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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2004
[ ] 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.
(Exact 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)
Issuer's telephone number: (212) 944-8000
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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 the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of August 11, 2004, the issuer had outstanding 14,640,301 shares of Common
Stock, $.01 par value.
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BLUEFLY, INC.
TABLE OF CONTENTS
PAGE
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Part I. Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheets as of June 30, 2004
and December 31, 2003 (unaudited) 3
Consolidated Condensed Statements of Operations for the six
months ended June 30, 2004 and 2003 (unaudited) 4
Consolidated Condensed Statements of Operations for the three
months ended June 30, 2004 and 2003 (unaudited) 5
Consolidated Condensed Statements of Cash Flows for the six
months ended June 30, 2004 and 2003 (unaudited) 6
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Item 4. Controls and Disclosures 18
Part II. Other Information 19
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 19
Signature 21
Part I - FINANCIAL INFORMATION
Item 1. - Financial Statements
BLUEFLY, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
JUNE 30, DECEMBER 31,
2004 2003
------------- -------------
ASSETS
Current assets
Cash and cash equivalents $ 9,102,000 $ 7,721,000
Restricted cash 1,250,000 --
Inventories, net 9,651,000 11,340,000
Accounts receivable, net of allowance for doubtful accounts 1,258,000 1,157,000
Prepaid expenses 288,000 253,000
Other current assets 342,000 453,000
------------- -------------
Total current assets 21,891,000 20,924,000
Property and equipment, net 1,527,000 1,659,000
Other assets 406,000 415,000
------------- -------------
Total assets $ 23,824,000 $ 22,998,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 2,328,000 $ 3,122,000
Accrued expenses and other current liabilities 2,700,000 3,869,000
Deferred revenue 1,593,000 1,252,000
Notes payable to related party shareholders, includes interest
payable of $443,000 in 2004 and $34,000 in 2003 4,625,000 216,000
------------- -------------
Total current liabilities 11,246,000 8,459,000
Note payable to related party shareholders -- 4,000,000
Long-term interest payable to related party shareholders -- 159,000
Long-term capital lease liability -- 101,000
------------- -------------
Total liabilities 11,246,000 12,719,000
------------- -------------
Commitments and contingencies
Shareholders' equity
Series A Preferred stock - $.01 par value; 500,000 shares
authorized, 460,000 issued and outstanding (liquidation preference:
$9.2 million plus accrued dividends of $4.5 million and $4.0
million as of June 30, 2004 and December 31, 2003, respectively) 5,000 5,000
Series B Preferred stock - $.01 par value; 9,000,000 shares
authorized, 8,889,414 shares issued and outstanding (liquidation
preference: $30 million plus accrued dividends of $6.2 million and
$5.2 million as of June 30, 2004 and December 31, 2003,
respectively) 89,000 89,000
Series C Preferred stock - $.01 par value; 3,500 shares authorized
and 1,000 shares issued and outstanding (liquidation preference:
$1 million plus accrued dividends of $145,000 and $102,000 as of
June 30, 2004 and December 31, 2003, respectively) -- --
Series D Preferred stock - $.01 par value; 7,150 shares authorized,
7,136.548 issued and outstanding (liquidation preference: $7.1
million plus accrued dividends of $1.1 million and $678,000 as of
June 30, 2004 and December 31, 2003, respectively) -- --
Series E Preferred stock - $.01 par value; 1,000 shares authorized,
issued and outstanding (liquidation preference: $1.0 million plus
accrued dividends of $135,000 and $74,000 as of June 30, 2004 and
December 31, 2003, respectively) -- --
Common stock - $.01 par value; 92,000,000 shares authorized and
14,592,388 and 12,894,166 shares issued and outstanding as of June
30, 2004 and December 31, 2003, respectively 146,000 129,000
Additional paid-in capital 106,512,000 102,392,000
Accumulated deficit (94,174,000) (92,336,000)
------------- -------------
Total shareholders' equity 12,578,000 10,279,000
------------- -------------
Total liabilities and shareholders' equity $ 23,824,000 $ 22,998,000
============= =============
The accompanying notes are an integral part of these
consolidated condensed financial statements.
3
BLUEFLY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
------------------------------
2004 2003
------------- -------------
Net sales $ 20,609,000 $ 15,725,000
Cost of sales 13,020,000 11,553,000
------------- -------------
Gross profit 7,589,000 4,172,000
Selling, marketing and fulfillment expenses 6,659,000 5,394,000
General and administrative expenses 3,153,000 2,609,000
------------- -------------
Total operating expenses 9,812,000 8,003,000
Operating loss (2,223,000) (3,831,000)
Interest and other income 785,000 22,000
Interest expense (400,000) (154,000)
------------- -------------
Net loss $ (1,838,000) $ (3,963,000)
Deemed dividend related to beneficial conversion feature on
Series C Preferred Stock -- (225,000)
Preferred stock dividends (2,086,000) (1,483,000)
------------- -------------
Net loss available to common shareholders $ (3,924,000) $ (5,671,000)
============= =============
Basic and diluted loss per common share $ (0.27) $ (0.52)
============= =============
Weighted average common shares outstanding
(basic and diluted) 14,445,034 11,003,596
============= =============
The accompanying notes are an integral part of these
consolidated condensed financial statements.
4
BLUEFLY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED
JUNE 30,
------------------------------
2004 2003
------------- -------------
Net sales $ 9,495,000 $ 7,468,000
Cost of sales 5,688,000 5,153,000
------------- -------------
Gross profit 3,807,000 2,315,000
Selling, marketing and fulfillment expenses 3,210,000 2,982,000
General and administrative expenses 1,394,000 1,406,000
------------- -------------
Total operating expenses 4,604,000 4,388,000
Operating loss (797,000) (2,073,000)
Interest and other income 329,000 16,000
Interest expense (240,000) (66,000)
------------- -------------
Net loss $ (708,000) $ (2,123,000)
Preferred stock dividends (1,062,000) (845,000)
------------- -------------
Net loss available to common shareholders $ (1,770,000) $ (2,968,000)
============= =============
Basic and diluted loss per common share $ (0.12) $ (0.27)
============= =============
Weighted average common shares outstanding
(basic and diluted) 14,575,345 11,024,568
============= =============
The accompanying notes are an integral part of these
consolidated condensed financial statements.
5
BLUEFLY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
-------------------------------
2004 2003
-------------- --------------
Cash flows from operating activities
Net loss $ (1,838,000) $ (3,963,000)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 740,000 1,031,000
Non-cash expense related to warrants issued to supplier 95,000 --
Provisions for returns (997,000) (533,000)
Allowance for doubtful accounts 98,000 88,000
Write-down of inventory 200,000 220,000
Change in value of warrants (564,000) --
Stock option expense 2,000 --
Changes in operating assets and liabilities:
(Increase) decrease in
Inventories 1,394,000 (707,000)
Accounts receivable (199,000) (370,000)
Prepaid expenses (35,000) 103,000
Other current assets 111,000 (37,000)
Increase (decrease) in
Accounts payable (794,000) 341,000
Accrued expenses and other current liabilities (121,000) (515,000)
Interest payable to related party 250,000 10,000
Deferred revenue 341 000 131,000
-------------- --------------
Net cash used in operating activities (1,317,000) (4,201,000)
-------------- --------------
Cash flows from investing activities
Cash collateral in connection with Rosenthal Pledge Agreement (1,250,000) --
Purchase of property and equipment (599,000) (262,000)
-------------- --------------
Net cash used in investing activities (1,849,000) (262,000)
-------------- --------------
Cash flows from financing activities
Net proceeds from January 2004 Financing 4,577,000 --
Net proceeds from exercise of stock options 122,000 --
Proceeds from sale of Series D Preferred Stock -- 2,000,000
Proceeds from issuance of Notes Payable (January 2003 Financing) -- 1,000,000
Proceeds from sale of Series E Preferred Stock -- 1,000,000
Payments of capital lease obligation (152,000) (116,000)
-------------- --------------
Net cash provided by financing activities 4,547,000 3,884,000
-------------- --------------
Net increase in cash and cash equivalents 1,381,000 (579,000)
Cash and cash equivalents - beginning of period 7,721,000 1,749,000
-------------- --------------
Cash and cash equivalents - end of period $ 9,102,000 $ 1,170,000
============== ==============
Supplemental schedule of non-cash investing and financing
activities:
Exchange of note for equity -- $ 2,027,000
============== ==============
Conversion of debt to equity -- $ 1,009,000
============== ==============
Deemed dividend related to beneficial conversion feature on
Series C Preferred Stock -- $ 225,000
============== ==============
Warrants issued to related party shareholders -- $ 43,000
============== ==============
Interest paid $ 84,000 $ 43,000
============== ==============
The accompanying notes are an integral part of these
consolidated condensed financial statements.
6
BLUEFLY, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Bluefly, Inc. and its wholly owned subsidiary (collectively the "Company"). All
significant intercompany balances and transactions have been eliminated in
consolidation. The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnote
disclosures required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. The results of operations of any interim period are not
necessarily indicative of the results of operations to be expected for the
fiscal year. For further information, refer to the consolidated financial
statements and accompanying footnotes included in the Company's Form 10-K/A for
the year ended December 31, 2003.
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 on its ability to
establish profitable operations and/or raise additional financing through public
or private debt or equity financing, or other sources to fund operations. The
Company believes that its current funds, together with working capital, will be
sufficient to enable it to meet its planned expenditures through at least
December 31, 2004. The Company may seek additional equity or debt financing 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 operating plan, future
operations will need to be modified, scaled back or discontinued.
NOTE 2 - THE COMPANY
The Company is a leading Internet retailer that sells over 350 brands of
designer apparel, accessories and home products at discounts up to 75% off
retail value. The Company's Web store ("Bluefly.com" or Web Site") was launched
in September 1998.
NOTE 3 - JANUARY 2004 FINANCING
On January 12, 2004, the Company completed a private placement pursuant to which
it raised $5,000,000. 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.
In accordance with EITF 00-19, the Company accounted for the warrants issued in
January 2004 at fair market value and classified the warrants as a liability
because the Company may be 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
the 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 and $303,000 of other income for the
six months and the three months ended June 30, 2004, respectively.
In January 2004, the Company also extended the maturity dates on the Convertible
Promissory Notes issued to affiliates of Soros Private Equity Partners, LLC that
collectively own a majority of its capital stock (collectively, "Soros") in July
and October 2003 (the "Notes"). The maturity dates of the Notes, which were
originally January and April 2004, respectively, were
7
BLUEFLY, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2004
each extended to March 1, 2005. In February 2004, the maturity date of the Notes
was further extended to May 1, 2005.
NOTE 4 - FINANCING AGREEMENT
The Company has a Financing Agreement (the "Financing Agreement") with Rosenthal
& Rosenthal, Inc. ("Rosenthal") pursuant to which Rosenthal provides the Company
with certain credit accommodations, including loans and advances,
factor-to-factor guarantees or letters of credit in favor of suppliers or
factors or purchases of payables owed to the Company's suppliers (the "Loan
Facility").
The Financing Agreement was amended in April 2004 to: (i) extend the term until
March 30, 2005; (ii) substitute $1.25 million of cash collateral pledged by the
Company for the $2.0 million standby letter of credit previously provided by
Soros as collateral security for the Company's obligations under the Loan
Facility; (iii) decrease the maximum amount available under the Loan Facility
from $4.5 million to $4.0 million; (iv) increase the tangible net worth
requirement to $7.0 million; (v) increase the working capital requirement to
$6.0 million; and (vi) increase the minimum cash balance that the Company is
required to maintain to $750,000 (exclusive of the $1.25 million in cash
collateral). The cash collateral is included on the balance sheet as "Restricted
Cash" and represents monies deposited in a segregated account that has been
pledged to Rosenthal as collateral for the facility.
As of June 30, 2004, the maximum availability under the Loan Facility was
approximately $3.5 million of which approximately $1.8 million was committed,
leaving approximately $1.7 million available against the Loan Facility.
NOTE 5 - LOSS PER SHARE
The Company has determined Loss Per Share in accordance with Statement of
Financial Accounting Standards ("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.
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
from continuing operations, the following options and warrants to purchase
shares of Common Stock and Preferred Stock convertible into shares of Common
Stock were not included in the computation of diluted loss per share because the
result of the exercise of such inclusion would be antidilutive:
Security June 30, 2004 Exercise Prices June 30, 2003 Exercise Prices
-------------------- ----------------- ----------------- ----------------- -----------------
Options 9,179,152 $ 0.69-$ 16.60 9,592,912 $ 0.69 - $ 16.60
Warrants 1,704,945 $ 0.78-$ 9.08 1,119,144 $ 0.78 - $ 9.08
Preferred Stock 43,323,430* 43,323,430*
Convertible Notes --** --
* Excludes dividends on preferred stock, which are payable in cash or
common stock, at the Company's option, upon conversion, redemption or
liquidation.
** Excludes debt issued in connection with the July 2003 financing and
October 2003 financing, which is currently not convertible into Common
Stock.
NOTE 6 - STOCK BASED COMPENSATION
The Company applies Statement of Financial Accounting Standards No. ("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"
8
BLUEFLY, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2004
in accounting for its stock based compensation plan. In accordance with SFAS No.
123, the Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations for expense recognition. In the fiscal quarter ended June 30,
2004, compensation expense of $2,000 was recorded in connection with certain
options issued below market value to the Company's President in accordance with
the terms of her employment agreement. Except for these options, no compensation
expense has been recorded in fiscal quarters ended June 30, 2004 and June 30,
2003 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:
For the Six Months Ended For the Three Months Ended
----------------------------- -----------------------------
June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
------------- ------------- ------------- -------------
Net loss, as reported $ (1,838,000) $ (3,963,000) $ (708,000) $ (2,123,000)
Add: Stock-based employee compensation
expense included in reported net income 2,000 -- 2,000 --
Deduct: total stock-based employee
compensation expense determined under
fair value based method for all awards (1,234,000) (2,100,000) (492,000) (958,000)
Pro forma, net loss (3,070,000) (6,063,000) (1,198,000) (3,081,000)
Loss Per Share:
Basic and diluted, as reported $ (0.27) $ (0.52) $ (0.12) $ (0.27)
Basic and diluted, pro forma $ (0.36) $ (0.71) $ (0.16) $ (0.36)
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.
NOTE 7 - 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 3 above, the Company recognized $564,000 of
other income for the six months ended June 30, 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 3).
NOTE 8 - RECLASSIFICATIONS
Certain amounts in the consolidated condensed financial statements of the prior
period have been reclassified to conform to the current period presentation for
comparative purposes.
9
BLUEFLY, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2004
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Bluefly, Inc., a Delaware corporation, is a leading Internet retailer that sells
over 350 brands of designer apparel, accessories and home products at discounts
up to 75% off retail value. Bluefly.com, our Web site, was launched in September
1998.
Our net sales increased approximately 27% to $9,495,000 for the quarter ended
June 30, 2004 from $7,468,000 for the second quarter ended June 30, 2003.
Our gross margin increased to 40.1% in the second quarter of 2004 from 31.0% in
the second quarter of 2003. The 40.1% gross margin in the second quarter of 2004
represents the highest quarterly gross margin level we have ever achieved. While
we believe that our gross margins in 2004 will be significantly better than they
were in 2003, they may not consistently meet this record level. Indeed, our
gross margin is dependent upon a number of factors, including our ability to
forecast demand and fashion trends accurately, and, accordingly, there can be no
assurance that we will meet any particular margin level.
Our customer acquisition costs decreased to $10.81 per customer in the second
quarter of 2004, from $15.16 per customer in the second quarter of 2003. On
average, the positive contribution to overhead that we generate from a
customer's first purchase exceeds our current customer acquisition costs by a
significant margin. Accordingly, we believe that it may be prudent to be more
aggressive in acquiring customers (even though it may increase our customer
acquisition costs in 2004 and beyond) in order to acquire larger numbers of
customers with profitable ordering patterns.
Our reserve for returns and credit card chargebacks increased to 39.6% in the
second quarter of 2004 from 37.7% in the second quarter of 2003. On the whole,
our reserve for returns and credit card chargebacks has risen for the past three
years, from 32% in 2001, to 36% in 2002 to 37% in 2003 as a result of increasing
return rates. The increase in return rates has primarily been driven by shifts
in our merchandise mix. However, we believe that the increase in return rates is
more than offset by higher gross margins and average order sizes that have been
generated by this shift in merchandise mix. While we are testing initiatives to
reduce our return rates, we believe that the overall shift in merchandise mix
has been beneficial to the overall gross profit realized per order. Accordingly,
we do not expect return rates to decrease significantly in the near term, and
they may in fact, increase.
From time to time, a portion of our inventory consists of out-of-season
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) to appropriate
mark-downs.
At June 30, 2004, we had an accumulated deficit of $94,174,000, of which
approximately $29,000,000 was the result of non-cash beneficial conversion
charges incurred in connection with the reduction of the conversion price of the
Company's Preferred Stock. The net losses and accumulated deficit resulted
primarily from the costs associated with developing and marketing our Web site
and building our infrastructure. In order to expand our business, we intend to
invest in sales, marketing, merchandising, operations, information systems, site
development and additional personnel to support these activities. We therefore
expect to continue to incur substantial operating losses for the near future.
Although we have experienced revenue growth in recent years, this growth may not
be sustainable and therefore should not be considered indicative of future
performance.
CRITICAL ACCOUNTING POLICIES
Management Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the reporting
10
BLUEFLY, INC.
JUNE 30, 2004
periods. The most significant estimates and assumptions relate to the adequacy
of the allowances for sales returns, the recoverability of inventories and
deferred tax valuation allowances. Actual amounts could differ significantly
from these estimates.
Revenue Recognition
We recognize revenue in accordance with Staff Accounting Bulletin ("SAB") No.
101 "Revenue Recognition in the Financial Statements" as amended. Gross sales
consists primarily of revenue from product sales and shipping and handling
charges and is net of promotional discounts. Net sales represent gross sales,
less provisions for returns, credit card chargebacks, and adjustments for
uncollected sales taxes. Revenue is recognized when all the following criteria
are met:
. A customer executes an order via our website.
. The product price and the shipping and handling fee have been
determined.
. Credit card authorization has occurred and collection is reasonably
assured.
. The product has been shipped and received by the customer.
Shipping and handling billed to customers are classified as revenue in
accordance with Financial Accounting Standards Board ("FASB") Task Force's
Emerging Issues Task Force ("EITF") No. 00-10, "Accounting for Shipping and
Handling Fees and Costs" ("EITF No. 00-10").
Provision for Returns and Doubtful Accounts
We generally permit returns for any reason within 90 days of the sale.
Accordingly, we establish a reserve for estimated future returns and bad debt at
the time of shipment based primarily on historical data. We perform credit card
authorizations and check the verification of our customers prior to shipment of
merchandise. However, our future return and bad debt rates could differ from
historical patterns, and, to the extent that these rates increase significantly,
it could have a material adverse effect on our business, prospects, cash flows,
financial condition and results of operations.
Inventory Valuation
Inventories, which consist of finished goods, are stated at the lower of cost or
market value. Cost is determined by the first-in, first-out ("FIFO") method. We
review our inventory levels in order to identify slow-moving merchandise and in
some instances use markdowns below cost to clear merchandise. Markdowns below
cost may be used if inventory exceeds customer demand for reasons of style,
changes in customer preference or lack of consumer acceptance of certain items,
or if it is determined that the inventory in stock will not sell at its
currently marked price. Such markdowns may have an adverse impact on earnings,
depending on the extent of the markdowns and amount of inventory affected.
Deferred Tax Valuation Allowance
We recognize deferred income tax assets and liabilities on the differences
between the financial statement and tax bases of assets and liabilities using
enacted statutory rates in effect for the years in which the differences are
expected to reverse. The effect on deferred taxes of a change in tax rates is
realized in income in the period that included the enactment date. We have
assessed the future taxable income and determined that a 100% deferred tax
valuation allowance is deemed necessary. In the event that we were to determine
that we would be able to realize our deferred tax assets, an adjustment to the
deferred tax valuation allowance would increase income in the period such
determination is made.
RESULTS OF OPERATIONS
For The Six Months Ended June 30, 2004 Compared To The Six Months Ended June 30,
2003
11
BLUEFLY, INC.
JUNE 30, 2004
The following table sets forth our statement of operations data, for the six
months ended June 30th. All data is in thousands except as indicated below:
2004 2003 2002
--------------------- --------------------- ---------------------
As a % of As a % of As a % of
Net Sales Net Sales Net Sales
--------- --------- ---------
Net sales $ 20,609 100.0% $ 15,725 100.0% $ 14,445 100.0%
Cost of sales 13,020 63.2% 11,553 73.5% 9,538 66.0%
--------- --------- ---------
Gross profit 7,589 36.8% 4,172 26.5% 4,907 34.0%
Selling, marketing and fulfillment expenses 6,659 32.3% 5,394 34.3% 5,095 35.3%
General and administrative expenses 3,153 15.3% 2,609 16.6% 2,269 15.7%
--------- --------- ---------
Total operating expenses 9,812 47.6% 8,003 50.9% 7,364 51.0%
Operating loss (2,223) (10.8)% (3,831) (24.4)% (2,457) (17.0)%
Interest (expense) and other income 385 1.9% (132) (0.8)% (127) (0.9)%
--------- --------- ---------
Net loss (1,838) (8.9)% (3,963) (25.2)% (2,584) (17.9)%
We also measure and evaluate ourselves against certain other key operational
metrics. The following table sets forth our actual results based on these other
metrics for the six months ended June 30th, as indicated below:
2004 2003 2002
---------- ---------- ----------
Average Order Size (including shipping & handling) $ 188.61 $ 171.62 $ 161.70
Average Order Size Per New Customer (including shipping & handling) $ 166.67 $ 158.53 $ 146.69
Average Order Size Per Repeat Customer (including shipping & handling) $ 200.16 $ 178.76 $ 169.67
New Customers Added during the Period 58,813 49,612 45,930
Revenue from Repeat Customers as a % of total Revenue 70% 67% 69%
Customer Acquisition Costs $ 10.76 $ 9.77 $ 12.85
We define a "repeat customer" as a person who has bought more than once from us
during their lifetime. We calculate customer acquisition cost by dividing total
advertising expenditures (excluding staff related costs) during a given time
period by total new customers added during that period. All measures of the
number of customers are based on unique email addresses.
Net sales: Gross sales (which includes sales of product and shipping revenue)
for the six months ended June 30, 2004 increased by over 33% to $33,369,000,
from $25,038,000 for the six months ended June 30, 2003. For the six months
ended June 30, 2004, we recorded a provision for returns and credit card
chargebacks and other discounts of $12,760,000, or approximately 38.2% of gross
sales. For the six months ended June 30, 2003, the provision for returns and
credit card chargebacks and other discounts was $9,313,000, or approximately
37.2% of gross sales. The increase in this provision as a percentage of gross
sales resulted from an increase in the return rate. 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.
After the necessary provisions for returns, credit card chargebacks and
adjustments for uncollected sales taxes, our net sales for the six months ended
June 30, 2004 were $20,609,000. This represents an increase of approximately 31%
compared to the six months ended June 30, 2003, in which net sales totaled
$15,725,000. The growth in net sales resulted from both the net revenue from new
customers acquired and an increase in average order size (approximately 10%
higher compared to the six months ended June 2003). For the six months ended
June 30, 2004 revenue from shipping and handling (which is included in net
sales) increased by almost 29% to $1,612,000 from $1,252,000 for the six months
ended June 30, 2003. Revenue as a whole increased at a slightly higher rate than
shipping and handling revenue because of the increase in average order size.
12
BLUEFLY, INC.
JUNE 30, 2004
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 six months ended June 30, 2004 totaled
$13,020,000, resulting in gross margin of approximately 36.8%. Cost of sales for
the six months ended June 30, 2003 totaled $11,553,000, resulting in gross
margin of 26.5%. Gross profit increased by approximately 82%, to $7,589,000 for
the six months ended June 30, 2004 compared to $4,172,000 for the six months
ended June 30, 2003. The growth in gross margin is primarily the result of
increased product margins. In addition, our gross margins were lower in 2003
than they had been historically because we decided to turn more of our
out-of-season merchandise, as well as inventory items that we were particularly
deep in, into cash that could be used to purchase new inventory, rather than
holding the inventory for the next season. Because we currently have
significantly more cash than we did during a large part of 2003, we do not
expect to face the same issues in 2004. In addition, our merchandise strategy is
now focused on offering the most current trends, which allows us to generate a
higher product margin while still providing significant value to our customers.
Selling, marketing and fulfillment expenses: Selling, marketing and fulfillment
expenses increased by approximately 23% for the first six months of 2004
compared to the first six months of 2003. Selling, marketing and fulfillment
expenses were comprised of the following:
Percentage
Six Months Six Months Difference
Ended Ended increase
June 30, 2004 June 30, 2003 (decrease)
------------- ------------- ---------------
Marketing $ 1,025,000 $ 776,000 32.1%
Operating 2,821,000 2,250,000 25.4%
Technology 2,020,000 1,761,000 14.7%
E-Commerce 793,000 607,000 30.6%
------------- -------------
$ 6,659,000 $ 5,394,000 23.5%
As a percentage of net sales, our selling, marketing and fulfillment expenses
decreased slightly to 32.3% for the six months ended June 30, 2004 from 34.3%
for the six months ended June 30, 2003. The decrease in selling, marketing and
fulfillment expenses as a percentage of net sales resulted from economies of
scale, as some of the fixed costs involved in maintaining our Web site and
processing orders are allocated over a larger number of orders. Our goal 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.
Marketing expenses include expenses related to online and print advertising,
direct mail campaigns as well as staff related costs. Marketing expenses
increased by a higher percentage than revenue as a result of an 31% increase in
customer acquisition spending as well as an increase in salaries and related
expenses. Customer acquisition costs increased to $10.76 per customer for the
six months ended June 30, 2004, from $9.77 per customer for the six months ended
June 30, 2003 because we were more aggressive in our customer acquisition
efforts (acquiring over 18.5% more new customers in the six months ended June
30, 2004 than we acquired in the six months ended June 30, 2003). On average,
the positive contribution to overhead that we generate from a customer's
purchase exceeds our current customer acquisition costs by a significant margin.
Accordingly, we believe that it may be prudent to continue to be more aggressive
in acquiring customers (even thought it may increase our customer acquisition
costs in 2004 and beyond) in order to acquire larger numbers of customers with
profitable ordering patterns.
Operating expenses include all costs related to inventory management,
fulfillment, customer service, and credit card processing. Operating expenses
increased in the first six months of 2004 by approximately 25% compared to the
first six months of 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 costs associated with our temporary clearance
store, which closed in March.
Technology expenses consist primarily of staff related costs, amortization of
capitalized costs and Web Site hosting. For the six months ended June 30, 2004
technology expenses increased by approximately 15% compared to the six months
ended June 30, 2003. This increase resulted from an increase in headcount and
salary related expenses, an increase in web hosting expense, and was offset by a
decrease in depreciation expense. We believe that our investment in the
technology department will continue to increase throughout the year, as we
intend to roll-out of new features that drive the performance of our business.
13
BLUEFLY, INC.
JUNE 30, 2004
E-Commerce expenses include expenses related to our photo studio, image
processing, and Web Site design. For the six months ended June 30, 2004, this
amount increased by approximately 31% as compared to the six months ended June
30, 2003, primarily due to an increase in salary related expenses as well as an
increase in expenses associated with outside research tools. We believe that our
increased investment in the e-commerce group played a key role in the growth of
our business during the first six months, and we intend to continue to invest in
this area throughout the year.
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 six months ended
June 30, 2004 increased by approximately 21% to $3,153,000 as compared to
$2,609,000 for the six months ended June 30, 2003. The increase in general and
administrative expenses was the result of increased salary and benefit expenses
primarily related to the merchandising team, as well as an increase in public
company expenses, and were partially offset by a decrease in professional and
consulting fees.
As a percentage of net sales, general and administrative expenses for the first
six months of 2004 decreased slightly to approximately 15.3% from 16.6%.
Loss from operations: Operating loss decreased by 42% in the second six months
of 2004 to $2,223,000 from $3,831,000 in the first six months of 2003 as a
result of the increase in gross margin and revenue.
Interest and other income: Other income for the six months ended June 30, 2004
increased to $785,000 from $22,000 for the six months ended June 30, 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 3 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.
Interest expense: Interest expense for the six months ended June 30, 2004
totaled $400,000, and related primarily to fees paid in connection with the Loan
Facility and interest expense on the Convertible Notes. For the six months ended
June 30, 2003, interest expense totaled $154,000, 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.
For The Three Months Ended June 30, 2004 Compared To The Three Months Ended June
30, 2003
The following table sets forth our statement of operations data, for the three
months ended June 30th. All data is in thousands, except as indicated below:
2004 2003 2002
---------------------- ---------------------- ----------------------
As a % of As a % of As a % of
Net Sales Net Sales Net Sales
--------- --------- ---------
Net sales $ 9,495 100.0% $ 7,468 100.0% $ 6,799 100.0%
Cost of sales 5,688 59.9% 5,153 69.0% 4,392 64.6%
--------- --------- ---------
Gross profit 3,807 40.1% 2,315 31.0% 2,407 35.4%
Selling, marketing and fulfillment expenses 3,210 33.8% 2,982 39.9% 2,659 39.1%
General and administrative expenses 1,394 14.7% 1,406 18.8% 1,207 17.8%
--------- --------- ---------
Total operating expenses 4,604 48.5% 4,388 58.7% 3,866 56.9%
Operating loss (797) (8.4)% (2,073) (27.7)% (1,459) (21.5)%
Interest (expense) and other income, net 89 0.9% (50) (0.7)% (60) (0.9)%
--------- --------- ---------
Net loss (708) (7.5)% (2,123) (28.4)% (1,519) (22.4)%
14
BLUEFLY, INC.
JUNE 30, 2004
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 three months ended June 30th, as indicated below:
2004 2003 2002
--------- --------- ---------
Average Order Size (including shipping & handling) $ 187.52 $ 176.70 $ 161.65
Average Order Size Per New Customer (including shipping & handling) $ 166.38 $ 165.15 $ 149.01
Average Order Size Per Repeat Customer (including shipping & handling) $ 197.49 $ 182.78 $ 167.80
New Customers Added during the Period 25,478 22,581 21,057
Revenue from Repeat Customers as a % of total Revenue 72% 68% 70%
Customer Acquisition Costs $ 10.81 $ 15.16 $ 16.92
We define a "repeat customer" as a person who has bought more than once from us
during their lifetime. We calculate customer acquisition cost by dividing total
advertising expenditures (excluding staff related costs) during a given time
period by total new customers added during that period. All measures of the
number of customers are based on unique email addresses.
Net sales: Gross sales (which includes sales of product and shipping revenue)
for the three months ended June 30, 2004 increased by over 31% to $15,719,000,
from $11,994,000 for the three months ended June 30, 2003. For the three months
ended June 30, 2004, we recorded a provision for returns and credit card
chargebacks and other discounts of $6,224,000, or approximately 39.6% of gross
sales. For the three months ended June 30, 2003, the provision for returns and
credit card chargebacks and other discounts was $4,526,000, or approximately
37.7% of gross sales. The increase in this provision as a percentage of gross
sales resulted from an increase in the return rate. 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.
After the necessary provisions for returns, credit card chargebacks and
adjustments for uncollected sales taxes, our net sales for the three months
ended June 30, 2004 were $9,495,000. This represents an increase of
approximately 27% compared to the three months ended June 30, 2003, in which net
sales totaled $7,468,000. The growth in net sales resulted from both an increase
in the net revenue from new customers and an increase in average order size
(approximately 6% higher compared to the second quarter of 2003). For the three
months ended June 30, 2004, revenue from shipping and handling (which is
included in net sales) increased by 23% to $774,000 from $629,000 for the
quarter ended June 30, 2003. Revenue as a whole increased at a slightly higher
rate than shipping and handling revenue because of the increase in average order
size.
Cost of sales: Cost of sales for the three months ended June 30, 2004 totaled
$5,688,000, resulting in gross margin of approximately 40.1%. Cost of sales for
the three months ended June 30, 2003 totaled $5,153,000, resulting in gross
margin of 31.0%. Gross profit increased by over 64%, to $3,807,000 for the three
months ended June 30, 2004 compared to $2,315,000 for the three months ended
June 30, 2003. The growth in gross margin is primarily the result of increased
product margins. In addition, our merchandise strategy is now focused on
offering the most current trends, which allows us to generate a higher product
margin while still providing significant value to our customers.
Selling, marketing and fulfillment expenses: Selling, marketing and fulfillment
expenses increased by approximately 7.6% for three months ended June 30, 2004
compared to the three months ended June 30, 2003. Selling, marketing and
fulfillment expenses were comprised of the following:
Three Months Ended Three Months Ended Percentage Difference
June 30, 2004 June 30, 2003 increase (decrease)
------------------ ------------------ ---------------------
Marketing $ 446,000 $ 515,000 (13.4)%
Operating 1,320,000 1,115,000 18.4%
Technology 1,035,000 1,047,000 (1.1)%
E-Commerce 409,000 305,000 34.1%
---------------- ----------------
$ 3,210,000 $ 2,982,000 7.6%
15
BLUEFLY, INC.
JUNE 30, 2004
As a percentage of net sales, our selling, marketing and fulfillment expenses
decreased to 33.8% for the three months ended June 30, 2004 from 39.9% in the
three months ended June 30, 2003. The decrease in selling, marketing and
fulfillment expenses as a percentage of net sales resulted from economies of
scale, as some of the fixed costs involved in maintaining our Web site and
processing orders are allocated over a larger number of orders. Our goal 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.
Marketing expenses include expenses related to online and print advertising,
direct mail campaigns as well as staff related costs. Marketing expenses
decreased due to lower customer acquisition costs in the quarter, due in part to
the fact that we did not do a direct mail campaign in the second quarter of
2004. Customer acquisition costs decreased to $10.81 per customer for the three
months ended June 30, 2004, from $15.16 per customer for the three months ended
June 30, 2003. On average, the positive contribution to overhead that we
generate from a customer's purchase exceeds our current customer acquisition
costs by a significant margin. Accordingly, we believe that it may be prudent to
be more aggressive in acquiring customers (even thought it may increase our
customer acquisition costs in 2004 and beyond) in order to acquire larger
numbers of customers with profitable ordering patterns.
Operating expenses include all costs related to inventory management,
fulfillment, customer service, and credit card processing. Operating expenses
increased for the three months ended June 30, 2004 by approximately 18% compared
to the three months ended June 30, 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).
Technology expenses consist primarily of staff related costs, amortization of
capitalized costs and Web Site hosting. For the three months ended June 30,
2004, technology expenses decreased by approximately 1% compared to the three
months ended June 30, 2003. This decrease resulted from a decrease in
depreciation expense, as a number of the Company's technology assets are now
fully depreciated. The decrease in depreciation was offset by an increase in
headcount and salary related expenses, and an increase in web hosting expense.
We believe that our investment in the technology department will continue to
increase throughout the year, as we intend to roll-out new features that drive
the performance of our business.
E-Commerce expenses include expenses related to our photo studio, image
processing, and Web Site design. For the three months ended June 30, 2004, this
amount increased by approximately 34% as compared to the three months ended June
30, 2003, primarily due to an increase in salary related expenses as well as an
increase in expenses associated with outside research tools. We believe that our
increased investment in the e-commerce group played a key role in the growth of
our business during the second quarter, and we intend to continue to invest in
this area throughout the year.
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 three months ended
June 30, 2004 decreased slightly by approximately 0.9% to $1,394,000 as compared
to $1,406,000 for the three months ended June 30, 2003. The decrease in general
and administrative expenses was primarily the result of decreased professional
and consulting fees, offset by increased salary and benefit expenses related to
the merchandising team. We expect to continue to add to our merchandising team
throughout the year.
As a percentage of net sales, general and administrative expenses for the three
months ended June 30, 2004 decreased to approximately 14.7% from 18.8% for the
three months ended June 30, 2003.
Loss from operations: Operating loss decreased by approximately 61% for the
three months ended June 30, 2004 to $797,000 from $2,073,000 for the three
months ended June 30, 2003, primarily as a result of the increase in gross
margin and revenue.
Interest and other income: Other income for the three months ended June 30, 2004
increased to $329,000 from $16,000 for the three months ended June 30, 2003. The
increase resulted from $303,000 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 3 to our financial
statements), and an increase in interest income earned on our cash balance.
16
BLUEFLY, INC.
JUNE 30, 2004
Interest expense: Interest expense for the three months ended June 30, 2004
totaled $240,000, and related primarily to fees paid in connection with the Loan
Facility and interest expense on the Convertible Notes. For the three months
ended June 30, 2003, interest expense totaled $66,000, 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 June 30, 2004, we had approximately $9.1 million of liquid assets, entirely
in the form of cash and cash equivalents, and working capital of approximately
$9.4 million (both amounts exclude the $1.25 million of restricted cash). In
addition, as of June 30, 2004, we had approximately $1.8 million of borrowings
committed under the Loan Facility, leaving approximately $1.7 million of
availability.
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
gross revenue and product margin levels, as well as return rates, and any
deterioration in our performance on these financial measures would have a
negative impact on our liquidity. Total availability under the Loan Facility is
based upon our inventory levels and is dependent, among other things, on the
Company having at least $7.0 million of tangible net worth, $6.0 million of
working capital and cash balances of at least $750,000 (exclusive of the $1.25
million cash collateral pledged to Rosenthal to secure our obligations under the
Loan Facility). In addition, both availability under the Loan Facility and our
operating cash flows are affected by the payment terms that we receive from
suppliers and service providers, and the extent to which suppliers require us to
request Rosenthal to provide credit support under the Loan Facility. We believe
that our suppliers' decision-making with respect to payment terms and/or the
type of credit support requested is largely driven by their perception of our
credit rating, which is affected by information reported in the industry and
financial press and elsewhere as to our financial strength. Accordingly,
negative perceptions as to our financial strength could have a negative impact
on our liquidity.
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, 2004. We may seek additional equity or debt financing 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 operating plan, future operations will need to be modified, scaled
back or discontinued.
Loan Facility
Pursuant to the Loan Facility, Rosenthal provides us with certain credit
accommodations, including loans and advances, factor-to-factor guarantees,
letters of credit in favor of suppliers or factors and purchases of payables
owed to our suppliers. The Rosenthal Financing Agreement was amended in April
2004 to: (i) extend the term until March 30, 2005; (ii) substitute $1.25 million
of cash collateral pledged by the Company for the $2.0 million standby letter of
credit previously provided by Soros as collateral security for the Company's
obligations under the Loan Facility; (iii) decrease the maximum amount available
under the Loan Facility from $4.5 million to $4.0 million; (iv) increase the
tangible net worth requirement to $7.0 million; (v) increase the working capital
requirement to $6.0 million; and (vi) increase the minimum cash balance that the
Company is required to maintain to $750,000 (exclusive of the $1.25 million in
cash collateral). Because we removed the requirement that Soros provide a
standby letter of credit to secure the Loan Facility, we are no longer subject
to an agreement with Soros that previously required us to issue additional
warrants to Soros with an exercise price equal to 75% of market price in the
event that Rosenthal were to draw on Soros' letter of credit.
Interest accrues monthly on the average daily amount outstanding under the Loan
Facility during the preceding month at a per annum rate equal to the prime rate
plus 1%. We pay an annual facility fee equal to 1.5% of the portion of the Loan
Facility that is provided on the basis of our inventory level. This formula
currently results in an annual facility fee of $33,750. We also pay Rosenthal
certain fees to open letters of credit and guarantees in an amount equal to a
certain percentage of the face amount of the letter of credit for each thirty
(30) days such letter of credit, or a portion thereof, remains open.
In consideration for the Loan Facility, among other things, we granted to
Rosenthal a first priority lien on substantially all of our assets, including
control of all of our cash accounts (including the $1.25 million of cash
collateral, which has been placed in a
17
BLUEFLY, INC.
JUNE 30, 2004
segregated, restricted account) upon an event of default and certain of our cash
accounts in the event that the total amount of funded debt loaned to us under
the Loan Facility exceeds 90% of the maximum amount available under the Loan
Facility for more than 10 days.
Under the terms of the Loan Facility, Soros has the right to purchase all of our
obligations from Rosenthal at any time during its term.
Commitments and Long Term Obligations
As of June 30, 2004, we had the following commitments and long term obligations:
2004 2005 2006 2007 2008 Thereafter Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
Marketing and Advertising $ 36,000 -- -- -- -- -- $ 36,000
Operating Leases $ 229,000 461,000 468,000 480,000 441,000 475,000 $ 2,554,000
Capital Leases $ 162,000 101,000 -- -- -- -- $ 263,000
Employment Contracts $ 910,000 1,011,000 730,000 99,000 -- -- $ 2,750,000
Notes payable to shareholders $ 182,000 4,000,000 -- -- -- -- $ 4,182,000
----------- ----------- ----------- ----------- ----------- ----------- -----------
Grand total $ 1,519,000 5,573,000 1,198,000 579,000 441,000 475,000 $ 9,785,000
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 our
business. 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In March, 2004, the Emerging Issues Task Force issued EITF 03-6, "Participating
Securities and the Two-Class Method under FASB Statement No. 128". This
statement provides additional guidance on the calculation and disclosure
requirements for earnings per share. The FASB concluded in EITF 03-6 that
companies with multiple classes of common stock or participating securities, as
defined by SFAS No. 128, calculate and disclose earnings per share based on the
two-class method. The adoption of this statement does not have an impact to the
Company's financial statement presentation as the Company is currently in a loss
position.
ITEM 3. 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 4. CONTROLS AND DISCLOSURES
As of the end of the period covered by this Form 10-Q, we carried out an
evaluation, under the supervision and with the participation of our management,
including our 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
timely alerting them to material information relating to us (including our
consolidated subsidiaries) required to be included in our periodic SEC filings.
There have been no changes in our internal control over financial reporting that
occurred during our most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This report may include statements that constitute "forward-looking" statements,
usually containing the words "believe", "project", "expect", or similar
expressions. These statements are made pursuant to the safe harbor provisions of
the Private Securities
18
BLUEFLY, INC.
JUNE 30, 2004
Litigation Reform Act of 1995. Forward-looking statements inherently involve
risks and uncertainties that could cause actual results to differ materially
from the forward-looking statements. The risks and uncertainties are detailed
from time to time in reports filed by us with the Securities and Exchange
Commission, including Forms 8-A, 8-K, 10-Q, and 10-K. These risks and
uncertainties include, but are not limited to, the following: our history of
losses and anticipated future losses; need for additional capital and potential
inability to raise such capital; the risk of default by us under the Rosenthal
financing agreement and the consequences that might arise from us having granted
a lien on substantially all of our assets under that agreement; potential
dilution arising from future equity financings, including potential dilution as
a result of the anti-dilution provisions contained in our Preferred Stock and
Convertible Notes; risks associated with Soros owning a majority of our stock;
the potential failure to forecast revenues and/or to make adjustments to our
operating plans necessary as a result of any failure to forecast accurately;
unexpected changes in fashion trends; cyclical variations in the apparel and
e-commerce markets; risks of litigation for sale of unauthentic or damaged goods
and litigation risks related to sales in foreign countries; the dependence on
third parties and certain relationships for certain services, including our
dependence on U.P.S. (and the risks of a mail slowdown due to terrorist
activity) and our dependence on our third-party web hosting and fulfillment
centers; online commerce security risks; risks related to brand owners' efforts
to limit our ability to purchase products indirectly; management of potential
growth; the competitive nature of our business and the potential for competitors
with greater resources to enter the business; the availability of merchandise;
the need to further establish brand name recognition; risks associated with our
ability to handle increased traffic and/or continued improvements to its Web
site; rising return rates; dependence upon executive personnel; the successful
hiring and retaining of new personnel; risks associated with expanding our
operations; risks associated with potential infringement of other's intellectual
property; the potential inability to protect our intellectual property;
government regulation and legal uncertainties; uncertainties relating to the
imposition of sales tax on Internet sales; and risks associated with the
agreements with Soros with respect to a change of control and the liquidation
preference of the Preferred Stock owned by Soros.
Part II - OTHER INFORMATION
ITEM 1. 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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following is a list of exhibits filed as part of this Report:
EXHIBIT NUMBER DESCRIPTION
-------------- ---------------------------------------------------------
10.64 CallTech Master Agreement for Outsourcing Contact
Center Support, dated as of August 5, 2004, by and
between the Registrant and CallTech Communications, LLC*
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.
(b) Reports on Form 8-K:
Current Report on Form 8-K, filed on April 22, 2004, attaching the press release
announcing that the Company amended its credit
19
BLUEFLY, INC.
JUNE 30, 2004
facility with Rosenthal & Rosenthal, Inc.
Current Report on Form 8-K, filed on April 29, 2004, attaching the press release
announcing the Company's results of operations for the quarter ended June 30,
2004.
20
BLUEFLY, INC.
JUNE 30, 2004
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
BLUEFLY, INC.
By: /s/ E. Kenneth Seiff
----------------------------
E. Kenneth Seiff
Chief Executive Officer
By: /s/ Patrick C. Barry
-----------------------------
Patrick C. Barry
Chief Financial Officer
August 13, 2004
21