York, New York 10106.
Messrs. Moszkowski and Wassong are the designees of the holders of the
Series A and B Preferred Stock. Messrs. Moszkowski and Wassong disclaim
beneficial ownership of the Series A Preferred Stock beneficially owned by
George Soros and QIP and none of such shares are included in the table
above as being beneficially owned by them.
(4) Represents the 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, with its principal address at Kaya
Flamboyan 9, Willemstad, Curacao, Netherlands Antilles. 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. SFM is the sole managing member of QIH
Management. Mr. Soros, as Chairman of SFM, may be deemed to have shared
voting power and sole investment power with respect to the QIP A Shares.
Accordingly, each of QIHMI, QIH Management, SFM 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 17, 2006, 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)
---------------------------------------- -------------------- ----------------
Patrick C. Barry - -
Barry Erdos - -
Ann Jackson - -
Alan Kane - -
Martin Keane - -
Bradford Matson - -
Martin Miller - -
Neal Moszkowski (3) - -
33
NUMBER OF SHARES
NAME (1) BENEFICIALLY OWNED PERCENTAGE (2)
---------------------------------------- -------------------- ----------------
Christopher G. McCann - -
Melissa Payner-Gregor - -
David Wassong (3) - -
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 (11 persons) - -
----------
*Less than 1%.
(1) Except as otherwise indicated, the address of each of the individuals
listed is c/o Bluefly, Inc., 42 West 39th Street, New York, New York 10018.
(2) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect
to securities. Shares of Common Stock issuable upon the exercise of options
or warrants currently exercisable or exercisable within 60 days are deemed
outstanding for computing the percentage ownership of the person holding
such options or warrants but are not deemed outstanding for computing the
percentage ownership of any other person.
(3) Mr. Moszkowski's address is c/o TowerBrook Capital Partners, L.P., 430 Park
Avenue New York, New York 10022 and Mr. Wassong's address is c/o Soros Fund
Management LLC, 888 Seventh Avenue, 33rd Floor, New York, New York 10106.
Messrs. Moszkowski and Wassong are the designees of the holders of the
Series A and B Preferred Stock. Messrs. Moszkowski and Wassong disclaim
beneficial ownership of the shares of Series B Preferred Stock beneficially
owned by George Soros and QIP and none of such shares are included in the
table above as being beneficially owned by them.
(4) Represents the 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, with its principal address at Kaya
Flamboyan 9, Willemstad, Curacao, Netherlands Antilles. 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. SFM is the sole managing member of QIH
Management. Mr. Soros, as Chairman of SFM, may be deemed to have shared
voting power and sole investment power with respect to the QIP B Shares.
Accordingly, each of QIHMI, QIH Management, SFM 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 17, 2006, 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)
---------------------------------------- -------------------- ----------------
Patrick C. Barry - -
Barry Erdos - -
34
NUMBER OF SHARES
NAME (1) BENEFICIALLY OWNED PERCENTAGE (2)
---------------------------------------- -------------------- ----------------
Ann Jackson - -
Alan Kane - -
Martin Keane - -
Bradford Matson - -
Martin Miller - -
Neal Moszkowski (3) - -
Christopher G. McCann - -
Melissa Payner-Gregor - -
David Wassong (3) - -
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 (11 persons) - -
----------
*Less than 1%.
(1) Except as otherwise indicated, the address of each of the individuals
listed is c/o Bluefly, Inc., 42 West 39th Street, New York, New York 10018.
(2) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect
to securities. Shares of Common Stock issuable upon the exercise of options
or warrants currently exercisable or exercisable within 60 days are deemed
outstanding for computing the percentage ownership of the person holding
such options or warrants but are not deemed outstanding for computing the
percentage ownership of any other person.
(3) Mr. Moszkowski's address is c/o TowerBrook Capital Partners, L.P., 430 Park
Avenue New York, New York 10022 and Mr. Wassong's address is c/o Soros Fund
Management LLC, 888 Seventh Avenue, 33rd Floor, New York, New York 10106.
Messrs. Moszkowski and Wassong are the designees of the holders of the
Series A and B Preferred Stock. Messrs. Moszkowski and Wassong disclaim
beneficial ownership of the shares of Series 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, with its principal address at Kaya
Flamboyan 9, Willemstad, Curacao, Netherlands Antilles. 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. SFM is the sole managing member of QIH
Management. Mr. Soros, as Chairman of SFM, may be deemed to have shared
voting power and sole investment power with respect to the QIP C Shares.
Accordingly, each of QIHMI, QIH Management, SFM 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 Company as of
February 17, 2006, for (i) each person who is known by the Company to own
beneficially more than 5% of the Series D Preferred Stock of the Company, (ii)
each of the Company's directors, (iii) the Named Executives, and (iv) all
directors and executive officers as a group.
35
NUMBER OF SHARES
NAME (1) BENEFICIALLY OWNED PERCENTAGE (2)
---------------------------------------- -------------------- ----------------
Patrick C. Barry - -
Barry Erdos - -
Ann Jackson - -
Alan Kane - -
Martin Keane - -
Bradford Matson - -
Martin Miller - -
Neal Moszkowski (3) - -
Christopher G. McCann - -
Melissa Payner-Gregor - -
David Wassong (3) - -
Portside Growth and Opportunity Fund(4) 330.78 5.7%
Quantum Industrial Partners LDC 4,668.26(5)(7) 80.3%
George Soros 4,821.09(6)(7) 82.9%
All directors and executive officers as
a group (11 persons) - -
----------
*Less than 1%.
(1) Except as otherwise indicated, the address of each of the individuals
listed is c/o Bluefly, Inc., 42 West 39th Street, New York, New York 10018.
(2) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect
to securities. Shares of Common Stock issuable upon the exercise of options
or warrants currently exercisable or exercisable within 60 days are deemed
outstanding for computing the percentage ownership of the person holding
such options or warrants but are not deemed outstanding for computing the
percentage ownership of any other person.
(3) Mr. Moszkowski's address is c/o TowerBrook Capital Partners, L.P., 430 Park
Avenue New York, New York 10022 and Mr. Wassong's address is c/o Soros Fund
Management LLC, 888 Seventh Avenue, 33rd Floor, New York, New York 10106.
Messrs. Moszkowski and Wassong are the designees of the holders of the
Series A and B Preferred Stock. Messrs. Moszkowski and Wassong disclaim
beneficial ownership of the shares of Series 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) Ramius Capital Group, LLC ("Ramius Capital") is the investment advisor of
Portside Growth and Opportunity Fund ("Portside") and consequently has
voting and investment power over securities held by Portside. Ramius
Capital disclaims beneficial ownership of the shares held by Portside.
Peter A. Cohen, Morgan B. Stark, Thomas W. Strauss and Jeffrey M. Solomon
are the sole managing members of C4S & Co., LLC, the sole managing member
of Ramius Capital. As a result, Messrs. Cohen, Stark, Strauss and Solomon
may be considered beneficial owners of any shares deemed to be beneficially
owned by Ramius Capital. Messrs. Cohen, Stark, Strauss and Solomon disclaim
beneficial ownership of these shares.
(5) 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, with its principal address at Kaya
Flamboyan 9, Willemstad, Curacao, Netherlands Antilles. 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. SFM is the sole managing member of QIH
Management. Mr. Soros, as Chairman of SFM, may be deemed to have shared
voting power and sole investment power with respect to the QIP D Shares.
Accordingly, each of QIHMI, QIH Management, SFM 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.
36
(6) Represents both (i) 152.829 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.
(7) 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 Company as of
February 17, 2006, for (i) each person who is known by the Company to own
beneficially more than 5% of the Series D Preferred Stock of the Company, (ii)
each of the Company'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)
---------------------------------------- -------------------- ----------------
Patrick C. Barry - -
Barry Erdos - -
Ann Jackson - -
Alan Kane - -
Martin Keane - -
Bradford Matson - -
Martin Miller - -
Neal Moszkowski (3) - -
Christopher G. McCann - -
Melissa Payner-Gregor - -
David Wassong (3) - -
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 (11 persons) - -
----------
*Less than 1%.
(1) Except as otherwise indicated, the address of each of the individuals
listed is c/o Bluefly, Inc., 42 West 39th Street, New York, New York 10018.
(2) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect
to securities. Shares of Common Stock issuable upon the exercise of options
or warrants currently exercisable or exercisable within 60 days are deemed
outstanding for computing the percentage ownership of the person holding
such options or warrants but are not deemed outstanding for computing the
percentage ownership of any other person.
(3) Mr. Moszkowski's address is c/o TowerBrook Capital Partners L.P., 430 Park
Avenue New York, New York 10022 and Mr. Wassong's address is c/o Soros Fund
Management LLC, 888 Seventh Avenue, 33rd Floor, New York, New York 10106.
Messrs. Moszkowski and Wassong are the designees of the holders of the
Series A and B Preferred Stock. Messrs. Moszkowski and Wassong disclaim
beneficial ownership of the shares of Series E 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, with its principal address at Kaya
Flamboyan 9, Willemstad, Curacao, Netherlands Antilles. 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. SFM is the sole managing member of QIH
Management. Mr. Soros, as Chairman of SFM, may be deemed to have shared
voting power and sole investment power with respect to the QIP E Shares.
Accordingly, each of QIHMI, QIH Management, SFM 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.
37
(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 E 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 F PREFERRED STOCK
The following table sets forth certain information with respect to the
beneficial ownership of the Series F Preferred Stock of the Company as of
February 17, 2006, for (i) each person who is known by the Company to own
beneficially more than 5% of the Series F Preferred Stock of the Company, (ii)
each of the Company'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)
---------------------------------------- -------------------- ----------------
Patrick C. Barry - -
Barry Erdos - -
Ann Jackson - -
Alan Kane - -
Martin Keane - -
Bradford Matson - -
Martin Miller - -
Neal Moszkowski (3) - -
Christopher G. McCann - -
Melissa Payner-Gregor - -
David Wassong (3) - -
JGB Capital, L.P. (4) 284.6 6.9%
Crescent International Ltd. (5) 285.7 6.9%
Portside Growth and Opportunity Fund(6) 571.4 13.8%
Quantum Industrial Partners LDC 2,904.6(7)(9) 70.13%
George Soros 3,000(8)(9) 72.43%
All directors and executive officers as
a group (10 persons) - -
----------
*Less than 1%.
(1) Except as otherwise indicated, the address of each of the individuals
listed is c/o Bluefly, Inc., 42 West 39th Street, New York, New York 10018.
(2) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect
to securities. Shares of Common Stock issuable upon the exercise of options
or warrants currently exercisable or exercisable within 60 days are deemed
outstanding for computing the percentage ownership of the person holding
such options or warrants but are not deemed outstanding for computing the
percentage ownership of any other person.
(3) Mr. Moszkowski's address is c/o TowerBrook Capital Partners L.P., 430 Park
Avenue New York, New York 10022 and Mr. Wassong's address is c/o Soros Fund
Management LLC, 888 Seventh Avenue, 33rd Floor, New York, New York 10106.
Messrs. Moszkowski and Wassong are the designees of the holders of the
Series A and B Preferred Stock. Messrs. Moszkowski and Wassong disclaim
beneficial ownership of the shares of Series F 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) Brett Cohen in his capacity as the President of JGB Management, Inc., the
general partner of JGB Capital, LP, has voting and investment power over
such securities.
(5) Mel Craw and Maxi Brezzi, in their capacity as managers of GreenLight
Switzerland SA, the investment advisor to Crescent International Ltd., have
voting and investment power over the shares owned by Crescent International
Ltd. Messrs. Craw and Brezzi disclaim beneficial ownership of such shares.
38
(6) Ramius Capital Group, LLC ("Ramius Capital") is the investment advisor of
Portside Growth and Opportunity Fund ("Portside") and consequently has
voting and investment power over securities held by Portside. Ramius
Capital disclaims beneficial ownership of the shares held by Portside.
Peter A. Cohen, Morgan B. Stark, Thomas W. Strauss and Jeffrey M. Solomon
are the sole managing members of C4S & Co., LLC, the sole managing member
of Ramius Capital. As a result, Messrs. Cohen, Stark, Strauss and Solomon
may be considered beneficial owners of any shares deemed to be beneficially
owned by Ramius Capital. Messrs. Cohen, Stark, Strauss and Solomon disclaim
beneficial ownership of these shares.
(7) Represents the shares of Series F 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, with its principal address at Kaya
Flamboyan 9, Willemstad, Curacao, Netherlands Antilles. 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. SFM is the sole managing member of QIH
Management. Mr. Soros, as Chairman of SFM, may be deemed to have shared
voting power and sole investment power with respect to the QIP F Shares.
Accordingly, each of QIHMI, QIH Management, SFM 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.
(8) Represents both (i) 95.4 shares of Series F Preferred Stock held in the
name of SFMDI (the "SFMDI F Shares") and (ii) the QIP F Shares referenced
in Note 4 above. As managing member of SFMDI, Mr. Soros also may be deemed
the beneficial owner of the SFMDI F Shares. The principal office of SFMDI
is at 888 Seventh Avenue, 33rd Floor, New York, New York 10106.
(9) See "Risk Factors - Change of Control Covenant and Liquidation Preference
of Preferred Stock."
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
EQUITY COMPENSATION PLAN INFORMATION (AS OF DECEMBER 31, 2005)
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) (C)
---------------------------- -------------------------- ------------------------- -------------------------
Equity compensation plans
approved by security holders 7,503,912 $ 2.01 2,831,518
Equity compensation plans not
approved by security holders 534,616 $ 1.49 518,402
Total 8,038,528 $ 1.97 3,349,920
The following is a summary of the material provisions of the Bluefly, Inc. 2000
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 Plans. 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
39
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 the 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.
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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
EXTENSION OF MATURITY DATES OF NOTES
In February 2006, Soros agreed to extend the maturity dates on the Convertible
Promissory Notes issued to affiliates of Soros in July and October 2003. The
maturity dates of the Notes, which were originally January and April 2004,
respectively, were each extended for one year, from May 1, 2006 to May 1, 2007.
TRANSACTIONS WITH SOROS RELATING TO THE LOAN FACILITY
Our Credit Facility with Wells Fargo is secured by a lien on all of the
Company's assets, as well as a $2,000,000 letter of credit issued by Soros in
favor of Wells Fargo (the "Soros LC"). Availability under the Credit Facility is
determined by a formula that takes into account the amount of the Company's
inventory and accounts receivable, as well as the Soros LC.
We are required to pay Soros Fund Management LLC an annual fee in connection
with the issuance and maintenance of the Soros LC in an amount equal to the fee
that we would be required to pay in order to have a similar letter of credit
issued under the Credit Facility. For the year beginning on the date of the
closing of the Credit Facility this formula requires an annual fee of $55,000.
We are also required to reimburse Soros for any costs and expenses associated
with the issuance and maintenance of the Soros LC.
40
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
The aggregate fees billed for professional services rendered by
PricewaterhouseCoopers, LLP ("PwC"), our independent registered public
accounting firm, for the audit of our consolidated financial statements,
including the reviews of our condensed consolidated financial statements
included in our quarterly reports on Form 10-Q, for fiscal 2005 and 2004 were
approximately $175,400 and $148,500, respectively. In addition, we paid PwC
approximately $25,000 in connection with professional services rendered to us in
connection with the filing of our registration statements on Forms S-3 and S-8
in 2005. All of the foregoing services rendered by PwC were pre-approved by the
Audit Committee.
AUDIT RELATED FEES
Other than the fees described under the caption "Audit Fees" above, PwC did
not bill us any fees for services rendered to us during fiscal 2005 and 2004 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 2005 and 2004 for tax compliance, tax advice or tax planning.
OTHER FEES
PwC did not bill us for any other professional services rendered during
fiscal 2005 and 2004 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. The Audit
Committee has delegated its Chairman, Barry Erdos, to approve non-audit services
up to $15,000 on behalf of the Committee.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1. Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2005 and 2004
Consolidated Statements of Operations for the three years ended December
31, 2005, 2004 and 2003
Consolidated Statements of Changes in Shareholders' Equity for the three
years ended December 31, 2005, 2004 and 2003
Consolidated Statements of Cash Flows for the three years ended December
31, 2005, 2004 and 2003
Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts
3. Exhibits:
EXHIBIT NO. DESCRIPTION
---------- -----------------------------------------------------------------
3.1 (f) Certificate of Incorporation of the Company.
3.2 (f) By-Laws of the Company.
3.3 (i) Certificate of Powers, Designations, Preferences and Rights of
Series C Preferred Stock of the Company.
3.4 (j) Certificate of Powers, Designations, Preferences and Rights of
Series D Preferred Stock of the Company.
41
3.5 (k) Certificate of Powers, Designations, Preferences and Rights of
Series E Preferred Stock of the Company.
3.6 (v) Certificate of Powers, Designations, Preferences and rights of
Series F Preferred Stock of the Company.
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) 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.
10.11 (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.0
10.12 (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.
10.13 (f) Warrant, dated March 30, 2001, issued to Quantum Industrial
Partners LDC.
10.14 (f) Warrant, dated March 30, 2001, issued to SFM Domestic
Investments LLC.
*10.15 (g) Software License and Services Agreement, dated March 12, 2002, by
and among the Company and Blue Martini Software, Inc.
10.16 (g) Warrant No. 1 dated March 27, 2002, issued to Quantum Industrial
Partners LDC.
10.17 (g) Warrant No. 2 dated March 27, 2002, issued to SFM Domestic
Investments LLC.
10.18 (g) Warrant No. 3 dated March 30, 2002, issued to Quantum Industrial
Partners LDC.
10.19 (g) Warrant No. 4 dated March 30, 2002, issued to SFM Domestic
Investments LLC.
10.20 (h) Common Stock and Warrant Purchase Agreement, dated May 24, 2002,
by and between the Registrant and the investors listed on
Schedule 1 thereto.
10.21 (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.
10.22 (j) Employment Agreement, dated as of July 31, 2002, by and between
the Company and Patrick Barry.
10.23 (j) Note and Warrant Purchase Agreement, dated January 28, 2003, by
and between the Registrant and the investors listed on Schedule 1
thereto.
10.24 (j) Warrant No. 1 dated January 28, 2003, issued to Quantum
Industrial Partners LDC.
10.25 (j) Warrant No. 2 dated January 28, 2003, issued to SFM Domestic
Investments LLC.
10.26 (j) Series D Preferred Stock Purchase Agreement, dated March 12,
2003, by and between the Registrant and the investors listed on
Schedule 1 thereto.
42
10.27 (j) Warrant No. 4 dated March 17, 2003, issued to Quantum Industrial
Partners LDC.
10.28 (j) Warrant No. 5 dated March 17, 2003, issued to SFM Domestic
Investments LLC.
10.29 (k) Series E Preferred Stock Purchase Agreement, dated May 21,
2003, by and between the Registrant and the investors
listed on Schedule 1 thereto.
10.20 (l) Note Purchase Agreement, dated as of July 16, 2003, by and
between the Registrant and the investors listed on Schedule 1
thereto.
10.31 (l) Demand Promissory Note, dated as of July 16, 2003, issued to
Quantum Industrial Partners LDC.
10.32 (l) Demand Promissory Note, dated as of July 16, 2003, issued to
SFM Domestic Investments LLC.
10.33 (m) Note Purchase Agreement, dated as of October 17, 2003, by and
between the Registrant and the investors listed on Schedule 1
thereto.
10.34 (m) Demand Promissory Note, dated as of October 17, 2003, issued to
Quantum Industrial Partners LDC.
10.35 (m) Demand Promissory Note, dated as of October 17, 2003, issued to
SFM Domestic Investments LLC.
10.36 (n) Employment Agreement dated as of September 22, 2003 by and
between Bluefly, Inc. and Melissa Payner-Gregor.
10.37 (o) Common Stock and Warrant Purchase Agreement dated January 9, 2004
by and among the Company and the Investors listed on Schedule 1
thereto.
10.38 (p) Amendment to Promissory Notes, dated as of January 12, 2004, by
and among the Company, Quantum Industrial Partners LDC and SFM
Domestic Investments LLC.
*10.39 (q) CallTech Master Agreement for Outsourcing Contact Center Support,
dated as of August 5, 2004, by and between the Registrant and
CallTech Communications, LLC.
10.40 (r) Amendment to Promissory Notes, dated as of February 18, 2005, by
and among the Company, Quantum Industrial Partners LDC and SFM
Domestic Investments LLC.
10.41 (s) Bluefly, Inc. 2005 Stock Incentive Plan.
*10.42 (t) Master Service Agreement, dated as of February 28, 2005, by and
between the Company and Level 3 Communications, LLC.
*10.43 (t) Customer Order Addendum, dated as of February 28, 2005, by and
between the Company and Level 3 Communications, LLC.
*10.44 (u) Master Services Agreement, dated as of March 21, 2005, by and
between the Company and NewRoads, Inc.
*10.45 (u) Statement of Work 1 by and between the Company and NewRoads, Inc.
10.46 (v) Preferred Stock and Warrant Purchase Agreement, dated as of June
24, 2005, by and among the Company and the Investors listed on
the signature page thereto.
10.47 (w) Loan and Security Agreement, dated July 26, 2005, by and between
the Company and Wells Fargo Retail Finance, LLC.
10.48 (w) Reimbursement Agreement, dated July 26, 2005, by and among the
Company, Quantum Industrial Partners LDC and Soros Fund
Management, LLC.
43
10.49 (w) Fee Letter, dated July 26, 2005, by and between the Company and
Soros Fund Management, LLC.
10.50 (x) Employment Agreement, dated as of September 19, 2005, by and
between the Company and Bradford Matson.
10.51 (y) Amendment to Promissory Notes, dated as of February 17, 2006, by
and among the Company, Quantum Industrial Partners LDC and SFM
Domestic Investments LLC.
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
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.
* Confidential treatment requested as to certain portions of this Exhibit.
Such portions have been redacted.
(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 current 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
January 13, 2004.
(p) Incorporated by reference to the Company's report on Form 8-K, dated
January 16, 2004.
(q) Incorporated by reference to the Company's quarterly report on Form
10-Q for the quarterly period ended June 30, 2004.
(r) Incorporated by reference to the Company's report on Form 8-K, dated
February 22, 2005.
(s) Incorporated by reference to the Company's annual report on Form 10-K
for the year ended December 31, 2005.
(t) Incorporated by reference to the Company's report on Form 8-K, dated
March 4, 2005.
(u) Incorporated by reference to the Company's report on Form 8-K, dated
March 23, 2005.
(v) Incorporated by reference to the Company's report on Form 8-K, dated
June 28, 2005.
(w) Incorporated by reference to the Company's report on Form 8-K, dated
July 29, 2005.
(x) Incorporated by reference to the Company's report on Form 8-K, dated
September 22, 2005.
(y) Incorporated by reference to the Company's report on Form 8-K, dated
February 21, 2006.
* Confidential treatment has been requested as to certain portions of this
Exhibit. Such portions have been redacted.
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BLUEFLY, INC.
By: /s/ Melissa Payner-Gregor
-------------------------------------
Melissa Payner-Gregor
Chief Executive Officer and President
February 28, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934, 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/ Alan Kane Chairman of the Board February 28, 2006
----------------------------
Alan Kane
/s/ Melissa Payner-Gregor Chief Executive Officer
---------------------------- (Principal Executive Officer), February 28, 2006
Melissa Payner-Gregor President and Director
/s/ Patrick C. Barry Chief Financial Officer and February 28, 2006
---------------------------- Chief Operating Officer
Patrick C. Barry (Principal Accounting Officer)
/s/ Barry Erdos Director February 28, 2006
----------------------------
Barry Erdos
/s/ Ann Jackson Director February 28, 2006
----------------------------
Ann Jackson
/s/ Martin Miller Director February 28, 2006
----------------------------
Martin Miller
/s/ Neal Moszkowski Director February 28, 2006
----------------------------
Neal Moszkowski
/s/Christopher McCann Director February 28, 2006
----------------------------
Christopher McCann
/s/ David Wassong Director February 28, 2006
----------------------------
David Wassong
45