U.S. 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, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number: 333-22895
---------------------------------------
BLUEFLY, INC.
(Name of registrant as specified in its charter)
Delaware 13-3612110
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
42 West 39th Street, New York, NY 10018
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (212) 944-8000
---------------------------------------
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 [ ]
As of August 1, 2001, the issuer had outstanding 9,205,331 shares of Common
Stock, $.01 par value.
BLUEFLY, INC.
TABLE OF CONTENTS
PAGE
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2001 (unaudited)
and December 31, 2000 3
Consolidated Statements of Operations for the six months ended
June 30, 2001 and 2000 (unaudited) 4
Consolidated Statements of Operations for the three months ended
June 30, 2001 and 2000 (unaudited) 5
Consolidated Statements of Changes in Shareholders' Equity
(Deficit) and Redeemable Preferred Stock for the year
ended December 31, 2000 and for the six months ended
June 30, 2001(unaudited) 6
Consolidated Statements of Cash Flows for the six months ended
June 30, 2001 and 2000 (unaudited) 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Part II. Other Information 16
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use Of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
2
PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
BLUEFLY, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
2001 2000
------------ ------------
(Unaudited)
ASSETS
Current assets
Cash $ 7,066,000 $ 5,350,000
Inventories, net 6,816,000 7,294,000
Accounts receivable 858,000 861,000
Prepaid expenses 357,000 303,000
Other current assets 414,000 540,000
------------ ------------
Total current assets 15,511,000 14,348,000
Property and equipment, net 1,126,000 1,326,000
Other assets 153,000 194,000
------------ ------------
Total assets $ 16,790,000 $ 15,868,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable $ 2,516,000 $ 3,593,000
Accrued expenses and other current liabilities 2,054,000 2,538,000
Note payable (net of $302,000 of unamortized discount) -- 19,698,000
------------ ------------
Total current liabilities 4,570,000 25,829,000
Commitments and contingencies
Redeemable preferred stock - $.01 par value; 2,000,000 shares authorized and 0
and 500,000 shares issued and outstanding as of June 30, 2001 and December
31, 2000, respectively (liquidation preference: $20 per share plus accrued
dividends)
-- 11,088,000
Shareholders' equity (deficit)
Series A Preferred stock - $.01 par value; 500,000 shares authorized and
500,000 and 0 shares issued and outstanding as of June 30, 2001 and
December 31, 2000, respectively (liquidation preference: face value
plus accrued dividends) 5,000 --
Series B Preferred stock - $.01 par value; 9,000,000 shares authorized and
8,910,782 and 0 shares issued and outstanding as of June 30, 2001 and
December 31, 2000, respectively (liquidation preference: face value
plus accrued dividends, plus $10,000,000) 89,000 --
Common stock - $.01 par value; 40,000,000 shares authorized and 9,205,331
and 4,924,906 shares issued and outstanding as of June 30,
2001 and December 31, 2000, respectively 92,000 49,000
Additional paid-in capital 72,195,000 17,242,000
Accumulated deficit (60,161,000) (38,340,000)
------------ ------------
Total shareholders' equity (deficit) 12,220,000 (21,049,000)
------------ ============
Total liabilities and shareholders' equity (deficit) $ 16,790,000 $ 15,868,000
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
3
BLUEFLY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
----------------------------
2001 2000
---- ----
Net sales $ 9,931,000 $ 8,296,000
Cost of sales 6,924,000 6,785,000
------------ ------------
Gross profit 3,007,000 1,511,000
Selling, marketing and fulfillment expenses 8,076,000 10,029,000
General and administrative expenses 3,038,000 2,458,000
------------ ------------
Total 11,114,000 12,487,000
Operating loss (8,107,000) (10,976,000)
Interest income 148,000 100,000
Interest expense (includes a $13,007,000 one-time,
non-cash charge in connection with the conversion
of debt and redeemable preferred equity to
permanent equity) (13,240,000) (92,000)
------------ ------------
Net loss $(21,199,000) $(10,968,000)
Preferred stock dividends (1,682,000) (399,000)
------------ ------------
Net loss available to common shareholders $(22,881,000) $(11,367,000)
============ ============
Basic and diluted loss per common share $ (3.20) $ (2.31)
============ ============
Weighted average common shares outstanding 7,147,889 4,924,906
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
4
BLUEFLY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED
JUNE 30,
--------------------------
2001 2000
---- ----
Net sales $ 5,285,000 $ 4,560,000
Cost of sales 3,561,000 3,717,000
----------- -----------
Gross profit 1,724,000 843,000
Selling, marketing and fulfillment expenses 4,535,000 4,890,000
General and administrative expenses 1,387,000 1,191,000
----------- -----------
Total 5,922,000 6,081,000
Operating loss (4,198,000) (5,238,000)
Interest income 85,000 27,000
Interest expense (55,000) (90,000)
----------- -----------
Net loss $(4,168,000) $(5,301,000)
Preferred stock dividends (615,000) (199,000)
----------- -----------
Net loss available to common shareholders $(4,783,000) $(5,500,000)
=========== ===========
Basic and diluted loss per common share $ (0.52) $ (1.12)
=========== ===========
Weighted average common shares outstanding 9,205,331 4,924,906
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
5
BLUEFLY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) AND
REDEEMABLE PREFERRED STOCK YEAR ENDED DECEMBER 31, 2000 AND FOR THE SIX MONTHS
ENDED JUNE 30, 2001(UNAUDITED)
Series A Preferred Stock
Redeemable Preferred Stock $.01 par value
-------------------------- --------------
Number of
Number of shares Amount shares Amount
---------------- ------ ------ ------
Balance at December 31, 1999 500,000 $ 10,286,000 -- $ --
Issuance of warrants in connection with Convertible
Notes -- -- -- --
Issuance of warrants to supplier -- -- -- --
Accrued dividends on Series A Preferred Stock -- 802,000 -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance at December 31, 2000 500,000 11,088,000 -- --
Conversion of Redeemable Preferred Stock to
Preferred Stock Series A (500,000) (11,088,000) 500,000 5,000
Conversion of debt to Preferred Stock Series B -- -- -- --
Sale of common stock in connection with Rights
Offering ($2.34 per share) net of $350,000 of
expenses -- -- -- --
Issuance of warrants to lender -- -- -- --
Issuance of warrants in exchange for services -- -- -- --
Issuance of warrants to investor -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance at June 30, 2001 -- $ -- 500,000 $ 5,000
============ ============ ============ ============
Series B Preferred Stock Common Stock
$.01 par value $.01 par value
-------------- --------------
Number of Number of
shares Amount shares Amount
------ ------ ------ ------
Balance at December 31, 1999 -- $ -- 4,924,906 $ 49,000
Issuance of warrants in connection with Convertible
Notes -- -- -- --
Issuance of warrants to supplier -- -- -- --
Accrued dividends on Series A Preferred Stock -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance at December 31, 2000 -- 4,924,906 49,000
Conversion of Redeemable Preferred Stock to
Preferred Stock Series A -- -- -- --
Conversion of debt to Preferred Stock Series B 8,910,782 89,000 -- --
Sale of common stock in connection with Rights
Offering ($2.34 per share) net of $350,000 of
expenses -- -- 4,280,425 43,000
Issuance of warrants to lender -- -- -- --
Issuance of warrants in exchange for services -- -- -- --
Issuance of warrants to investor -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance at June 30, 2001 8,910,782 $ 89,000 9,205,331 $ 92,000
============ ============ ============ ============
Additional Accumulated
Paid-in capital Deficit Total
--------------- ------- -----
Balance at December 31, 1999 $ 17,482,000 $(17,231,000) $ 300,000
Issuance of warrants in connection with Convertible
Notes 467,000 -- 467,000
Issuance of warrants to supplier 95,000 -- 95,000
Accrued dividends on Series A Preferred Stock (802,000) -- (802,000)
Net loss -- (21,109,000) (21,109,000)
------------ ------------ ------------
Balance at December 31, 2000 17,242,000 (38,340,000) (21,049,000)
Conversion of Redeemable Preferred Stock to
Preferred Stock Series A 18,852,000 (622,000) 18,235,000
Conversion of debt to Preferred Stock Series B 26,318,000 -- 26,407,000
Sale of common stock in connection with Rights
Offering ($2.34 per share) net of $350,000 of
expenses 9,622,000 -- 9,665,000
Issuance of warrants to lender 45,000 -- 45,000
Issuance of warrants in exchange for services 42,000 -- 42,000
Issuance of warrants to investor 74,000 -- 74,000
Net loss -- (21,199,000) (21,199,000)
------------ ------------ ------------
Balance at June 30, 2001 $ 72,195,000 $(60,161,000) $ 12,220,000
============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
6
BLUEFLY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
----------------------------
2001 2000
------------ ------------
Cash flows from operating activities
Net loss $(21,199,000) $(10,968,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 395,000 308,000
Warrants issued for service 42,000 --
Interest expense on conversion of debt to equity 13,007,000 --
Changes in operating assets and liabilities:
(Increase) decrease in
Inventories 478,000 (476,000)
Accounts receivable 3,000 (481,000)
Other current assets 194,000 273,000
Prepaid expenses (54,000) (321,000)
Other assets 20,000 --
Increase (decrease) in
Accounts payable (227,000) (579,000)
Accrued expenses and other current liabilities (484,000) (58,000)
------------ ------------
Net cash used in operating activities (7,825,000) (12,302,000)
------------ ------------
Cash flows from investing activities
Purchase of property and equipment (124,000) (699,000)
------------ ------------
Net cash used in investing activities (124,000) (699,000)
------------ ------------
Cash flows from financing activities
Net proceeds from Rights Offering 9,665,000 --
Proceeds from notes payable -- 9,000,000
------------ ------------
Net cash provided by financing activities 9,665,000 9,000,000
------------ ------------
Net increase (decrease) in cash and cash equivalents 1,716,000 (4,001,000)
Cash and cash equivalents - beginning of period 5,350,000 7,934,000
------------ ------------
Cash and cash equivalents - end of period $ 7,066,000 $ 3,933,000
============ ============
Supplemental disclosure of cash flow information:
Warrant issued to lender $ 45,000 $ --
============ ============
Warrant issued to investor $ 74,000 $ --
============ ============
Conversion of debt to equity $ 20,851,000 $ --
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
7
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
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 without
audit 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
footnotes 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 for
the year ended December 31, 2000.
There have been no changes in significant accounting policies since December 31,
2000. The Company has sustained net losses and negative cash flows from
operations since the establishment 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 or raise additional financing through public
or private equity financing, collaborative or other arrangements with corporate
sources, or other sources to fund operations. There can be no assurance that the
Company will establish profitable operations, such financing will be
consummated, or that any additional financing or other sources of capital will
be available to the Company upon acceptable terms, or at all. The inability to
obtain additional financing, when needed, would have a material adverse effect
on the Company's business, financial condition and results of operations.
NOTE 2 - THE COMPANY
The Company is a leading Internet retailer of designer fashions and home
accessories at outlet store prices. The Company's Web store ("Bluefly.com" or
"Web Site") which launched in September 1998, sells over 450 brands of designer
apparel, accessories and home products at discounts of up to 75% off of retail
prices.
In June 2001, the Company announced a streamlined operating plan designed to
achieve profitability, improve efficiency and reduce its need for additional
capital. As part of the plan, the Company eliminated approximately 32 jobs, or,
approximately 34% of its workforce, as well as reduced marketing and other
operating expenses. In connection with these cutbacks the Company recorded a
pre-tax charge of approximately $340,000 in the second quarter of 2001. Of this
amount, approximately $145,000 is included in selling, marketing and fulfillment
costs and $195,000, is included in general and administrative expenses.
NOTE 3 - RIGHTS OFFERING
On November 13, 2000, the Company entered into an investment agreement with
affiliates of Soros Private Equity Partners (collectively referred to herein as
"Soros") pursuant to which Soros agreed to invest up to an additional $15
million in the Company, subject to certain conditions. Under the terms of the
agreement, Soros initially invested, in November 2000, an additional $5 million
in the form of a promissory note (the "New Note"), convertible into preferred
stock at a price of $2.34 per share. In February 2001, pursuant to the
agreement, the Company offered the public shareholders of the Company the right
to purchase up to an aggregate of $20 million of common stock (the "Rights
Offering"). Pursuant to its agreement with the Company, as part of the Rights
Offering, Soros purchased the difference between $20 million and the amount
purchased by the public shareholders (approximately $16,000), up to a total of
$10 million, all at a price of $2.34 per share (the "Standby Commitment"). As
part of the transaction, on February 5, 2001, $15 million of convertible
promissory notes (the "Amended Notes") as well as the New Note, and the related
accrued interest on both the Amended and New Note, converted into 8,910,782
shares of the Company's Series B Convertible Preferred Stock (the "Series B
Preferred Stock") at a price of $2.34 per share. Immediately after the closing
of the Rights Offering, Soros beneficially owned 78% of the outstanding Common
Stock of the Company.
The conversion price of the Company's Series A Convertible Preferred Stock
("Series A Preferred Stock") previously issued to
8
BLUEFLY, INC.
JUNE 30, 2001
Soros and other investors was reduced to $2.34 per share.
The accompanying financial statements reflect the conversion of the Amended
Notes and the New Note into Series B Preferred Stock at a price of $2.34 per
share, after giving effect to the remaining unamortized discount of $302,000 and
the conversion of accrued interest on both the Amended Notes and New Note of
$851,000 through February 5, 2001 into shares of Series B Preferred Stock. The
Company recorded a beneficial conversion feature of approximately $5,556,000 in
connection with the conversion of the Amended Notes into Series B Preferred
Stock. This amount was credited to additional paid-in capital and charged
against interest expense in accordance with Emerging Issues Task Force Issue No.
98-5 ("EITF No. 98-5"). In addition, as a result of certain changes made to the
Certificate of Designation for the Series A Preferred Stock in connection with
the second closing of the agreement with Soros, the Series A Preferred Stock was
converted into permanent equity and the conversion price was reduced from $10.50
to $2.34. This resulted in the recording of approximately $7,771,000 to
additional paid-in capital. The corresponding charge to accumulated deficit was
broken out as follows: $5,000,000 was classified as debt discount on the New
Note, and charged to interest expense, $2,149,000 was classified as interest
expense and $622,000 was assigned to dividends.
NOTE 4 - FINANCING AGREEMENT
On March 30, 2001, the Company entered into a Financing Agreement (the
"Financing Agreement") with Rosenthal & Rosenthal, Inc. ("Rosenthal") pursuant
to which Rosenthal will provide to the Company certain credit accommodations,
including loans or advances, factor-to-factor guarantees or letters of credit in
favor of suppliers or factors or purchases of payables owed to the Company's
suppliers (the "Loan Facility"). The maximum amount available under the Loan
Facility is an amount equal to the lesser of (i) the undrawn amount of the Soros
Guarantee (defined below) plus the lesser of (x) $2 million, (y) 20% of the book
value of the Company's inventory or (z) the full liquidation value of the
Company's inventory or (ii) $10 million. As of June 30, 2001, the Company had
approximately $3.8 million available under the Loan Facility. Of the total
amount available under the Loan Facility as of June 30, 2001 $1.4 million has
been borrowed, leaving $2.4 million available against the Loan Facility. The
Company pays interest monthly on the average daily amount outstanding under the
Loan Facility during the preceding month at a per annum rate equal to the prime
rate plus 1%. For the three months ended June 30, 2001 interest expense totaled
approximately $0.
In consideration for the Loan Facility, among other things, the Company granted
to Rosenthal a first priority lien (the "Rosenthal Lien") on substantially all
of its assets, including control of all of the Company's cash accounts upon an
event of default and certain of its cash accounts in the event that the total
amount of monies loaned the Company under the Loan Facility exceeds 90% of the
undrawn amount of the Standby Letter of Credit (defined below) for more than ten
days. The Company also issued to Rosenthal a warrant to purchase 50,000 shares
of the Company's Common Stock at an exercise price of $2.34 per share
exercisable for five years. The Company valued the warrant using the
Black-Scholes option pricing model and credited additional paid in capital for
$45,000. This amount is being amortized over the life of the Loan Facility.
In connection with the Loan Facility, the Company entered into a Reimbursement
Agreement with Soros pursuant to which Soros agreed to issue a Standby Letter of
Credit at closing in the amount of $2.5 million in favor of Rosenthal to
guarantee a portion of the Company's obligations under the Financing Agreement.
In addition, during the term of the Financing Agreement, at the Company's
request, Soros will issue another Standby Letter of Credit for an additional
$1.5 million. As used herein, the term "Soros Guarantee" means the total face
amount of all Standby Letters of Credit which Soros is maintaining in connection
with the Loan Facility and the term "Standby Letter of Credit" shall mean any
standby letter of credit issued by Soros in favor of Rosenthal in connection
with the Loan Facility. In consideration for the Soros Guarantee, the Company
granted to Soros a lien (the "Soros Lien") subordinated to the Rosenthal Lien on
substantially all of the Company's assets, and issued to Soros a warrant (the
"Soros Upfront Warrant") to purchase 100,000 shares of the Company's Common
Stock at an exercise price equal to the average closing price of the Company's
Common Stock on the ten trading days preceding September 15, 2001, exercisable
for ten years beginning on September 16, 2001. The Company accounted for the
warrant in accordance with Accounting Principles Board Opinion No. 14 ("APB No.
14") and credited additional paid in capital for approximately $74,000. This
amount is being amortized over the life of the Loan Facility.
Subject to certain conditions, if the Company defaults on any of its obligations
under the Financing Agreement, Rosenthal has the
9
BLUEFLY, INC.
JUNE 30, 2001
right to draw upon the Standby Letter of Credit to satisfy any such obligations.
If Rosenthal draws on the Standby Letter of Credit, pursuant to the terms of the
Reimbursement Agreement, the Company would have the obligation to, among other
things, reimburse Soros for any amounts drawn under such Standby Letter of
Credit plus interest accrued thereon. In addition, to the extent that Rosenthal
draws on the Standby Letter of Credit during the continuance of a default under
the Financing Agreement or at any time that the total amount outstanding under
the Loan Facility exceeds 90% of the Standby Letter of Credit, the Company would
be required to issue to Soros another warrant (each a "Contingent Warrant") to
purchase a number of shares of Common Stock equal to the quotient of (a) any
amounts drawn under the Soros Guarantee and (b) 75% of the average closing price
of the Company's Common Stock on the ten trading days preceding the date of
issuance of such warrant. Each Contingent Warrant will be exercisable for ten
years from the date of issuance at an exercise price equal to 75% of the average
closing price of the Company's Common Stock on the ten trading days preceding
the later of (a) ten trading days after the date of issuance and (b) September
15, 2001.
Under the Financing Agreement, Soros has the right to purchase all of the
Company's obligations to Rosenthal under the Loan Facility from Rosenthal (the
"Buyout Option") at any time during the term of the Financing Agreement. With
respect to such Buyout Option, Soros has the right to request that Rosenthal
make a draw under the Standby Letter of Credit as consideration for Soros'
purchase of such obligations. The initial terms of the Financing Agreement ends
on March 30, 2002. The Financing Agreement provides for automatic one year
renewals unless either party provides at least 30 day prior notice of its desire
not to renew.
NOTE 5 - EARNINGS (LOSS) PER SHARE
The Company has determined Earnings (Loss) Per Share in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." Basic earnings (loss) per share excludes dilution and is computed by
dividing earnings (loss) available to common shareholders by the weighted
average number of common shares outstanding for the period.
Diluted earnings (loss) per share is computed by dividing earnings (loss)
available to common shareholders by the weighted average number of common shares
outstanding for the period, adjusted to reflect potentially dilutive securities.
Due to the loss from continuing operations, options and warrants to purchase
5,432,062 shares of Common Stock and Preferred Stock convertible into 13,184,286
shares of Common Stock were not included in the computation of diluted earnings
per share because the result of the exercise of such would be antidilutive.
NOTE 6 - RECLASSIFICATIONS
Certain amounts in the consolidated financial statements of the prior period
have been reclassified to conform to the current period presentation for
comparative purposes.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Bluefly is a leading Internet retailer of designer fashion at discounted prices.
We sell over 450 brands of designer clothing, fashion accessories and home
products at discounts ranging from 25% to 75% off of retail prices. In February
2001, we changed our state of incorporation from New York to Delaware. We derive
revenue primarily from the sale of designer products on our Web Site. Revenue is
recognized when goods are received by our customers, which occurs only after
credit card authorization. We generally permit returns for any reason within 90
days of the sale. Accordingly, we reserve for estimated future returns and bad
debt at the time of shipment based on historical data. However, our future
return and bad debt rates could differ significantly from historical patterns.
We have incurred substantial costs to develop our Web Site and infrastructure.
In order to expand our business, we intend to invest in sales, marketing,
merchandising, operations, information systems, site development and additional
personnel to support these activities. We therefore expect to continue to incur
substantial operating losses until at least the fourth quarter of fiscal 2002.
10
BLUEFLY, INC.
JUNE 30, 2001
In June 2001, we announced a streamlined operating plan designed to achieve
profitability, improve efficiency and reduce our need for additional capital. As
part of the plan, we eliminated approximately 32 jobs, or, approximately 34% of
our workforce, as well as reduced marketing and other operating expenses. In
connection with these cutbacks we recorded a pre-tax charge of approximately
$340,000 in the second quarter of 2001. Of this amount, approximately $145,000
is included in selling, marketing and fulfillment costs and $195,000 is included
in general and administrative expenses.
Our net sales increased nearly 16% to $5,285,000 for the three months ended June
30, 2001 from $4,560,000 for the three months ended June 30, 2000. Our gross
profit increased by approximately 104% to $1,724,000 from $843,000. Gross margin
grew to 32.6% in the second quarter of 2001 from 18.5% in the second quarter of
2000. Operating loss (before interest income and interest expense) for the
second quarter of 2001 decreased to $4,198,000, or $0.46 per share, from
$5,238,000 or $1.06 per share, in the second quarter of 2000. This represents
the third consecutive quarter (based on a year over year comparison) that we
have reduced our operating loss. This trend is due to a continued increase in
sales, an increase in gross margin, and a reduction in selling, marketing and
fulfillment expenses.
New customers for the second quarter of 2001 totaled approximately 25,998. This
represents a decrease of 28% compared to 36,063 new customers acquired in the
second quarter of 2000. Although the number of new customers acquired during the
second quarter decreased compared to the same period in the prior year, the
effect was offset by the increase in the percentage of quarterly sales from
repeat customers as well as the increase in average order size. The percentage
of gross sales from repeat customers increased to 56% for the quarter ended June
30, 2001 from 45% in 2000. Average order size (including shipping and handling
revenue) grew by approximately 35% to $140 in the second quarter of 2001
compared to $104 in the second quarter of 2000. Customer acquisition cost for
the three months ended June 30, 2001 increased by approximately 3% to
approximately $75 from approximately $73 for the second quarter of 2000.
In accordance with Emerging Issue Task Force Issue No. 00-10, we have included
revenues from shipping and handling in net revenue. Out-bound shipping costs are
included in cost of goods sold. These amounts were previously offset against
each other and included in selling, marketing and fulfillment expenses in the
Statement of Operations. All prior periods have been reclassified to conform
with this presentation.
RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO THE SIX MONTHS ENDED
JUNE 30, 2000
NET SALES: Gross sales, which consists primarily of revenue from product sales
and shipping and handling revenue (before any adjustment for reserves or
promotional discounts), totaled $14,144,000 for the six months ended June 30,
2001. We recorded a provision for returns and credit card chargebacks and other
discounts of $4,213,000, or approximately 29.8% of gross sales. The reserve
allowance takes into account our 90-day return policy and actual experience to
date, which may vary over time. After the necessary provisions for returns,
credit card chargebacks and adjustments for uncollected sales taxes, our net
sales for the six months ended June 30, 2001 were $9,931,000. This represents an
increase of approximately 20% compared to net sales for the six months ended
June 30, 2000, in which net sales totaled $8,296,000. The increase in sales was
primarily attributable to an increase in average order size as well as an
increase in sales to repeat customers.
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, 2001 totaled
$6,924,000, resulting in gross margin of approximately 30.3%. Cost of sales for
the six months ended June 30, 2000 were $6,785,000, resulting in gross margin of
18.2%. The increase in gross margin resulted primarily from improved product
margins and decreased cost of freight out as a percentage of revenue,
attributable to a change in carrier.
SELLING, MARKETING AND FULFILLMENT EXPENSES: Selling, marketing and fulfillment
expenses consist of costs associated with online strategic marketing
relationships, print advertising, Web Site hosting, inventory management,
fulfillment costs, and customer service. Selling, marketing and fulfillment
expenses totaled $8,076,000 for the six months ended June 30, 2001. Of the total
selling, marketing and fulfillment expenses for the six months ended June 30,
2001, marketing expenses related to online and print
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BLUEFLY, INC.
JUNE 30, 2001
advertising totaled approximately $2,950,000, Web Site hosting costs totaled
approximately $1,120,000, fulfillment costs totaled approximately $1,299,000 and
salaries related to those departments totaled $2,036,000. Selling, marketing and
fulfillment expenses for the six months ended June 30, 2000 were approximately
$10,029,000. Of the total selling, marketing and fulfillment expenses for the
six months ended June 30, 2000, marketing expenses related to online and print
advertising totaled approximately $6,030,000, Web Site hosting costs totaled
approximately $1,044,000, fulfillment costs totaled approximately $1,069,000 and
salaries related to those departments totaled $1,613,000.
The decreased marketing expenses was a result of our effort to increase the
efficiency of our marketing spending. The increase in Web Site hosting costs
resulted from our efforts to improve the speed and stability of the Web Site and
effectively handle traffic to the Web Site. The increased fulfillment costs were
largely attributable to the increased sales volume. Included in the selling,
marketing and fulfillment costs for the six months ended June 30, 2001 are
approximately $145,000 of costs associated with the cutbacks the Company made in
June 2001.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses
consists of 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, 2001 were $3,038,000 as compared to $2,458,000 for the six months
ended June 30, 2000. The increase in general and administrative expenses was
largely the result of an increase in the number of our employees, and their
related benefits as well as increased professional fees. In addition, included
in general and administrative expenses for the six months ended June 30, 2001
are approximately $195,000 of one time costs in connection with the Company's
June 2001 streamlined operating plan.
INTEREST EXPENSE AND INTEREST INCOME: Interest expense for the six months ended
June 30, 2001 totaled $13,240,000. Included in this amount is approximately
$13,007,000 of non-cash, one-time charges that were incurred in connection with
the conversion of our notes payable and redeemable equity into permanent equity.
This amount also includes interest expense of $175,000, related to the interest
on the notes payable that were issued during fiscal 2000. In connection with the
increase in the cash balance, interest income for the six months ended June 30,
2001 increased to $148,000 from $100,000 for the six months ended June 30, 2000.
FOR THE THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 2000
NET SALES: Gross sales, which consists primarily of revenue from product sales
and shipping and handling revenue (before any adjustment for reserves or
promotional discounts), totaled $7,631,000 for the three months ended June 30,
2001. We recorded a provision for returns and credit card chargebacks and other
discounts of $2,346,000, or approximately 30.7% of gross sales. The reserve
allowance takes into account our 90-day return policy and actual experience to
date, which may vary over time. After the necessary provisions for returns,
credit card chargebacks and adjustments for uncollected sales taxes, our net
sales for the three months ended June 30, 2001 were $5,285,000. This represents
an increase of nearly 16% compared to net sales for the three months ended June
30, 2000, in which net sales totaled $4,560,000. The increase in sales was
primarily attributed to an increase in average order size as well as an increase
in sales to repeat customers.
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 three months ended June 30, 2001
totaled $3,561,000, resulting in gross margin of approximately 32.6%. Cost of
sales for the three months ended June 30, 2000 were $3,717,000, resulting in
gross margin of 18.5%. The increase in gross margin resulted primarily from
improved product margins and decreased cost of freight out as a percentage of
revenue, attributed to a change in carrier.
SELLING, MARKETING AND FULFILLMENT EXPENSES: Selling, marketing and fulfillment
expenses consists of costs associated with online strategic marketing
relationships, print advertising, Web Site hosting, inventory management,
fulfillment cost, and customer service. Selling, marketing and fulfillment
expenses totaled $4,535,000 for the three months ended June 30, 2001. Of the
total selling, marketing and fulfillment expenses for the quarter ended June 30,
2001, marketing expenses related to online and print advertising totaled
approximately $1,960,000, Web Site hosting costs totaled approximately $408,000,
fulfillment costs totaled approximately $706,000 and salaries related to those
departments totaled $1,093,000. Selling, marketing and fulfillment expenses
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BLUEFLY, INC.
JUNE 30, 2001
for the three months ended June 30, 2000 were approximately $4,890,000. Of the
total selling, marketing and fulfillment expenses for the quarter ended June 30,
2000, marketing expenses related to online and print advertising totaled
approximately $2,640,000, Web Site hosting costs totaled approximately $584,000,
fulfillment costs totaled approximately $611,000 and salaries related to those
departments totaled $826,000.
The decrease in marketing expenses was a result of our effort to increase the
efficiency of our marketing spending. The decrease in Web Site hosting costs
resulted from our efforts to reduce the number of web servers utilized. The
increased fulfillment costs were largely attributable to the increased sales
volume. Included in the selling, marketing and fulfillment costs for the three
months ended June 30, 2001 are approximately $145,000 of costs associated with
the cutbacks the Company made in June 2001.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses
consists of 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, 2001 were $1,387,000 as compared to $1,191,000 for the
three months ended June 30, 2000. The increase in general and administrative
expenses was largely the result of employee severance packages as well as one
time charges, such as professional service fees, incurred in connection with the
implementation of the streamlined operating plan announced on June 19, 2001.
INTEREST EXPENSE AND INTEREST INCOME: Interest expense for the three months
ended June 30, 2001 totaled $55,000 compared to $90,000 for the same period in
2000. Interest expense for the three months ended June 2000 related entirely to
interest on notes that were converted in February 2001. In connection with the
increase in the cash balance, interest income for the three months ended June
30, 2001 increased to $85,000 from $27,000 for the three months ended June 30,
2000.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2001, we had approximately $7.1 million of cash and cash equivalents
and working capital of approximately $10.9 million. In addition, as of June 30,
2001, the Company had approximately $3.8 million available under the Loan
Facility. Of the total amount available under the Loan Facility as of June 30,
2001, $1.4 million has been borrowed, leaving $2.4 million available against the
Loan Facility.
On November 13, 2000, we entered into an investment agreement with affiliates of
Soros pursuant to which Soros agreed to invest up to an additional $15 million
in the Company, subject to certain conditions. Under the terms of the agreement,
Soros initially invested, in November 2000, an additional $5 million in the form
of a New Note, convertible into preferred stock at a price of $2.34 per share.
In February 2001, pursuant to the agreement, we offered the public shareholders
of the Company the right to purchase up to an aggregate of $20 million of common
stock. Pursuant to its agreement with the Company, as part of the Rights
Offering, Soros purchased the difference between $20 million and the amount
purchased by the public shareholders (approximately $16,000), up to a total of
$10 million, all at a price of $2.34 per share. As part of the transaction, on
February 5, 2001, the Amended Notes as well as the New Note, and the relate
accrued interest on both the Amended and New Note, converted into shares of our
Series B Convertible Preferred Stock at a price of $2.34 per share. Immediately
after the closing of the Rights Offering, Soros beneficially owned 78% of the
outstanding Common Stock of the Company.
The accompanying financial statements reflect the conversion of the Amended
Notes and the New Notes into Series B Preferred Stock at a price of $2.34 per
share, after giving effect to the remaining unamortized discount of $302,000 and
the conversion of accrued interest on both the Amended Notes and New Notes of
$851,000 through February 5, 2001, into shares of Series B Preferred Stock. We
recorded a beneficial conversion feature of approximately $5,556,000 in
connection with the conversion of the Amended Notes into Series B Preferred
Stock. This amount was credited to additional paid-in capital and charged
against interest expense in accordance with EITF No. 98-5. In addition, as a
result of certain changes made to the Certificate of Designation for the Series
A Preferred Stock in connection with the second closing of the investment
agreement, the Series A Preferred Stock was converted into permanent equity and
the conversion price was reduced from $10.50 to $2.34. This resulted in the
recording of approximately $7,771,000 to additional paid-in capital. The
corresponding charge to accumulated deficit was broken out as follows:
$5,000,000 was classified as debt discount on the New Note, and charged to
interest expense, $2,149,000 was classified as
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BLUEFLY, INC.
JUNE 30, 2001
interest expense and $622,000 was assigned to dividends.
On March 30, 2001, we entered into a Financing Agreement with Rosenthal pursuant
to which Rosenthal will provide us certain credit accommodations, including
loans or advances, factor-to-factor guarantees or letters of credit in favor of
suppliers or factors or purchases of payables owed to our suppliers. The maximum
amount available under the Loan Facility is an amount equal to the lesser of (i)
the undrawn amount of the Soros Guarantee (defined below) plus the lesser of (x)
$2 million, (y) 20% of the book value of the Company's inventory or (z) the full
liquidation value of the Company's inventory or (ii) $10 million. We pay
interest monthly on the average daily amount outstanding under the Loan Facility
during the preceding month at a per annum rate equal to the prime rate plus 1%.
In consideration for the Loan Facility, among other things, we granted to
Rosenthal a first priority lien (the "Rosenthal Lien") on substantially all of
our assets, including control of all of our cash accounts upon an event of
default and certain of our cash accounts in the event that the total amount of
monies loaned us under the Loan Facility exceeds 90% of the undrawn amount of
the Standby Letter of Credit (defined below) for more than ten days. We also
issued to Rosenthal a warrant to purchase 50,000 shares of our Common Stock at
an exercise price of $2.34 per share exercisable for five years.
In connection with the Loan Facility, we entered into a Reimbursement Agreement
with Soros pursuant to which Soros agreed to issue a Standby Letter of Credit at
closing in the amount of $2.5 million in favor of Rosenthal to guarantee a
portion of our obligations under the Financing Agreement. In addition, during
the term of the Financing Agreement, at our request, Soros will issue another
Standby Letter of Credit for an additional $1.5 million. As used herein, the
term "Soros Guarantee" means the total face amount of all Standby Letters of
Credit which Soros is maintaining in connection with the Loan Facility and the
term "Standby Letter of Credit" shall mean any standby letter of credit issued
by Soros in favor of Rosenthal in connection with the Loan Facility. In
consideration for the Soros Guarantee, we granted to Soros a lien (the "Soros
Lien") subordinated to the Rosenthal Lien on substantially all of our assets,
and issued to Soros a warrant (the "Soros Upfront Warrant") to purchase 100,000
shares of our Common Stock at an exercise price equal to the average closing
price of our Common Stock on the ten days preceding September 15, 2001,
exercisable for ten years beginning on September 16, 2001.
Subject to certain conditions, if we default on any of our obligations under the
Financing Agreement, Rosenthal has the right to draw upon the Standby Letter of
Credit to satisfy any such obligations. If Rosenthal draws on the Standby Letter
of Credit, pursuant to the terms of the Reimbursement Agreement, we would have
the obligation to, among other things, reimburse Soros for any amounts drawn
under such Standby Letter of Credit plus interest accrued thereon. In addition,
to the extent that Rosenthal draws on the Standby Letter of Credit during the
continuance of a default under the Financing Agreement or at any time that the
total amount outstanding under the Loan Facility exceeds 90% of the Standby
Letter of Credit, we would be required to issue to Soros another warrant (each a
"Contingent Warrant") to purchase a number of shares of Common Stock equal to
the quotient of (a) any amounts drawn under the Soros Guarantee and (b) 75% of
the average closing price of our Common Stock on the ten trading days preceding
the date of issuance of such warrant. Each Contingent Warrant will be
exercisable for ten years from the date of issuance at an exercise price equal
to 75% of the average closing price of our Common Stock on the ten trading days
preceding the later of (a) ten trading days after the date of issuance and (b)
September 15, 2001.
Under the Financing Agreement, Soros has the right to purchase all of our
obligations to Rosenthal under the Loan Facility from Rosenthal (the "Buyout
Option") at any time during the term of the Financing Agreement. With respect to
such Buyout Option, Soros has the right to request that Rosenthal make a draw
under the Standby Letter of Credit as consideration for Soros' purchase of such
obligations.
As of June 30, 2001, we had marketing and advertising commitments of
approximately $600,000 through December 31, 2001
In order to continue to expand our product offerings, we intend to expand our
relationships with suppliers of end-of-season and excess name brand apparel and
fashion accessories. We expect that our suppliers will continue to include
designers and retail stores that sell excess inventory as well as third-party
end-of-season apparel aggregators. To achieve our goal of offering a wide
selection of top name brand designer clothing and fashion accessories, we may
acquire certain goods on consignment and may explore
14
BLUEFLY, INC.
JUNE 30, 2001
leasing or partnering select departments with strategic partners and
distributors. Due to our recurring losses, a number of our suppliers have
limited our payment terms and, in some cases, have required us to pay for
merchandise in advance of delivery. We believe that the Loan Facility has
allowed us to negotiate more favorable payment terms with suppliers. We expect
to continue to use the Loan Facility to negotiate more favorable payment terms
with suppliers in the future, although there can be no assurance that this will
be the case.
We anticipate that the proceeds from the New Note, the Rights Offering and the
Financing Agreement together with existing resources and cash generated from
operations, should be sufficient to satisfy our cash requirements into the
second quarter of 2002. However, we may seek additional debt and/or equity
financing sooner in order to maximize the growth of our business. There can be
no assurance that any additional financing or other sources of capital will be
available to us upon acceptable terms, or at all. The inability to obtain
additional financing, when needed, would have a material adverse effect on our
business, financial condition and results of operations.
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 convertible notes payable. Due to the short-term nature of
these investments we have determined that the risks associated with interest
rate fluctuations related to these financial instruments do not pose a material
risk to us.
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 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 the company
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: the Company's limited working capital, need for additional capital
and potential inability to raise such capital; the competitive nature of the
business and the potential for competitors with greater resources to enter such
business; the risk that recent favorable trends in sales, gross margin and
reduced sales marketing and fulfillment expenses will not continue; risks of
litigation for sale of unauthentic or damaged goods and litigation risks related
to sales in foreign countries; availability formulas under the Rosenthal credit
facility which limit the amount of funds available for borrowing; the Company's
potential inability to make repayments under the Rosenthal credit facility and
the possible shareholder dilution that could result if the Soros standby letter
of credit is drawn upon; the risk of default by the Company under the Rosenthal
financing agreement and the consequences that might arise from the Company
having granted a lien on substantially all of its assets under that agreement;
consumer acceptance of the Internet as a medium for purchasing apparel; recent
losses and anticipated future losses; potential adverse effects on gross margin
resulting from mark downs and allowances; the capital intensive nature of such
business (taking into account the need for advertising to promote such
business); the dependence on third parties and certain relationships for certain
services, including uncertainty arising from a lack of operating history with
the company's new fulfillment center; the successful hiring and retaining of
personnel; the dependence on continued growth of online commerce; rapid
technological change; online commerce security risks; the startup nature of the
Internet business; governmental regulation and legal uncertainties; management
of potential growth; and unexpected changes in fashion trends.
15
BLUEFLY, INC.
JUNE 30, 2001
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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following is a list of exhibits filed as part of this Report:
None.
(b) Reports on Form 8-K:
The Company filed a report on Form 8-K, dated February 6, 2001 concerning the
second closing of the investment agreement between the Company and affiliates of
Soros Private Equity Partners LLC and the change in control resulting therefrom.
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BLUEFLY, INC.
JUNE 30, 2001
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
CEO and President
By: /s/ Patrick C. Barry
-----------------------------
Patrick C. Barry
Chief Financial Officer
August 1, 2001
17