<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 27, 1998
REGISTRATION NO. 333-22895
SECURITIES AND EXCHANGE COMMISSION
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POST-EFFECTIVE AMENDMENT NO. 3
TO FORM SB-2
ON FORM S-3
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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BLUEFLY, INC.
(FORMERLY KNOWN AS PIVOT RULES, INC.)
(Exact name of registrant as specified in its charter)
NEW YORK 13-3612110
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
42 WEST 39TH STREET
NEW YORK, NEW YORK 10018
(212) 944-8000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
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E. KENNETH SEIFF
PRESIDENT AND CHIEF EXECUTIVE OFFICER
BLUEFLY, INC.
42 WEST 39TH STREET
NEW YORK, NEW YORK 10018
(212) 944-8000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Copies to:
RICHARD A. GOLDBERG, ESQ.
SWIDLER BERLIN SHEREFF FRIEDMAN, LLP
919 THIRD AVENUE, 20TH FLOOR
NEW YORK, NEW YORK 10022
(212) 758-9500
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ] _____
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If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] _____
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED NOVEMBER 27, 1998
PROSPECTUS
2,163,000 SHARES OF COMMON STOCK
513,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
BLUEFLY, INC.
This Prospectus relates to 2,163,000 shares of common stock, par value
$.01 per share ("Common Stock"), and 150,000 Redeemable Common Stock Purchase
Warrants (the "Purchase Warrants"), of Bluefly, Inc., formerly known as Pivot
Rules, Inc., a New York corporation (the "Company"), of which (i) 1,500,000
shares of Common Stock are issuable upon exercise of outstanding warrants (the
"IPO Warrants") of the Company issued in connection with the Company's 1997
initial public offering (the "Initial Public Offering"), (ii) 363,000 shares of
Common Stock are issuable upon exercise of warrants which were converted from
warrants issued in connection with the Company's 1997 bridge financing, (iii)
300,000 shares of Common Stock are issuable upon exercise of a certain unit
purchase option ("Purchase Option") and the exercise of the Purchase Warrants
underlying the Purchase Option and (iv) 150,000 Purchase Warrants which may be
issued upon exercise of the Purchase Option previously issued by the Company to
the representative ("Representative") of the underwriters in the Initial Public
Offering (the "Representative Warrants"). This Prospectus also relates to the
offer and sale by certain persons ("Selling Securityholders") of 363,000
Purchase Warrants issued to the Selling Securityholders in connection with the
Company's 1997 bridge financing (the "Bridge Warrants" and collectively with
the IPO Warrants and the Representative Warrants, the "Warrants"). See "Selling
Securityholders" and "Plan of Distribution."
Each Warrant entitles the holder to purchase one share of Common Stock
for $5.00, subject to adjustment in certain circumstances, at any time until
May 15, 2002. The Company may redeem the Warrants, at a price of $.01 per
Warrant, at any time after they become exercisable on not less than 30 days'
prior written notice to the warrant holders, if the last sale price of the
Common Stock has been at least 165% of the then exercise price of the Warrants
on 20 out of the 30 consecutive trading days ending on the third day prior to
the date on which the notice of redemption is given. The Purchase Option is
exercisable at $8.00 for one share of Common Stock and one Warrant, subject to
adjustment.
The Common Stock and Warrants are quoted on the Nasdaq SmallCap Market
under the symbols "BFLY" and "BLFYW," respectively, and The Boston Stock
Exchange under the symbols "BFL" and "BFLW," respectively. On November 25, 1998,
the last sale prices per share of Common Stock and per Warrant, as reported by
the Nasdaq SmallCap Market, were $10.31 and $5.31, respectively.
The Company will not receive any proceeds from the sale of these
securities, however the Company will receive the exercise price of the Warrants
and the Purchase Option (assuming no exercise of the cashless exercise right
contained in the Purchase Option) that are exercised. There can be no assurance
that the Purchase Option or any Warrants will be exercised. See "Selling
Securityholders."
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE
"RISK FACTORS" BEGINNING ON PAGE 8 OF THIS PROSPECTUS.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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THE DATE OF THIS PROSPECTUS IS NOVEMBER __, 1998
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information concerning the Company may be inspected
without charge at the public reference facilities maintained by the Commission
at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. In addition, upon
request such reports, proxy statements and other information will be made
available for inspection and copying at the Commission's public reference
facilities at Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and at Seven World Trade Center, 13th Floor, New York,
New York 10048. Copies of such material can be obtained at prescribed rates
upon request from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549. The Commission maintains a Web site
(http://www.sec.gov) that contains reports, proxy and information statements
and other information regarding issuers who file electronically with the
Commission. The Registration Statement of which this Prospectus forms a part
has been filed electronically through the Commission's Electronic Data
Gathering Analysis and Retrieval (EDGAR) system and may be obtained through the
Commission's Web site.
The Common Stock and Warrants are traded on the Nasdaq SmallCap Market
and The Boston Stock Exchange. Reports, proxy statements and other information
can be inspected at the offices of the National Association of Securities
Dealers, Inc. at 1735 K Street, N.W., Washington, D.C. 20006 and The Boston
Stock Exchange, One Boston Place, Boston, Massachusetts 02108.
The Company intends to furnish to its shareholders annual reports
containing financial statements audited and reported on by its independent
public accounting firm and such other periodic reports as the Company may
determine to be appropriate or as may be required by law.
The Company has filed with the Commission a Registration Statement on
Form S-3 under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the securities offered by this Prospectus (the "Offering").
This Prospectus does not contain all of the information set forth in the
Registration Statement and in the exhibits thereto, certain parts of which are
omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the Company, reference is made to the
Registration Statement, including the exhibits thereto, copies of which may be
obtained at prescribed rates from the Commission at the public reference
facilities maintained by the Commission. Descriptions contained in this
Prospectus as to the contents of any contract or other documents filed as an
exhibit to the Registration Statement are not necessarily complete and each
such description is qualified by reference to such contract or documents.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed with the Commission are
hereby incorporated by reference into this Prospectus:
1. The Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1997, filed with the Commission on
March 28, 1998;
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2. The Company's Annual Report on Form 10-KSB/A for the fiscal
year ended December 31, 1997, filed with the Commission on
April 30, 1998;
3. The Company's Quarterly Report on Form 10-QSB for the fiscal
quarter ended March 31, 1998, filed with the Commission on
May 14, 1998;
4. The Company's Quarterly Report on Form 10-QSB for the fiscal
quarter ended June 30, 1998, filed with the Commission on
August 10, 1998;
5. The Company's Quarterly Report on Form 10-QSB/A for the
fiscal quarter ended June 30, 1998, filed with the Commission
on October 19, 1998;
6. The Company's Quarterly Report on Form 10-QSB for the fiscal
quarter ended September 30, 1998, filed with the Commission
on November 16, 1998;
7. The Company's Current Reports on Form 8-K dated February 2,
1998, July 2, 1998 and September 17, 1998, respectively;
8. The description of the Common Stock and Warrants contained in
the Company's Registration Statement on Form 8-A, filed with
the Commission on April 22, 1997; and
9. The description of the Common Stock, Warrants and units
contained in the Company's Registration Statement on Form
8-A/A, filed with the Commission on May 6, 1997.
Subsequent to the periods covered in certain of the documents
incorporated by reference in this Prospectus, the Company discontinued
operations of its golf sportswear division. Accordingly, prospective investors
are cautioned to read any financial statements or Management's Discussion and
Analysis or Plan of Operations contained therein in conjunction with the
financial statements including the notes related thereto contained herein.
All documents subsequently filed by the Company pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act prior to the termination of the
Offering shall be deemed to be incorporated by reference in this Prospectus and
to be a part of this Prospectus from the date of filing thereof. Any statement
contained in a document incorporated by reference herein shall be deemed to be
modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of
this Prospectus.
The Company will provide without charge to each person to whom a copy
of this Prospectus has been delivered, upon the written or verbal request of
any such person, a copy of any or all of the documents which have been
incorporated herein by reference, other than exhibits to such documents (unless
such documents are specifically incorporated by reference to such documents).
Requests for such documents should be directed by mail to: Bluefly, Inc.,
42 West 39th Street, New York, 10018, Attention: Chief Financial Officer, or by
telephone to (212) 944-8000.
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CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995:
This Prospectus, including any documents that are incorporated by
reference as set forth in "Incorporation of Certain Documents by Reference,"
contains "forward-looking statements" within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. Forward-looking statements
include, without limitation, any statement that may predict, forecast,
indicate, or imply future results, performance, or achievements, and may
contain the words "believe," "anticipate," "expect," "estimate," "project,"
"will be," "will continue," "will likely result," or words or phrases of
similar meaning. Forward-looking statements involve risks and uncertainties
that may cause actual results to differ materially from the forward-looking
statements. The risks and uncertainties include, among others, the following:
lack of operating history of Internet business; risks associated with the
start-up of the Internet business; limited working capital (need for additional
financing); recent losses and anticipated future losses; competition; the
potential for competitors with greater resources to enter such business and the
Company's lack of experience in such business; risk of litigation for sale of
unauthentic or damaged goods; dependence on third parties and certain
relationships; availability of merchandise; uncertain acceptance of the
Company's brand; risk of capacity constraints; reliance on internally developed
systems; system development risks; consumer acceptance of the Internet as a
medium for purchasing apparel; the capital intensive nature of such business
taking into account the need for advertising to promote a Web site; seasonality
and quarterly fluctuations and the Company's ability to retain qualified
personnel for the Internet business. See "Risk Factors."
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THE COMPANY
On September 8, 1998, the Company publicly launched Bluefly.com, a Web
site ("Bluefly.com") that offers men's, women's, and children's name brand
apparel and accessories at significant discounts as well as provides
information on current trends and other fashion related content. The Company is
designing its online store to combine the best traditional retailing practices
with innovative and convenient features made possible by the Internet. As an
online commerce and content provider, the Company intends to provide a
compelling and enjoyable online shopping experience that includes a broad
selection of name brand products at significant discounts to retail prices, an
intuitive store layout, friendly customer service, a visually pleasing
environment, a liberal return policy, the convenience of shopping from home in
a store that never closes, and sophisticated search technology features which
will allow customers to locate quickly the items which interest them. See
"Business."
With over seven years' experience in the fashion industry, the Company
is using its industry relationships, knowledge of fashion trends, and marketing
skills to build what it believes will be the most comprehensive online retail
store to sell off-price, name brand apparel and accessories as well as to offer
fashion related content. The Company believes that the projected growth in the
number of Internet users (and, in particular the number of female users), the
high disposable income of today's Internet shopper, and the absence of a
dominant online apparel and fashion accessory retailer have combined to create
a highly favorable climate for the recent launch of Bluefly.com. See
"Business."
Certain key statistics about online commerce today and projections
regarding online commerce underlie the Company's belief that a favorable
climate exists for Bluefly.com. Among these projections and statistics are the
following:
o According to a July 1998 report by Discount Store News,
traditional retailers of off-price apparel sold approximately
$18.5 billion worth of goods in 1997. In addition, according
to a 1998 study by the International Council of Shopping
Centers ("ICSC"), factory outlet sales of apparel and
accessories equaled $8.3 billion in 1997.
o According to a 1996 study by Simmons Market Research, apparel
and accessories has been the largest product segment of the
traditional direct market channel, accounting for over $15
billion of revenues in 1996. In contrast, according to a 1997
report by Maxwell Sroge Company, the direct marketing of
books accounted for only $2.75 billion of sales in 1996.
o Based on a 1997 report by Simmons Market Research, 23% of all
adults in the United States made at least one clothing
purchase through remote channels in 1995.
o According to Jupiter Communications ("Jupiter"), online
purchases in the United States were $707 million and $2.6
billion in 1996 and 1997, respectively. Jupiter expects for
these figures to grow to $11.9 billion in 1999 and $41.1
billion in 2002.
o Based on a 1997 survey by Business Week, approximately 40
million people in the United States use the World Wide Web.
Based on a 1997 report by Morgan Stanley, Dean Witter,
Discover & Co., the number of people using the Internet is
expected to grow to more than 150 million by the year 2000.
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o According to Jupiter, women spend almost three times as much
as men on remote apparel purchases. Jupiter expects that the
percentage of women online will grow from 38% in 1996 to 46%
by the year 2000.
o According to Jupiter, the average income of the online
household exceeds that of the traditional remote purchasing
household by approximately 28% ($59,000 vs. $46,000).
Until June 1998, the Company designed, sourced and marketed a full
collection of golf sportswear for men under the Pivot Rules brand name. In June
1998, the Company determined to discontinue the operations of its golf
sportswear division and devote all of the Company's energy and resources to
building Bluefly.com. The golf sportswear division had been operating at a
loss, and despite efforts to promote the brand, orders for the sportswear
collection had been significantly below the Company's business plan and even
further below last year's levels.
Bluefly, Inc., a New York corporation, was incorporated under the
laws of the State of New York in 1991 as Pivot Corporation and in 1994 changed
its name to Pivot Rules, Inc. and in 1998 changed its name to Bluefly, Inc. The
Company's executive office is located at 42 West 39th Street, New York, New
York 10018 and its telephone number is (212) 944-8000.
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<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
SECURITIES OFFERED BY THE COMPANY 2,163,000 shares of Common Stock issuable upon exercise of
outstanding Warrants and Purchase Option and 150,000
Warrants issuable upon exercise of the Purchase Option. Each
Warrant entitles the holder thereof to purchase one share of
Common Stock for $5.00 per share, subject to adjustment in
certain circumstances, at any time until May 15, 2002. The
Company may redeem the Warrants at a price of $.01 per
Warrant at any time after they become exercisable upon not
less than 30 days' prior written notice to the warrant
holders, if the last sale price of the Common Stock has been
at least 165% of the then exercise price of the Warrants on
20 out of the 30 consecutive trading days ending on the
third day prior to the date on which the notice of
redemption is given. The Purchase Option is exercisable at
$8.00 for one share of Common Stock and one Warrant, subject
to adjustment.
SECURITIES OFFERED FOR RESALE BY
THE SELLING SECURITYHOLDERS 363,000 Bridge Warrants
</TABLE>
COMMON STOCK OUTSTANDING AS OF NOVEMBER 27, 2,724,755 shares
1998(1)
COMMON STOCK ISSUABLE UPON EXERCISE OF 2,163,000 shares
WARRANTS AND PURCHASE OPTION
NASDAQ SYMBOLS Common Stock: BFLY
Warrants: BFLYW
BOSTON STOCK EXCHANGE SYMBOLS Common Stock: BFL
Warrants: BFLW
(1) Does not include (i) 251,725 shares of Common Stock reserved for
issuance upon exercise of outstanding stock options granted under
the Company's 1997 Stock Option Plan, as amended (the "Option
Plan"), (ii) 248,275 shares of Common Stock reserved for issuance
upon exercise of stock options which may be granted under the
Option Plan, (iii) 1,500,000 shares of Common Stock reserved for
issuance upon exercise of Warrants issued in connection with the
Initial Public Offering, (iv) 150,000 shares of Common Stock
reserved for issuance upon exercise of the Purchase Option and
150,000 shares of Common Stock reserved for issuance upon exercise
of Warrants underlying the Purchase Option and (v) 363,000 shares
of Common Stock reserved for issuance upon exercise of Warrants
issued in connection with the Company's 1997 bridge financing.
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RISK FACTORS
The purchase of the shares of Common Stock and Warrants offered hereby
is speculative and involves a high degree of risk, including the risk factors
described below. Each prospective investor should carefully consider the
following risk factors inherent in and affecting the business of the Company
before making a decision to purchase the securities being offered hereby.
LACK OF OPERATING HISTORY OF INTERNET BUSINESS. The Company initiated
the planning of Bluefly.com in March 1998 and publicly launched Bluefly.com on
September 8, 1998. Accordingly, the Company has little operating history upon
which an evaluation of the Company's Internet business and its prospects can be
based.
START-UP RISKS. The Company expects to incur significant expenditures
in connection with its newly established Internet business. The Company
anticipates substantial expenses associated with establishment, expansion and
maintenance of Bluefly.com. These expenses include advertising and marketing
expenses which are necessary to attract a high volume of traffic on
Bluefly.com. The Company believes that the division's success will depend in
large part on its ability to (i) attract customers to Bluefly.com, (ii) provide
its customers with outstanding value and a superior shopping experience, (iii)
achieve sufficient sales volume to realize economies of scale, and (iv)
successfully coordinate the fulfillment and service of customer orders. There
can be no assurance that any of these objectives will be achieved.
LIMITED WORKING CAPITAL; NEED FOR ADDITIONAL FINANCING. To date, the
Company has obtained working capital through its Initial Public Offering, cash
flow from operations, private financing, and a letter of credit agreement
("Letter of Credit Agreement") and Retail Collection Factoring Agreement
("Factoring Agreement"), each dated April 28, 1992 and amended November 14,
1997 with Heller Financial, Inc. ("Heller"), to whom the Company has granted a
senior security interest in substantially all of its assets. The Company
anticipates, based on current plans and assumptions relating to its operations,
that the proceeds of the Initial Public Offering, together with existing
resources and cash generated from operations, should be sufficient to satisfy
the Company's contemplated cash requirements for only approximately 7 months
after the date of this Prospectus. Moreover, there can be no assurance that the
Company will not require additional financing during such 7-month period. The
Company's current borrowing arrangements substantially limit the Company's
flexibility in obtaining additional financing. Proceeds from the exercise of
the Warrants and the Purchase Option could be a source of capital, although,
there can be no assurance of any such exercise. Under the terms of the
Factoring Agreement, Heller is not obligated to make any funds available to the
Company and any letter of credit provided under the Letter of Credit Agreement
will be provided at the discretion and on terms satisfactory to Heller. In
addition, as a result of the discontinuation of the golf sportswear division,
the Company anticipates that it will have factored receivables only through
December 1998. Borrowings thereafter would require a renegotiation of both the
Factoring Agreement and the Letter of Credit Agreement with the Company's
factor. There can be no assurance that such agreements can be attained.
The Company intends to seek additional debt and/or equity financing
through a public offering, private placement or otherwise to the extent there
are no proceeds from the exercise of the Warrants and the Purhase Option, such
proceeds are insufficient or the Company otherwise deems it necessary or
appropriate to raise additional capital. There can be no assurance that any
additional financing or other sources of capital will be available to the
Company upon acceptable terms, if at all. The inability to obtain additional
financing when needed would have a material adverse effect on the Company's
business, financial condition and operating results and raise substantial doubt
about the Company's ability to continue as a going concern.
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RECENT LOSSES; ANTICIPATED FUTURE LOSSES. Although the Company was
profitable in 1992, 1993, 1994 and 1996, it incurred a net loss of
approximately $381,000 in 1997 and a net loss of approximately $208,000 in
1995. For the nine months ended September 30, 1998, the Company incurred total
net losses of $2,419,000, of which $1,270,000 related to losses from
continuing operations. Included in the losses from continuing operations were
$327,000 of start-up expenses and $242,000 in expenses relating to the
research and development of the Web site. The Company anticipates that losses
will continue for the foreseeable future as it incurs start-up expenses and
expends substantial amounts on the development of Bluefly.com and marketing
and advertising to build recognition and market share for Bluefly.com.
COMPETITION. Electronic commerce generally and the online retail
apparel and fashion accessories market is new, rapidly changing and intensely
competitive. The Company's competition for online customers comes from a
variety of sources including, existing land-based retailers such as The Gap,
Inc. (the "Gap"), Lands' End, J. Crew Group, Inc., Nordstrom, Inc. and the
Macy's division of Federated Department Stores, Inc. ("Macy's") which are using
the Internet to grow their businesses and less established companies such as
Visionary Content Management Corp. ("Visionary"), Deal-A-Day, Inc., Delias,
Inc., and Designeroutlet.com, which are building their brands online. In
addition, the Company's competition for customers comes from traditional direct
marketers such as L.L. Bean, Inc. ("L.L. Bean") and Spiegel, Inc.
("Spiegel's"), television direct marketers such as QVC, Inc. ("QVC") as well as
land-based retail stores such as Dillard's, Inc., T.J. Maxx and Loehmanns, Inc.
("Loehmanns") which may or may not use the Internet to grow their customer
base. The Company also competes with other direct marketers and television
direct marketers with respect to its accessory products such as bedding and
cosmetics. The Company expects its competition to intensify, and believes that
the list of competitors will grow as apparel and fashion accessory designers
begin to use the Internet as a medium to sell directly to customers. Many of
the Company's competitors and potential competitors have longer operating
histories, larger customer bases, greater brand name recognition and
significantly greater financial, marketing and other resources than the
Company. Certain of the Company's competitors may be able to secure merchandise
from vendors on more favorable terms, devote greater resources to marketing and
promotional campaigns, adopt more aggressive pricing or inventory availability
policies and devote substantially more resources to Web site and systems
development than the Company. There can be no assurance that the Company will
be able to compete successfully against competitors and future competitors, and
competitive pressures faced by the Company may have a material adverse effect
on the Company's business, prospects, financial condition and results of
operations. See "Business -Competition."
POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS. The Warrants may
be redeemed by the Company at any time after they become exercisable for a
redemption price of $.01 per Warrant on not less than 30 days' prior written
notice if the last sale price of the Common Stock has been at least 165% of the
then exercise price of the Warrants on 20 out of the 30 consecutive trading
days ending on the third day prior to the day on which such notice is given.
Notice of a redemption of the Warrants could force the holders thereof to
exercise the Warrants and pay the exercise price at a time when it may be
disadvantageous for them to do so, to sell the Warrants at the current market
price when they might otherwise wish to hold the Warrants, or to accept the
redemption price which would be substantially less than the market value of
the Warrants at the time of redemption. As of November 25, 1998, the last
sale price per share of Common Stock was $10.31 and has been in excess of 165%
of the exercise price of the Warrants for 5 consecutive trading days as of such
date.
RISK OF LITIGATION. The Company sells only authentic, high quality
name brand products and has instituted procedures to insure that no counterfeit
or damaged goods be sold through Bluefly.com. While the Company believes that
these procedures will be effective, the possibility for error exists and
therefore the Company faces potential liability for the sale of unauthentic or
damaged goods.
DEPENDENCE ON THIRD PARTIES AND CERTAIN RELATIONSHIPS. The Company
will be heavily dependent upon its relationships with its fulfillment and call
center customer service operations as well as delivery companies like United
Parcel Service of America, Inc. to service its customers needs. The Company's
business is also generally dependent upon it ability to obtain the services of
programmers and Web site designers and other persons and entities necessary for
the development and maintenance of Bluefly.com. The failure of the Company to
obtain the services of any such person or entities on satisfactory terms, if at
all, or the loss of any such relationship could have a material adverse impact
on the Company's business, prospects, financial condition and results of
operations.
AVAILABILITY OF MERCHANDISE. Although the Company believes it can
establish relationships with vendors which will offer competitive sources of
name brand apparel and fashion accessories for Bluefly.com,
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<PAGE>
there can be no assurance that the Company will be able to obtain the quantity,
selection or brand quality of items which management believes is necessary. The
Company has no long-term contracts or arrangements with any of its suppliers
that guarantee the availability of merchandise or the continuation of
particular pricing practices. The Company's contracts with its suppliers
typically do not restrict such suppliers from selling products to other buyers.
There can be no assurance that the Company's current suppliers will continue to
sell products to the Company on current terms or that the Company will be able
to establish new or otherwise extend current supply relationships to ensure
acquisitions of product in a timely and efficient manner and on acceptable
commercial terms. The ability of the Company to partner with reputable
suppliers, obtain high quality merchandise from those suppliers and the ability
of the suppliers to produce, stock and deliver high quality products to the
Company's customers is critical to the Company's success. If the Company is
unable to satisfy any of these elements or is unable to develop and maintain
relationships with suppliers that would allow it to obtain a sufficient variety
and quantity of quality merchandise on acceptable commercial terms, its
business, prospects, financial condition and results of operation would be
materially, adversely affected. See "Business--Supply Management and Automated
Fulfillment Process."
UNCERTAIN ACCEPTANCE OF BRAND; RISKS ASSOCIATED WITH NAME CHANGE. The
Company believes that establishing, maintaining and enhancing its brand is a
critical aspect of its efforts to attract and expand its online traffic. The
number of Internet sites that offer competing services, many of which already
have well-established brands in online services or the retail apparel industry
generally, increase the importance of establishing and maintaining brand name
recognition. Promotion of Bluefly.com will depend largely on the Company's
success in providing a high-quality online experience supported by a high level
of customer service, which cannot be assured. To help brand Bluefly.com and
better reflect the changed business of the Company, the Company changed its
name from Pivot Rules, Inc. to Bluefly, Inc. on October 29, 1998. The Company
has expended substantial resources in establishing brand recognition of the
Company's former name and the change in its name adds to its start-up risks.
In addition, to attract and retain online users, and to promote and maintain
Bluefly.com in response to competitive pressures, the Company may find it
necessary to increase substantially its financial commitment to creating and
maintaining a strong brand loyalty among customers. This will require
significant expenditures on advertising and marketing. If the Company is
unable to provide high-quality online services or customer support, or
otherwise fails to promote and maintain Bluefly.com, or if the Company incurs
excessive expenses in an attempt to promote and maintain Bluefly.com, the
Company's business, prospects, financial condition and results of operations
would be materially adversely affected.
The Company's future success, and in particular its revenues and
operating results, depends upon its ability to successfully execute several key
aspects of its business plan. The Company must continually increase the dollar
volume of transactions booked through Bluefly.com, either by generating
significantly higher and continuously increasing levels of traffic to
Bluefly.com or by increasing the percentage of visitors to its online sites who
purchase products, or through some combination thereof. The Company must also
achieve a high level of repeat purchasers. In addition, the Company must
deliver a high level of customer service and compelling content. Although the
Company has established relationships with America Online, Inc. and Lycos, Inc.
("Lycos") and with other portal companies, there can be no assurance that
these strategies will be effective in increasing the dollar volume of products
purchased through Bluefly.com, increasing traffic to Bluefly.com, increasing
the percentage of visitors who purchase products or increasing the number of
repeat purchasers. The failure to do one or more of the foregoing would likely
have a material adverse effect on the Company's business, prospects, financial
condition and results of operations.
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RISK OF CAPACITY CONSTRAINTS; RELIANCE ON INTERNALLY DEVELOPED
SYSTEMS; SYSTEM DEVELOPMENT RISKS. A key element of the Company's strategy is
to generate a high volume of traffic on, and use of, Bluefly.com. Accordingly,
the satisfactory performance, reliability and availability of Bluefly.com,
transaction-processing systems and network infrastructure are critical to the
Company's reputation and its ability to attract and retain customers, as well
as maintain adequate customer service levels. The Company's revenues will
depend on the number of visitors who shop on Bluefly.com and the volume of
orders it will fulfill. Any system interruptions that result in the
unavailability of Bluefly.com or reduced order fulfillment performance would
reduce the volume of goods sold and the attractiveness of the Company's product
and service offerings and could also adversely affect consumer perception of
the Company and the Pivot Rules brand name. The Company may experience periodic
system interruptions from time to time. Any substantial increase in the volume
of traffic on Bluefly.com or the number of orders placed by customers will
require the Company to expand and upgrade further its technology,
transaction-processing systems and network infrastructure. There can be no
assurance that the Company will be able to accurately project the rate or
timing of increases, if any, in the use of Bluefly.com or expand and upgrade
its systems and infrastructure to accommodate such increases on a timely basis.
INFRASTRUCTURE NECESSARY TO SUPPORT EXPLOSIVE GROWTH OF INTERNET. The
Internet and other online services may not be accepted as a viable commercial
marketplace for a number of reasons, including potentially inadequate
development of the necessary network infrastructure or delayed development of
enabling technologies and performance improvements. To the extent that the
Internet and other online services continue to experience significant growth in
the number of users, their frequency of use or an increase in their bandwidth
requirements, there can be no assurance that the infrastructure for the
Internet and other online services will be able to support the demands placed
upon them. In addition, the Internet or other online services could lose their
viability due to delays in the development or adoption of new standards and
protocols required to handle increased levels of Internet or other online
service activity, or due to increased governmental regulation. Changes in or
insufficient availability of telecommunications services to support the
Internet or other online services also could result in slower response times
and adversely affect usage of the Internet and other online services generally
and Bluefly.com in particular. If use of the Internet and other online services
does not continue to grow or grows more slowly than expected, if the
infrastructure for the Internet and other online services does not effectively
support growth that may occur, or if the Internet and other online services do
not become a viable commercial marketplace, the Company's business, prospects,
financial condition and results of operations would be materially adversely
affected.
RAPID TECHNOLOGICAL CHANGE. To remain competitive, the Company must
continue to enhance and improve the responsiveness, functionality and features
of Bluefly.com. The online commerce industry is characterized by rapid
technological change, changes in user and customer requirements and
preferences, frequent new product and service introductions embodying new
technologies and the emergence of new industry standards and practices that
could render Bluefly.com and proprietary technology and systems obsolete. The
Company's future success will depend, in part, on its ability to license
leading technologies useful in its business, enhance its existing services,
develop new services and technologies that address the increasingly
sophisticated and varied needs of its prospective customers, and respond to
technological advances and emerging industry standards and practices on a
cost-effective and timely basis. The development of a Web site and other
proprietary technology entails significant technical and business risks. There
can be no assurance that the Company will successfully use new technologies
effectively or adapt Bluefly.com, proprietary technology and
transaction-processing systems to customer requirements or emerging industry
standards. If the Company is unable, for technical, legal, financial or other
reasons, to
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adapt in a timely manner in response to changing market conditions or customer
requirements, its business, prospects, financial condition and results of
operations would be materially adversely affected.
DEPENDENCE ON CONTINUED GROWTH OF ONLINE COMMERCE. The Company's
future revenues and any future profits will be dependent upon the widespread
acceptance and use of the Internet and other online services as an effective
medium of commerce by consumers. Rapid growth in the use of and interest in the
Web, the Internet and other online services is a recent phenomenon, and there
can be no assurance that acceptance and use will continue to develop or that a
sufficiently broad base of consumers will adopt, and continue to use, the
Internet and other online services as a medium of commerce and, in particular,
online apparel commerce. Demand and market acceptance for recently introduced
services and products over the Internet are subject to a high level of
uncertainty and there exist few proven services and products. The Company
relies, and will continue to rely, on consumers who have historically used
traditional means of commerce to purchase merchandise. For the Company to be
successful, these consumers must accept and utilize novel ways of conducting
business and exchanging information.
UNCERTAIN ABILITY TO OBTAIN AND PROTECT PROPRIETARY INFORMATION. The
Company regards its intellectual property as critical to its success, and
relies on trademark, copyright, and trade secret protection to protect its
proprietary rights. The Company is pursuing the registration of its service
marks in the United States and abroad. Effective trademark, copyright and trade
secret protection may not be available in every country in which the Company's
products will be available. The Company intends to effect appropriate
registrations internationally and domestically as its operations expand. There
can be no assurance that the United States or foreign jurisdictions will afford
the Company any protection for its intellectual property. There also can be no
assurance that any intellectual property right of the Company will not be
challenged, invalidated or circumvented, or that the rights granted thereunder
will provide any competitive advantage. The Company could also incur
substantial costs in asserting its intellectual property or proprietary rights
against others, including any such rights obtained from third parties, and/or
defending any infringement suits brought against the Company.
Although the Company has entered into confidentiality and invention
agreements with many of its employees and consultants, there can be no
assurance that such agreements will be honored or that the Company will be able
to protect its rights to its unpatented trade secrets and know-how effectively.
Moreover, there can be no assurance that others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's trade secrets and know-how. In addition, the
Company may be required to obtain licenses to certain intellectual property or
other proprietary rights from third parties. There can be no assurance that any
such licenses or proprietary rights would be made available under acceptable
terms, if at all. If the Company does not obtain required licenses or
proprietary rights, it could encounter delays in product development or find
that the development or sale of products requiring such licenses could be
foreclosed.
YEAR 2000 ISSUES. The Company will be interacting with certain
computer programs in connection with credit card transactions, fulfillment
operations, and programs used by the Company's vendors and suppliers. These
programs may refer to annual dates only by the last two digits (e.g., "97" for
"1997"), and could lose functionality in the Year 2000. While the Company
believes that its significant business, accounting and operations software are
Year 2000 compliant ("Compliant"), the Company cannot guarantee that all of
the other companies with which the Company interacts has taken the Year 2000
problem into account or has otherwise updated their programs. In the event
that the companies with which it interacts are unable to certify that they will
be Compliant by early 1999 or if such companies are unable to certify that their
failure to be Year 2000 compliant will not adversely affect the Company, the
Company will be reviewing its alternatives with respect to other companies.
There can be no assurance that the Company will be able to find other companies
with which to interact which are acceptable to the Company. In addition,
although the Company believes it is adequately addressing its Year 2000 issues,
there can be no assurance that unanticipated or undiscovered compliance
problems with regard to the Company or the companies with which it interacts
will not have a material adverse effect on the Company's business, prospects,
financial condition and results of operations.
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ONLINE COMMERCE SECURITY RISKS. A fundamental requirement for online
commerce and communications is the secure transmission of confidential
information over public networks. The Company relies on encryption and
authentication technology licensed from third parties to provide the security
and authentication necessary to effect secure transmission of confidential
information, such as customer credit card numbers. In addition, the Company
intends to maintain an extensive confidential database of customer profiles and
transaction information. There can be no assurance that advances in computer
capabilities, new discoveries in the field of cryptography, or other events or
developments will not result in a compromise or breach of the algorithms used
by the Company to protect customer transaction and personal data contained in
the Company's customer database. If any such compromise of the Company's
security were to occur, it could have a material adverse effect on the
Company's reputation, business, operating results and financial condition. A
party who is able to circumvent the Company's security measures could
misappropriate proprietary information or cause interruptions in the Company's
operations. The Company may be required to expend significant capital and other
resources to protect against such security breaches or to alleviate problems
caused by such breaches. Concerns over the security of transactions conducted
on the Internet and commercial online services and the privacy of users may
also inhibit the growth of the Internet and commercial online services,
especially as a means of conducting commercial transactions. To the extent that
activities of the Company or third-party contractors involve the storage and
transmission of proprietary information, such as credit card numbers or other
personal information, security breaches could expose the Company to a risk of
loss or litigation and possible liability. There can be no assurance that the
Company's security measures will prevent security breaches or that failure to
prevent such security breaches will not have a material adverse effect on the
Company's business, operating results and financial condition. See
"Business--Technology."
UNCERTAINTIES IN APPAREL MARKET; UNEXPECTED CHANGES IN FASHION TRENDS.
The apparel industry historically has been subject to substantial cyclical
variations. The Company and other apparel vendors rely on the expenditure of
discretionary income for most, if not all, of their sales. Any downturn,
whether real or perceived, in economic conditions or prospects could adversely
affect consumer spending habits and the Company's business, financial condition
and operating results. Fashion trends can change rapidly, and the Company's
business is sensitive to such changes. There can be no assurance that the
Company will accurately anticipate shifts in fashion trends and adjust its
merchandise mix to appeal to changing consumer tastes in a timely manner. If
the Company misjudges the market for its products or is unsuccessful in
responding to changes in fashion trends or in market demand, the Company could
experience insufficient or excess inventory levels or higher markdowns, either
of which would have a material adverse effect on the Company's business,
financial condition and results of operations.
RISKS ASSOCIATED WITH ENTRY INTO NEW BUSINESS AREAS. The Company has
commenced offerings of additional product categories such as bedding and
jewelry. The Company may choose to expand its operations by developing new Web
sites, promoting new or complementary products or sales formats, expanding the
breadth and depth of products and services offered, expanding its market
presence through relationships with third parties or adopting non-Internet
based channels for distributing its products. Expansion of the Company's
operations in this manner would require significant additional expenses and
development, operations and editorial resources and would strain the Company's
management, financial and operational resources. Although it has no present
understanding, commitments or agreements with respect to any material
acquisitions or investments, the Company may pursue the acquisition of new or
complementary businesses, products or technologies. There can be no assurance
that the Company would be able to expand its efforts and operations in a
cost-effective or timely manner or that any such efforts would increase overall
market acceptance. Furthermore, any new business or Web site (including
Bluefly.com) launched by the Company that is not favorably received by consumer
or trade customers could
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damage the Company's reputation. The lack of market acceptance of such efforts
or the Company's inability to generate satisfactory revenues from such expanded
services or products could have a material adverse effect on the Company's
business, prospects, financial condition and results of operations.
GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES. The Company is not
currently subject to direct regulation by any domestic or foreign governmental
agency, other than regulations applicable to businesses generally, and laws or
regulations directly applicable to online commerce. However, it is possible
that a number of laws and regulations may be adopted with respect to the
Internet and other online services. Furthermore, the growth and development of
the market for online commerce may prompt calls for more stringent consumer
protection laws that may impose additional burdens on those companies
conducting business online. The adoption of any additional laws or regulations
may decrease the growth of the Internet or other online services, which could,
in turn, decrease the demand for the Company's products and services and
increase the Company's cost of doing business, or otherwise have a material
adverse effect on the Company's business, prospects, financial condition and
results of operations.
Moreover, the applicability to the Internet of existing laws in
various jurisdictions governing issues such as property ownership, sale and
other taxes, libel and personal privacy is uncertain and may take years to
resolve. For example, tax authorities in a number of states are currently
reviewing the appropriate tax treatment of companies engaged in online
commerce, and new state tax regulations may subject the Company to additional
state sales and income taxes. Any such new legislation or regulation, the
application of laws and regulations from jurisdictions whose laws do not
currently apply to the Company's business, or the application of existing laws
and regulations to the Internet and online commerce could have a material
adverse effect on the Company's business, prospects, financial condition and
results of operations. For example, major U.S.-based online services (and
personnel) have been challenged by German authorities for making certain
content accessible in Germany. If the Company were alleged to have violated
federal, state or foreign, civil or criminal law, even if the Company could
successfully defend such claims, it could have a material adverse effect on the
Company's business, prospects, financial condition and results of operations.
SALES AND OTHER TAXES. The Company does not currently collect sales or
other similar taxes in respect of shipments of goods into states other than
Massachusetts and New York. However, one or more states may seek to impose
sales tax collection obligations on out-of-state companies such as the Company
which engage in online commerce. In addition, any new operation in states
outside Massachusetts and New York could subject shipments into such states to
state sales taxes under current or future laws. A successful assertion by one
or more states or any foreign country that the Company should collect sales or
other taxes on the sale of merchandise could have a material adverse effect on
the Company's business, prospects, financial condition and results of
operations.
RISKS ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS. The Company
is planning an international sales effort. International sales are subject to
inherent risks, including unexpected changes in regulatory requirements and
tariffs, difficulties in staffing and managing foreign operations, longer
payment cycles, greater difficulty in accounts receivable collection,
potentially adverse tax consequences, price controls or other restrictions on
foreign currency and difficulties in obtaining export and import licenses. To
the extent the Company's dependence on revenues from international sales
exists, a material adverse effect on the Company's international business could
materially and adversely affect the Company's business, financial condition and
results of operations as a whole. In particular, gains and losses on the
conversion of foreign payments into U.S. dollars may contribute to fluctuations
in the Company's results of operations and fluctuating exchange rates could
cause reduced gross revenues and/or gross margins from dollar-
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denominated international sales. Although the Company has not experienced any
material adverse impact to date from fluctuations in foreign currencies, there
can be no assurance that the Company will not experience a material adverse
impact on its financial condition and results of operations from fluctuations
in foreign currencies in the future.
SEASONALITY AND QUARTERLY FLUCTUATIONS; COST OF RETURNS. Historically,
the Company's sales and operating results in its retail division fluctuate by
quarter, with most sales occurring in the Company's second and fourth quarters.
The Company expects to experience significant fluctuations in its future
quarterly operating results due to the establishment of Bluefly.com. The
Company expects that its Internet business will be subject to seasonal
fluctuations affecting apparel vendors generally as well as to the slowdown of
Internet usage during the summer months. The Company recognizes that remote
purchases of apparel and fashion accessories may be subject to higher return
rates than traditional store bought merchandise. The Company has established a
liberal return policy in order to accommodate its customers and overcome any
hesitancy they may have with remote purchasing. In the event that return rates
are higher than expected, the Company's business, prospects, financial
condition and results of operations could be materially adversely affected.
MANAGEMENT OF POTENTIAL GROWTH. The Company intends to expand its
Internet operations substantially. This expansion may place a significant
strain on the Company's management, operations and financial resources. To
manage the expected growth of its operations and personnel, the Company will be
required to improve existing, and implement new, transaction-processing,
operational and financial systems, procedures and controls. The Company may
also be required to expand its finance, marketing, administrative and
operations staff. Further, the Company's management will be required to
maintain and expand its relationships with various manufacturers, distributors,
freight companies, fulfillment and customer service entities, other Web sites
and other third parties necessary to the Company's operations. There can be no
assurance that the Company's current and planned personnel, systems, procedures
and controls will be adequate to support the Company's future operations, that
management will be able to hire, train, retain, motivate and manage required
personnel or that the Company's management will be able to successfully
identify, manage and exploit existing and potential market opportunities. If
the Company is unable to manage growth effectively, its business, prospects,
financial condition and results of operations would be materially adversely
affected.
DEPENDENCE ON KEY PERSONNEL. The Company believes its success will
depend to a significant extent on the efforts and abilities of E. Kenneth
Seiff, its Chief Executive Officer. The Company has entered into an employment
agreement with Mr. Seiff which expires on January 1, 2000. The loss of the
services of Mr. Seiff could have a material adverse effect on the Company. The
Company maintains a $1.2 million key person life insurance policy on the life
of Mr. Seiff. The Company's operations will also depend to a great extent on
the Company's ability to attract new key personnel with Internet experience and
retain existing key personnel in the future. The Company's failure to attract
additional qualified employees or to retain the services of key personnel could
have a material adverse effect on the Company's business, prospects, financial
condition and results of operations.
LIABILITY FOR INTERNET CONTENT. As a distributor of Internet content,
the Company faces potential liability for negligence, copyright, patent,
trademark, defamation, indecency and other claims based on the nature and
content of the materials that it broadcasts. Such claims have been brought, and
sometimes successfully pressed, against Internet content distributors. In
addition, the Company could be exposed to liability with respect to the content
or unauthorized duplication or broadcast of content. Although the
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Company maintains general liability insurance, the Company's insurance may not
cover potential claims of this type or may not be adequate to indemnify the
Company for all liability that may be imposed. In addition, although the
Company intends to generally require its content providers to indemnify the
Company for such liability, such indemnification may be inadequate. Any
imposition of liability that is not covered by insurance, is in excess of
insurance coverage or is not covered by an indemnification by a content
provider could have a material adverse effect on the Company's business,
financial condition and results of operations.
DIVIDENDS UNLIKELY. The Company has never declared or paid cash
dividends on the Common Stock and does not intend to pay such dividends in the
foreseeable future. The payment of dividends in the future will be at the
discretion of the Company's Board of Directors.
NO ASSURANCE OF PUBLIC MARKET. Although the Common Stock and Warrants
are quoted on the Nasdaq SmallCap Market and The Boston Stock Exchange, there
can be no assurance that the Company will, in the future, be able to meet all
requirements for continued quotation thereon. In the absence of an active
trading market or if such securities cannot be traded on the Nasdaq SmallCap
Market or The Boston Stock Exchange, the securities could instead be traded on
the Electronic Bulletin Board or in the "Pink Sheets." In such event, the
liquidity and stock price of such securities in the secondary market may be
adversely affected. In addition, in the event such securities are delisted,
broker-dealers have certain regulatory burdens imposed upon them which may
discourage broker-dealers from effecting transactions in such securities,
further limiting the liquidity of such securities.
SHARES ELIGIBLE FOR FUTURE SALE. As of November 27, 1998, the Company
has 2,724,755 shares of Common Stock outstanding. 1,179,645 shares are
"Restricted Securities," as that term is defined under Rule 144 promulgated
under the Securities Act. The Company is unable to predict the effect that
sales made under Rule 144 or otherwise may have on the market price of the
Common Stock or Warrants prevailing at the time of any such sales.
CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIRED TO
EXERCISE WARRANTS. The Company will be able to issue shares of Common Stock
upon exercise of the Warrants only if such Common Stock is qualified for sale
or exempt from qualification under applicable state securities laws of the
jurisdictions in which the various holders of the Warrants reside. The Company
has undertaken to file and keep current a prospectus which will permit the
purchase and sale of the Purchase Warrants and the Common Stock underlying the
Warrants, but there can be no assurance that the Company will be able to do so.
Although the Company intends to seek to qualify for sale the shares of Common
Stock underlying the Warrants in those States in which the securities are to
be offered, no assurance can be given that such qualification will occur. The
Warrants may be deprived of any value and the market for the Warrants may
be limited if a current prospectus covering the Common Stock issuable upon the
exercise of the Warrants is not kept effective or if such Common Stock is not
qualified or exempt from qualification in the jurisdiction in which the holders
of the Warrants then reside.
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EFFECT OF OUTSTANDING WARRANTS AND OPTIONS. As of November 27, 1998,
there were outstanding options to purchase 251,725 shares of Common Stock
issued under the Option Plan, approximately 90,000 shares of which are vested.
The exercise of such outstanding options, the Warrants and the Purchase Option
(and the Warrants included therein) will dilute the then-existing shareholders'
percentage ownership of the Company's stock, and any sales in the public market
of Common Stock underlying such securities could adversely affect prevailing
market prices for the Common Stock. Moreover, the terms upon which the Company
would be able to obtain additional equity capital could be adversely affected
since the holders of such securities can be expected to exercise them at a time
when the Company would, in all likelihood, be able to obtain any needed capital
on terms more favorable to the Company than those provided by such securities.
In addition, the Company has granted certain demand and piggyback registration
rights to the Representative with respect to the securities issuable upon
exercise of the Purchase Option, as well as granted registration rights to
Kaufman Patricof Enterprises, Inc. ("KPE") with respect to the shares of Common
Stock issued to KPE.
ANTI-TAKEOVER MATTERS; POTENTIAL ADVERSE EFFECT OF FUTURE ISSUANCES OF
AUTHORIZED PREFERRED STOCK. The Company's Restated Certificate of Incorporation
("Restated Certificate") and by-laws, as amended and restated ("Restated
By-Laws"), contain certain provisions that may delay, defer or prevent a
takeover of the Company. The Company's Board of Directors have the authority to
issue up to 2,000,000 shares of preferred stock, par value $.01 per share
("Preferred Stock"), and to determine the price, rights, preferences and
restrictions, including voting rights, of those shares, without any further
vote or action by the shareholders. Accordingly, the Board of Directors is
empowered, without shareholder approval, to issue Preferred Stock, for any
reason and at any time, with such rates of dividends, redemption provisions,
liquidation preferences, voting rights, conversion privileges and other
characteristics as the Board of Directors may deem necessary. The rights of
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of holders of any Preferred Stock that may be issued in the future.
In addition, the Restated Certificate and Restated By-Laws include provisions
establishing a classified Board of Directors.
LIMITED LIABILITY OF DIRECTORS. As permitted by the Business
Corporation Law of the State of New York ("BCL"), the Restated Certificate
limits the personal liability of a director to the Company and its shareholders
for monetary damages for breach of duty as a director except in certain
circumstances. Accordingly, except in such circumstances, the Company's
directors will not be liable to the Company or its shareholders for breach of
such duty.
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BUSINESS
GENERAL
On September 8, 1998, the Company publicly launched Bluefly.com, a Web
site through which it offers men's, women's and children's named brand apparel
and accessories at significant discounts as well as provides information on
current trends and other fashion related content. In view of the millions of
consumers who have already purchased apparel and accessories remotely through
traditional print catalogs and even television, the size of the traditional
off-price apparel market and the logistical and economic barriers to direct
marketing excess and end-of-season apparel and accessories offline, the Company
believes a significant market opportunity exists to sell off-price apparel and
accessories via the Internet. See "Risk Factors -- Dependence on Continued
Growth of Online Commerce."
According to Discount Store News, traditional retailers of off-price
apparel such as T.J. Maxx, Marshalls, Inc. ("Marshalls") and Loehmanns sold
approximately $18.5 billion worth of goods in 1997. In addition, ICSC found
that factory outlet sales of apparel and accessories equaled $8.3 billion in
1997. The Company believes that this $26.8 billion market has generally failed
to address a number of consumer needs, including convenience and customer
service. The Company further believes that this industry has grown, in part,
because no better alternative exists.
The Company has designed its online outlet store to combine the best
traditional retailing practices with innovative and convenient features made
possible by the Internet. As an online commerce and content provider, the
Company intends to provide a compelling and enjoyable online shopping
experience that includes a broad selection of name brand products at
significant discounts to retail prices, an intuitive store layout, friendly
customer service, a visually pleasing environment, a liberal return policy, the
convenience of shopping from home in a store that never closes, and
sophisticated search technology features which will allow customers to locate
quickly the items which interest them. See "Risk Factors -- Start-up Risks."
The Company plans to capitalize on technology and the Internet to
pioneer the direct-to-customer, name brand discount price apparel market. The
Company believes that its use of state-of-the-art technology and implementation
of automation systems will permit consumers, customer service employees,
management, and administrative personnel to access information and manage data
in an effective and efficient manner. Moreover, the Company believes that its
use of technology will allow it to integrate seamlessly with its fulfillment
and call centers, reduce inefficiencies in customer service and transaction
processing, and allow for a user friendly Web site that can offer a
personalized shopping experience for today's busy shopper. See "Risk Factors --
Rapid Technological Change."
To date, the Company is not aware of any other business which has
devoted substantial resources to developing and promoting the
direct-to-consumer market for off-price name brand apparel and accessories.
This could be because, until recently, no medium existed that could accommodate
both a high volume of traffic and the logistical infrastructure necessary to
sell end-of-season and excess apparel inventory directly to customers in an
efficient and economical manner.
The direct marketing of excess inventory and end-of-season apparel
requires a cost effective medium that is capable of displaying a large number
of products, many of which are in limited supply and some of which are neither
available in all sizes nor easily replenished. Print catalogs are not well
suited to this task. The paper, printing, mailing, and other production costs
of a print catalog can be significant. To support
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these costs, a traditional cataloger requires products that are available in a
full range of sizes and in substantial quantities. Similarly, television is a
costly medium which requires substantial quantities of products that are
available in a full size scale in order for it to be an economical medium.
The Internet, however, is a far less expensive and, in many ways, more
effective medium. Utilizing the Internet, the Company can display an almost
limitless number of items to a global audience without the high costs of
printing and mailing. With the Internet, the Company can easily update product
images as new products arrive and other items sellout. By integrating a
sophisticated relational database with the power of the Internet, the Company
will be able to create a personalized shopping environment and allow its
customers to search for the products that interest them. Accordingly, the
Company believes that the Internet is a medium which will permit it to market
its products globally and in a cost-effective manner. See "Risk Factors --
Rapid Technological Change" and "Risk Factors -- Competition."
INDUSTRY BACKGROUND
Traditional Direct Marketing and the Growth of Online Commerce
The direct marketing industry is a well established, $100 billion
dollar component of the U.S. retail economy. According to a 1997 report by
Simmons Market Research, in 1996, 131 million U.S. adults purchased at least
one item by phone or mail. Companies like L.L. Bean, Spiegel's, and Lands' End
have established the print catalog as a vehicle through which customers
purchase goods and services from the convenience of their home or office. In
the past decade, companies like QVC and Home Shopping Network, Inc. have
applied the same principles to the medium of television and created a new,
multi-billion dollar industry. Today, the Internet represents a new, global
avenue for the direct marketing industry to exploit.
The Internet is a collection of thousands of computer networks and
millions of computer connections that enables individuals, businesses and
institutions to access and share information on a worldwide basis. The
Internet's growth has, by most measures, been astounding. According to Business
Week, in December of 1994, there were an estimated one million users of the
World Wide Web, the graphical portion of the Internet. By 1997, according to
Business Week, this number grew to approximately 40 million in the United
States alone. With advances in technology driving a significant reduction in
the cost of personal computers, the introduction of less expensive access
devices like "Web TV," and the mass incorporation of Internet technology by
governments, schools and businesses, it is expected that the number of people
using the World Wide Web will expand dramatically in the coming years. In this
regard, Morgan Stanley, Dean Witter, Discover & Co. has predicted that by the
year 2000 more than 150 million people will use the Internet. See "Risk Factors
- - -- Dependence on Continued Growth of Online Commerce."
As the number of Internet users grows, it is expected that
increasingly more businesses will seek to use this medium as a vehicle for
selling goods and services. One significant factor propelling this trend is
that online households have significantly higher income levels than households
without Internet access. According to Jupiter, the average income of the online
household exceeds that of the traditional remote purchasing household by
approximately 28% ($59,000 vs. $46,000), indicating greater disposable income
and spending power among the online audience.
Jupiter estimates that in 1996 $707 million was spent in online
purchases and that in 1997 this figure grew to $2.6 billion. A fall/winter 1997
CommerceNet/Nielsen study found that 10 million Web users in the United States
and Canada (about 16 percent of all Internet users in North America) have
actually
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purchased some item on the Web, up from 7.4 million six months earlier.
According to Jupiter, online sales in the United States are expected to grow to
$11.9 billion in 1999 and $41.1 billion in 2002. The success of companies like
Amazon.com, Inc., CDnow, Inc. and OnSale, Inc. indicate that individuals are
willing to purchase goods and services via the Internet. The Company believes
that the sale of apparel and accessories will constitute a meaningful market
and a significant portion of Internet sales in the future. See "Risk Factors --
Dependence on Continued Growth of Online Commerce."
The Online Apparel Opportunity
To date, according to Simmons Market Research, apparel and accessories
has been the largest product segment of the traditional direct marketing
channel, accounting for over $15 billion of revenues in 1996. According to
Simmons Market Research, nearly 23% of all adults in the United States made at
least one clothing purchase through remote channels in 1995. In the catalog
industry, according to a 1997 report by the Direct Marketing Association, for
example, apparel and accessories represented approximately 34% of the
industry's $48 billion of consumer sales in 1996. In contrast, according to
Maxwell Sroge Company, the direct marketing of books accounted for only $2.75
billion of sales in 1996. The magnitude of the apparel and accessories
direct-to-consumer market and the success of companies like J. Crew Group, Inc.
("J. Crew"), Lands' End, and Victoria's Secret Stores, Inc. are perhaps the
best evidence that people are prepared to purchase clothing and accessories
remotely, despite the fact that no catalog can convey the tactile element of
clothing or provide a fitting room in which consumers can try on clothing.
While online clothing and accessory purchases accounted for only $103
million in 1997, Jupiter is forecasting that this figure will grow to $641
million in 1999 and $2.8 billion in 2002. This represents a compounded annual
growth rate in excess of 94%. The Company believes that the market for online
sales of apparel is benefiting disproportionately from a confluence of trends.
In 1996, women comprised 38% of the online population. According to
Jupiter, by 2000, it is expected that women will represent 46% of the online
population. Since women, according to Jupiter, spend almost three times as much
as men on the remote purchase of apparel, the Company believes that the
increasing number of women online is likely to fuel the growth of online
apparel sales. In addition, as the online audience expands from technology
savvy pioneers to include mainstream consumers, demand for online goods and
services should more closely mimic the general population's demands. In light
of these factors, Jupiter projects that the apparel category will be the
fastest growing product category online between 1998 and 2002.
The Market for Off-Price Apparel
According to Discount Store News, traditional retailers of off-price
apparel such as T.J. Maxx, Marshalls and Loehmanns sold approximately $18.5
billion dollars worth of goods in 1997. In addition, the International Council
of Shopping Centers found that factory outlet sales of apparel and accessories
equaled $8.3 billion dollars in 1997. The Company believes that this $26.8
billion dollar market has generally failed to address a number of consumer
needs including convenience and customer service. The Company believes that
this industry has grown, in part, because no better alternative exists.
By offering competitively priced products in a more convenient format
with a higher level of customer service, the Company intends to provide a
meaningful alternative to the consumer and revolutionize the off-price apparel
industry. By offering name brand products at significant discounts, a
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money back guaranteed 90 day no-questions-asked return policy, a high level of
service and the convenience of 24/7 shopping, the Company believes that it can
provide an attractive alternative way for consumers to shop for apparel and
fashion accessories. See "Risk Factors -- Uncertain Acceptance of Brand; Risks
Associated with Name Change."
THE BLUEFLY APPROACH
Taking into account such factors as the significant size of the
traditional off-price apparel and accessory market, the absence of a dominant
online competitor, the propensity of Internet shoppers to respond to bargains,
and the lack of customer service provided by existing offline retailers, the
Company has decided to focus its attention on the off-price segment of the
online apparel market. The Company offers a full range of product categories,
including bedding, blazers, cosmetics, dresses, hats, jewelry, outerwear,
pants, shirts, skirts, socks, sweaters, sweatshirts, ties, underwear and
watches. In addition, because today's high-income Internet users have
sophisticated tastes, the Company offers the name brand apparel and accessories
which match their interests. See "Risk Factors -- Uncertainties in Apparel
Market; Unexpected Changes in Fashion Trends."
The Company plans to leverage technology and the Internet to pioneer
what it believes will be a significant new market, the direct-to-customer
market for discounted name brand apparel and accessories. As an online commerce
and content provider, the Company intends to provide a compelling and enjoyable
online shopping experience that includes:
o significant discounts to retail prices
o a broad and well merchandised selection of name brand products
o the convenience of shopping from home in a store that never
closes
o friendly and available customer service
o a personalized shopping experience which will enable
customers to quickly find the items which interest them
o a visually pleasing environment
o an intuitive store layout, and
o a liberal return policy.
The Company is designing its online store to combine the best
traditional retailing practices with innovative and convenient features made
possible by the Internet. In addition, the Company plans to include tips on
fashion trends and other fashion related content in an effort to become the
definitive off-price apparel and fashion accessory site on the Web.
The following are a few of the key components of the Company's
business model:
Significant Discounts
The Company offers customers discounts of between 25% and 75% off
comparable retail prices. The Company believes that it is able to offer
discounts of this magnitude by purchasing effectively and by eliminating many
of the significant overhead costs necessary to operate either a retail store or
traditional print catalog, including the rent and attendant personnel expenses
of a retail store and the printing and mailing costs of a cataloger. The
Company intends to purchase excess inventory and end-of-season goods and place
bulk orders in order to gain a competitive sourcing advantage. The Company
believes that its
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discount prices coupled with a wide selection of quality, name brand products
will create compelling reasons for customers to shop at Bluefly.com. See "Risk
Factors -- Lack of Operating History of Internet Business."
Breadth of Product Selection
Bluefly.com showcases men's, women's and children's apparel as well as
fashion and home accessories. The Company offers most major product categories,
including bedding, blazers, cosmetics, dresses, hats, jewelry, outerwear,
pants, shirts, skirts, socks, sweaters, sweatshirts, ties, underwear and
watches. Recognizing that some customers may be reluctant to make remote
purchases of clothing, the Company intends to offer only the high quality, name
brand items with which most online shoppers are familiar. See "Risk Factors
- - --Availability of Merchandise."
Customer Convenience
Without the constraints imposed by a physical location, an online
store may be the most convenient way for consumers to shop. Using Bluefly.com,
customers are able to shop at any time from the privacy and comfort of their
own home or office. By eliminating the need for customers to travel to a
physical location, the Company believes that it provides a significant service
to many shoppers, including those who drive hours to get to a manufacturer's
outlet mall. According to a 1998 survey by ICSC, 77% of shoppers typically
travel more than one hour to visit an outlet mall. By remaining open for
business 24 hours a day, 365 days a year, the Company services the needs of
today's time constrained customers as well as foreign customers shopping from
different time zones. See "Risk Factors -- Risks Associated with International
Sales and Operations."
A Personalized Shopping Experience
The Company believes that today's consumers prefer to shop in a store
that is tailored to their needs. The Company has personalized Bluefly.com to
allow customers to create their own shopping environment. In addition,
Bluefly.com offers customers real time access to their order history and order
status.
The Company plans to offer customers a variety of other personalized
services and features, including special occasion notification and narrowcasted
content and commerce. The special occasion notification will remind the
customers by e-mail of any birthdays, anniversaries or other dates of interest.
The Company intends to build a complex relational database, that will offer
narrow casted content, promotions and product displays based on customer
preferences, purchasing history, site behavior and seasonal considerations. See
"Risk Factors -- Risks of Capacity Constraints; Reliance on Internally
Developed Systems; System Development Risks."
A key consideration behind the Company's personalization programs is
the desire to build customer loyalty. In addition, the Company intends to build
site features, mine customer data and develop affinity and other marketing
programs designed to encourage repeat purchases and customer loyalty. By
encouraging feedback from its shoppers, the Company plans to improve its
customers' shopping experience and the efficiency of its operations. The
Company will offer e-mail, phone and telecopy options for customer comments,
complaints and suggestions.
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Visually Pleasing Interface and Fast Loading Pages
The Company believes that Bluefly.com will include a visually pleasing
shopping environment that is designed to download quickly in spite of today's
relatively limited bandwidth and slow data transmission technology. To satisfy
customers' desires for high quality graphic images, the Company has built a
state-ofthe-art digital photo studio that is used to capture accurate, high
resolution product images. Each item will have at least one thumbnail sized
image and one larger sized image on Bluefly.com along with a product and care
description so that customers will be able to make informed purchase decisions.
See "Risk Factors -Infrastructure Necessary to Support Explosive Growth of
Internet."
Dynamic Search Functionality
Bluefly.com is designed to be user-friendly and offers three unique
ways for customers to sort through merchandise quickly and efficiently. Using
any one of these three features, customers are able to find quickly the items
in which they are interested. The Company has designed Bluefly.com to be a
simple and attractive alternative for shoppers who are tired of traveling to
off-price stores, searching amidst cluttered racks and piles of clothes, only
to be disappointed by the poor service, limited size availability and
inconsistent quality of merchandise.
Compelling Content
The Company intends to offer its visitors interactive content,
including daily, weekly and monthly fashion articles covering news, information
on emerging trends, design ideas and other interesting fashion related
features. The Company intends to post content which it believes will be
interesting and informative as a means of attracting users to its site. The
Company also intends to test contextual selling techniques. For example, an
article on the latest trend in skirts might provide a link to a page with the
designer skirts available for sale on Bluefly.com. Because the Internet permits
a cost effective means of combining content with commerce, the Company believes
that Bluefly.com will provide it with a significant competitive advantage over
traditional methods of retailing. See "Risk Factors -- Risks Associated with
Entry in New Business Areas."
Quick Order Fulfillment
The Company has entered into an exclusive agreement with a third party
to provide fulfillment and call center customer service. The third party was
selected for its technological sophistication, its online commerce experience,
and its ability to integrate with the Company's information systems. The
Company expects that all customer orders will be shipped within one to two
business days of their receipt, and that all customer service calls will be
handled quickly and efficiently. The Company intends to provide quality
customer service in an effort to distinguish itself further from its off-line
competitors and establish itself as the premier online store for name brand
apparel and fashion accessories. See "Risk Factors -- Dependence on Third
Parties and Certain Relationships."
In the first nine months of 1998, the Company expended approximately
$242,000 on research and development costs associated with its Internet
business.
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Efficient Inventory System
Many large, national off-price retail apparel chains have slow,
cumbersome centralized distribution systems that result in merchandise taking
up to six weeks to reach store shelves. Such systems are inefficient and not
well suited to respond to ever-changing fashion trends and unexpected customer
demands for particular items of merchandise. The Company has designed a system
which it believes will allow it to make goods available for sale within as
little as three business days of the date the Company receives those goods. The
Company believes that this will provide it with a significant competitive
advantage. See "Risk Factors--Management of Potential Growth."
Changing Product Inventory
The Company's proprietary product information database is being
designed to maintain an up to the second count of all inventory available for
sale. This database is intended to eliminate the problem of back orders, which
many catalog companies face, because customers will only be able to view and
purchase instock items. The system is also being designed to allow the Company
to change product pricing quickly, thereby permitting the Company to run timed
promotional sales and facilitate dynamic pricing to address specific market or
competitive factors. See "Risk Factors -- Risk of Capacity Constraints;
Reliance on Internally Developed Systems; System Development Risks."
Marketing
The Company intends to promote its brand name and drive traffic to
Bluefly.com by combining traditional off line strategies, including public
relations, print and radio advertising, with online marketing vehicles such as
banner advertising and strategic partnerships with relevant Web sites and
portals.
Initially, the Company plans to devote a significant portion of its
marketing dollars to developing relationships with portal companies. According
to Jupiter, in 1997 an estimated $673 million, or 26% of the total online
shopping revenues, resulted from tenancy deals with portal companies. Jupiter
expects that this figure will increase to $1.7 billion in 1998 and $20.3
billion, or a little over half of all shopping revenue, by 2002. See "Risk
Factors -- Start-up Risks" and "Risk Factors -- Dependence on Third Parties and
Certain Relationships."
As the online audience continues to expand beyond the technology savvy
user of the Internet into the mainstream population, the importance of portal
environments created by companies such as America Online, Inc. ("AOL"), Yahoo,
Excite Inc. and Lycos will increase. Internet shoppers congregate in these
portal environments in order to quickly search for their desired destination or
information. The Company believes that by establishing links with the shopping
departments of these portals, it will succeed in building a large and diverse
customer base. To this end, the Company became a tenant in the apparel
departments in the three major distribution channels of AOL: the AOL Network,
AOL.com and CompuServe. Under the terms of its arrangement with AOL, the
Company established a permanent link to its Web site from the shopping
departments of each of these three portal sites for a period of one year. In
addition, the Company will also have the opportunity to promote itself across
the AOL Network, AOL.com, and CompuServe and has received and will continue to
receive a variety of promotional and joint marketing benefits, including the
use of key words to provide AOL users with direct access to Bluefly.com.
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The Company regards its relationship with AOL as an important means of
driving traffic to Bluefly.com. On August 27, 1998, AOL announced that it had
over 13 million registered users. Including CompuServe, AOL has over 15 million
members. This is a significant percentage of the online population and the
Company believes that by positioning itself in the apparel departments of AOL,
AOL.com, and CompuServe, the Company will be able to attract consumers that are
interested in purchasing apparel and fashion accessories online. See "Risk
Factors -- Dependence on Third Parties and Certain Relationships."
On November 19, 1998, the Company announced that it had formed a
strategic alliance with Lycos which will establish the Company as a premier
commerce vendor of Lycos. Under the terms of its agreement with Lycos, the
Company will have links to Bluefly.com throughout the Lycos Network, including
Lycos.com, Tripod and MailCity, for a period of fourteen months beginning in
November, 1998. The Company's aggregate future commitments to portal companies
is approximately $750,000, payable over the next fourteen months, plus in
certain instances certain contingent payments based on revenues. See "Risks
Factors -- Uncertain Acceptance of Brand; Risks Associated with Name Change."
The Company is presently negotiating other distribution arrangements
with some of the other major Internet companies in order to secure a cost
effective means of building its brand recognition and acquiring customers.
While the Company believes that establishing relationships with portal
companies will accelerate the growth of its business in the near term, it
expects that the importance of maintaining a presence on portal sites will
diminish as more customers gain Web-navigation experience and the Company
establishes its brand. See "Risk Factors -- Uncertain Acceptance of Brand;
Risks Associated with Name Change."
The Company is also planning an affiliate program through which it
will establish cross-promotional relationships with other Web sites, and will
consider revenue sharing relationships with established fashion oriented Web
sites. In those cases, the Company would pay affiliate partners a percentage of
each sale initiated by the affiliate. It is also exploring other arrangements
that would leverage its knowledge of the fashion industry and current trends by
sharing its content with affiliate partners in exchange for promotional
benefits. See "Risk Factors -- Uncertainties in Apparel Market; Unexpected
Changes in Fashion Trends."
Supply Management and Automated Fulfillment Process
With over seven years' experience in the fashion industry, the Company
is using its industry relationships to establish an effective network of
suppliers of discount, name brand apparel and fashion accessories. The Company
intends to buy products directly from manufacturers as well as from retailers
and other third party indirect resources. Because of the prevailing industry
practices to short ship and reallocate products after purchase orders are
placed, the Company takes title and delivery of its inventory prior to offering
it online. This not only assures that customers' purchases are in-stock and
available for immediate shipment but also has the added benefit of increasing
the number of potential suppliers since many vendors will not sell product on a
consignment basis. See "Risk Factors -- Availability of Merchandise."
Utilizing the technology of the Internet and its own proprietary
backend database, the Company has automated what has traditionally been a
cumbersome, labor intensive, paper ladened order processing system. The Company
has developed what it believes is a state-of-the-art Web site and backend data
server to integrate seamlessly with its fulfillment and call center operations.
Customer orders are transmitted automatically to the fulfillment center by a
secure, electronic connection, and processed usually within one to two business
days of their receipt. If a customer is uncomfortable ordering online or cannot
establish a secure connection with Bluefly.com, he or she is given the option
of completing his or her order by calling the Company's toll free customer
service number. See "Risk Factors -- Dependence on Third Parties and Certain
Relationships."
The Company offers the customer a choice of shipping options,
including overnight, two day and standard delivery within the United States. In
addition, to capitalize on the global reach of the Internet, the Company
intends to provide shipping to over 200 countries. See "Risk Factors -- Risks
Associated with International Sales and Operations." Upon receipt of an order,
it is expected that Bluefly.com will send an
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e-mail to the customer confirming the receipt of the order. Another e-mail will
follow when the shipment is made. In addition, Bluefly.com offers an order
tracking feature that allows customers to track the status of their order. See
"Risk Factors -- Dependence on Third Parties and Certain Relationships."
To accommodate customers and help them overcome any hesitancy they may
have with remote purchasing, the Company has established a no-questions-asked,
money-back guarantee policy for any item which is returned unused within 90
days of the date of purchase. By offering what it believes will be effective
customer service and allowing customers to shop in an interactive environment,
the Company believes that its return rate will be lower than that of
traditional catalogers. In addition, by offering only the highest quality brand
name goods, the Company believes that the vast majority of its customers will
be pleased with their purchases. See "Risk Factors -- Seasonality and Quarterly
Fluctuations; Cost of Returns."
Technology
The Company intends to implement a broad array of state-of-the-art
technology that will facilitate Web site management, complex database search
functionality, customer interaction and personalization, transaction
processing, fulfillment and customer service functionality. Such technology
will include a combination of proprietary technology and commercially
available, licensed technology. The Company believes that Bluefly.com will
comprise a suite of applications that will permit customers, customer service
employees, management, and administrative personnel to access and manage the
database in an effective and efficient manner. See "Risk Factors -- Rapid
Technological Change."
To address the critical issues of privacy and security on the
Internet, the Company will incorporate, for transmission of confidential
personal information between customers and the Company's Web server, Secure
Socket Layer Technology ("SSL") such that all data is transmitted via a fully
DES 128-bit encrypted session. In the event that a customer's browser does not
support SSL, Bluefly.com will instruct the customer to call the Company's
Customer Service Center to provide his credit card information over the phone.
Transmission of credit card and other personal information between the Web
server and the Company's fulfillment center will also be encrypted in a similar
manner. See "Risk Factors - Online Commerce Security Risks."
The Company has entered into a definitive agreement with a major
Internet service provider to host Bluefly.com and provide certain hardware and
software as well as year round 24 hour systems support. The server and network
architecture is designed to provide high speed, reliable access 24 hours a day,
365 days a year, accommodate several thousand simultaneous visitors, and allow
for rapid scaling of hardware and bandwidth to accommodate sudden increases in
site traffic. Initially, Bluefly.com resides on a bank of dedicated Compaq
ProLiant 1600R servers with dual 300 MHz Pentium II Processors running
Microsoft's NT 4.0. In order to ensure data redundancy and fault tolerance, all
data is mirrored on hardware controlled raid disk arrays. The Company's
proprietary search, commerce, and personalization engine technology
incorporates certain components of Microsoft's IIS 4.0, SQL Server 6.5, and
Commerce Server 3.0. Connectivity to the Internet is provided through a
dedicated pipe that is capable of handling sustained data bursts of 10
megabits/sec. See "Risk Factors -- Dependence on Third Parties and Certain
Relationships."
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Competition
Electronic commerce generally, and, in particular, the online retail
apparel and fashion accessories market, is a new, dynamic, high growth market.
To date, the Company is not aware of any other business which has devoted
substantial resources to developing and promoting the direct-to-consumer market
for off-price name brand apparel. This could be because, until recently, no
medium existed that could accommodate both a high volume of traffic and the
logistical infrastructure necessary to sell end-of-season and excess apparel
inventory directly to customers in an efficient and economical manner.
The direct marketing of excess inventory and end-of-season apparel
requires a cost effective medium that is capable of displaying a large number
of products, many of which are in limited supply and some of which are not
available in all sizes or easily re-stocked. Print catalogs are not well suited
to this task. The paper, printing, mailing, and other production costs of a
print catalog can be significant. To support these costs, a traditional
cataloger requires products that are available in a full range of sizes and
substantial quantities. Similarly, television is a costly medium which requires
substantial quantities of products that are available in a full size scale in
order for it to be an economical medium.
The Internet, however, is a far less expensive and, in many ways, more
effective medium. Utilizing the Internet, the Company can display an almost
limitless number of items without the high costs of printing and mailing. With
the Internet, the Company can easily update product images as new products
arrive and other items sellout. By integrating a sophisticated relational
database with the power of the Internet, the Company will be able to create a
personalized shopping environment and allow its customers to search for the
products that interest them. Accordingly, the Company believes that the
Internet is a medium which will permit it to market its products in a
cost-effective manner.
The Company's competition for online customers comes from a variety of
sources including, existing land-based retailers such as the Gap, Nordstrom,
Inc., Lands' End, J. Crew Group, Inc. and Macy's which are using the Internet
to expand their channels of distribution and less established companies such as
Visionary, Deal-A-Day, Inc., Delias, Inc. and Designeroutlet.com which are
building their brands online. In addition, the Company's competition for
customers comes from traditional direct marketers such as L.L. Bean and
Spiegel's, television direct marketers such as QVC, as well as land-based
retail stores, such as Dillard's, Inc., T.J. Maxx, Marshalls, and Loehmanns,
which may or may not use the Internet to grow their customer base.
The Company believes that any competitor which seeks to establish an
electronic commerce presence in the apparel and fashion accessory industry will
confront significant challenges in cost effectively addressing, among other
things, the need to incorporate legacy data and financial systems, establish an
efficient supply and logistics systems, develop and maintain a user-friendly
customer interface, create or adapt a brand name for the Internet commerce and
exploit the technologies and opportunities made possible by the Internet to
create innovative new retailing services and features. The Company believes
that its ability to compete favorably is enhanced by its first mover advantage
as well as its knowledge of fashion trends, relationships with key industry
figures, in-house marketing talent, proprietary technology, and sophisticated
logistics and supply management systems. See "Risk Factors -- Competition."
Plan of Operations
The Company anticipates, based on current plans and assumptions
relating to its operations, that the proceeds of the Initial Public Offering,
together with existing resources and cash generated from operations,
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should be sufficient to satisfy the Company's contemplated cash requirements
for approximately 7 months after the date of this Prospectus. Moreover, there
can be no assurance that the Company will not require additional financing
during such 7-month period. Proceeds from the exercise of the Warrants and the
Purchase Option could be a source of capital, although, there can be no
assurance of any such exercise. The Company intends to seek additional debt
and/or equity financing through a public offering, private placement or
otherwise to the extent there are no proceeds from the exercise of the Warrants
and the Purchase Option, such proceeds are insufficient or the Company
otherwise deems it necessary or appropriate to raise additional capital. There
can be no assurance that any additional financing or other sources of capital
will be available to the Company upon acceptable terms, if at all. The
inability to obtain additional financing when needed would have a material
adverse effect on the Company's business, financial condition and operating
results and raise substantial doubt about the Company's ability to continue as
a going concern.
During the next 7 to 12 months (depending on the level and
availability of additional financing), the Company intends to capitalize on
its early entry into online apparel shopping category by engaging in a number
of marketing initiatives designed to establish itself as the definitive
internet outlet store for top designer, name brand clothing and fashion
accessories, expanding its product offerings to include a wider variety of
products from many of the top designers, and increasing its consumer base to
include many more people. See "-Marketing" and "-- Breadth of Production
Selection."
In order to expand its customer base and establish its brand name, the
Company intends over the next 7 to 12 months (depending on the level and
availability of additional financing) to establish relationships with most of
the major portal companies. See "-- Marketing." In addition, the Company will
engage in offline marketing efforts, including print advertising campaigns and
possibly radio and television advertising campaigns. The Company's marketing
budget is subject to a number of factors, including the Company's results of
operations and ability to raise additional capital through the exercise of the
Warrants or issuance of additional securities. In the event that the Company is
not able to raise additional capital either through the exercise of outstanding
Warrants and the Purchase Option, a financing or a combination of the
foregoing, the Company anticipates that it will only have available
approximately $700,000 dollars for marketing initiatives over the next 7 months
which it will finance from its existing capital and results of operations. See
"Risk Factors -- Start-Up Risks," "Risk Factors -- Limited Working Capital;
Need for Additional Financing" and "--Marketing." In the event that the Company
is successful in raising additional capital or its results of operations exceed
its expectations, the Company's marketing budget for such 12-month period may
increase significantly. See "Risk Factors -- Limited Working Capital; Need for
Additional Financing."
In order to expand its product offerings the Company intends over the
next 7 to 12 months (depending on the level and availability of additional
financing) to expand its relationships with suppliers of discount, name brand
apparel and fashion accessories. The Company expects that its suppliers will
include designers, retail stores and designers that sell excess inventory as
well as third party end-of-season apparel aggregators. If the Company does not
raise additional capital or its results of operations do not exceed its
expectations, the Company expects that it will only have available approximately
$1 million dollars to expend on inventory which it will finance from its
results of operations and existing capital. See "Risk Factors -- Limited
Working Capital; Need for Additional Financing." If the Company is successful
in raising additional capital or its results of operations exceed its
expectations, the Company anticipates that it will spend significantly more on
inventory. In addition, to achieve its goal of offering a wide selection of top
name brand designer clothing and fashion accessories, the Company may acquire
certain goods on consignment and will explore leasing or partnering select
departments such as fragrances, sunglasses and cosmetics with strategic partners
and distributors. See "Risk Factors -- Availability of Merchandise."
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Intellectual Property
The Company has created and intends to continue to develop trademarks,
designs and proprietary systems and trade secrets to create competitive
advantages. As a result, it relies on a combination of trademark, service mark,
copyright and trade secret laws, as well as confidentiality agreements and
technical measures to protect its proprietary rights. The Company is pursuing
the registration of its service marks in the United States and abroad and is
considering the possibility of patenting certain of its proprietary technology.
See "Risk Factors -- Uncertain Ability to Obtain and Protect Proprietary
Information."
Government Approvals and Regulations
The Company is not currently subject to direct regulation by any
domestic or foreign governmental agency, other than regulations applicable to
businesses generally, and laws or regulations directly applicable to online
commerce. Although the Company is not aware of any permits or licenses that are
required in order for it to sell apparel and fashion accessories on the
Internet, permits or licenses may be required from federal, state or local
governmental authorities to operate or to sell certain other products on the
Internet. No assurances can be given that such permits or licenses will be
obtainable. The Company may be required to comply with future national and/or
international legislation and statutes regarding conducting commerce on the
Internet in all or specific countries throughout the world. No assurance can be
made that the Company will be able to comply with such legislation or statutes.
The Company's Internet operations are not currently impacted by
federal, state, local and foreign environmental protection laws and
regulations. See "Risk Factors -- Governmental Regulations and Legal
Uncertainties."
EMPLOYEES
As of November 27, 1998, the Company employed 10 full-time and 2
part-time employees. None of the Company's employees are represented by a labor
union, and the Company has never experienced a work stoppage. The Company
believes its relationship with its employees to be satisfactory.
- 29 -
<PAGE>
USE OF PROCEEDS
If the Purchase Option is exercised in full and all of the holders of
outstanding Warrants elect to exercise their Warrants, the estimated net
proceeds to the Company (assuming no exercise of the cashless exercise right
contained in the Purchase Option) would be approximately $11,940,000 (after
giving effect to expenses of the Offering estimated to be approximately $75,000,
but excluding any payment of commissions paid to the Representative as
described below).
The Representative shall be entitled to a 5% commission (provided that
each of the conditions set forth below are satisfied) in connection with the
solicitation of the exercise of the Warrants, which would reduce the net
proceeds received by the Company. The Representative shall receive a 5%
commission upon the exercise of any Warrant provided that: (i) the market price
of the Common Stock is greater than the price per share at which Common Stock
may be purchased at the time a Warrant is exercised, (ii) disclosure of
compensation arrangements was made both at the time of the original offering
and at the time of exercise (by delivery of this Prospectus or as otherwise
required by applicable law, rule or regulation), (iii) the exercise of the
Warrant was solicited by the Representative, (iv) the Warrant was not held in a
discretionary account, and (v) the solicitation of the exercise of the Warrant
was not in violation of Regulation M (as such rule or any successor rule may be
in effect as of such time of exercise) promulgated under the Exchange Act.
The Company intends to apply the net proceeds received by the Company
from the exercise of Warrants and the Purchase Option, if any, for working
capital, marketing and general corporate purposes and expanding the Company's
Internet services business.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on the
Common Stock and it is currently the intention of the Company not to pay cash
dividends on its Common Stock in the foreseeable future. Management intends to
reinvest earnings, if any, in the development and expansion of the Company's
business. Any future declaration of cash dividends will be at the discretion of
the Board of Directors and will depend upon the earnings, capital requirements
and financial position of the Company, general economic conditions and other
pertinent factors.
SELLING SECURITYHOLDERS
The Company has agreed to register the Bridge Warrants for resale
under the Securities Act concurrently with this Offering and to pay certain
expenses in connection therewith. An aggregate of 363,000 Bridge Warrants may
be offered and sold pursuant to this Prospectus by the holders thereof. The
securities offered by the Selling Securityholders are not part of an
underwritten offering. The Company will not receive any of the proceeds from
the sale of the Bridge Warrants.
The following table sets forth the name of each Selling Securityholder
and the number of Bridge Warrants beneficially owned prior to sale. None of the
Selling Securityholders has ever held any position or office with the Company
or had any other material relationship with the Company.
- 30 -
<PAGE>
NUMBER
NAME OF WARRANTS
- - ---- -----------
Wissam Amoudi.......................................... 4,000
Jan Arnett............................................. 10,000
Norma Barasch.......................................... 5,000
Herbert Chestler....................................... 10,000
Michael Cohen.......................................... 5,000
John Franco and Donna Franco........................... 10,000
Arnold Glatter......................................... 5,000
Abraham Goldstein...................................... 8,000
Robert D. Goldstein.................................... 8,000
Alan Henick............................................ 5,000
Huberfeld/Bodner Family Foundation..................... 20,000
Peter K. Hunt.......................................... 15,000
Irwin Schlass Enterprises, Inc......................... 8,000
Frank Joy and Charlotte Joy ........................... 10,000
Lawrence A. Kestin..................................... 10,000
Konigsberg Wolf & Co., P.C. 401(k) Plan................ 8,000
R. Bruce LeBlanc....................................... 10,000
Stephen E. Marks....................................... 8,000
Joseph Melnick and Georgia Melnick..................... 10,000
Joseph J. Messina...................................... 8,000
Irwin M. Miller........................................ 10,000
Frank Mills............................................ 10,000
Northstar Investment Group, Ltd........................ 70,000
Salvatore Palacino and Karen Palacino.................. 10,000
A.C. Providenti........................................ 5,000
Steven Rosen........................................... 5,000
Claudia C. Rouhana..................................... 8,000
William J. Rouhana, Jr................................. 8,000
Jack P. Schleifer...................................... 10,000
Mark J. Shankman....................................... 15,000
Howard M. Siegel....................................... 10,000
Jonathan H. Simon...................................... 20,000
Greg Trubowitsch....................................... 5,000
PLAN OF DISTRIBUTION
The Offering is self-underwritten; the Company has not employed an
underwriter for the issuance of the Common Stock upon the exercise of the
Warrants, for the resale of the Bridge Warrants or the issuance of the Purchase
Warrants upon the exercise of the Purchase Option and will bear all expenses of
the Offering.
The shares of Common Stock and the Warrants registered for sale under
the Registration Statement of which this Prospectus forms a part may be offered
and sold from time to time in transactions (which may include block
transactions) on the Nasdaq SmallCap Market or the Boston Stock Exchange, in
negotiated transactions, or a combination of such methods of sale, at fixed
prices which may be changed, at market
- 31 -
<PAGE>
prices prevailing at the time of sale, or at negotiated prices. None of the
Selling Securityholders have advised the Company that they have entered into
any agreements, understandings or arrangements with any underwriters or
broker-dealers regarding the sale of their securities. The Selling
Securityholders may effect such transactions by selling their securities
directly to purchasers or to or through broker-dealers (including GKN
Securities Corp.), which may act as agents or principals. Such broker-dealers
may receive compensation in the form of discounts, concessions, or commissions
from the Selling Securityholders and/or the purchasers of the securities for
whom such broker-dealers may act as agents or to whom they sell as principal,
or both (which compensation as to a particular broker-dealer might be in excess
of customary commissions). The Selling Securityholders and any broker-dealers
that act in connection with the sale of the securities might be deemed to be
"underwriters" within the meaning of Section 2(11) of the Securities Act. The
Selling Securityholders may agree to indemnify any agent, dealer or
broker-dealer that participates in transactions involving sales of the
securities against certain liabilities, including liabilities arising under the
Securities Act.
The Warrants may be exercised, at the discretion of the holder, by the
delivery to American Stock Transfer & Trust Company at 40 Wall Street, New
York, New York 10005 of the Warrant certificate accompanied by an election of
exercise and payment of the Warrant exercise price for each share of Common
Stock purchased in accordance with the terms of such Warrant. Payment must by
made in the form of cash, bank draft or certified check payable to the order of
the Company. Delivery of the certificates representing the Warrant shares will
be made after receipt of a certificate representing the underlying stock
purchase rights, duly executed for transfer together with payment for the
exercise price thereof. If fewer than all Warrants are exercised, a new Warrant
certificate evidencing the Warrants remaining unexercised will be issued to the
holder of such Warrant.
The Purchase Option may be exercised, at the discretion of the holder
or holders thereof, by the delivery to the Company of the Purchase Option
accompanied by an election of exercise and payment of the exercise price of the
Purchase Option in accordance with the terms of the Purchase Option. Payment
must be made in the form of cash, bank draft or certified check payable to the
order of the Company or by the surrender to the Company of any exercisable but
unexercised portion of the Purchase Option having a Value (as defined in the
Purchase Option), at the close of trading on the five trading days immediately
preceding the exercise of the Purchase Option, equal to the exercise price
multiplied by the number of shares of Common Stock and Warrants being purchased
upon exercise. If the Purchase Option is exercised in part only, a new Purchase
Option evidencing the Purchase Option remaining unexercised will be issued to
the holder of the Purchase Option.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Restated Certificate and Restated By-Laws provides that officers
and directors of the Company shall be indemnified by the Company to the fullest
extent permissible under New York law. Insofar as indemnification for liability
under the Securities Act may be permitted to directors, officers and
controlling persons of the Company pursuant to the foregoing provisions or
otherwise, the Company, has been advised that, in the opinion of the
Commission, such indemnification is against public policy as expressed in the
Securities Act, and is, therefore, unenforceable.
- 32 -
<PAGE>
LEGAL MATTERS
The legality of the securities offered hereby will be passed upon for
the Company by Swidler Berlin Shereff Friedman, LLP, New York, New York.
EXPERTS
The financial statements of the Company for the year ended December
31, 1996 included in this Prospectus have been audited by Grant Thornton LLP,
independent auditors, as set forth in their report thereon appearing therein,
and are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
The financial statements of the Company as at and for the year ended
December 31, 1997 included in this Prospectus have been audited by M.R.
Weiser&Co. LLP, independent certified public accountants. The report of M.R.
Weiser&Co. LLP appears elsewhere in this Prospectus and is included in reliance
upon the authority of such firm as experts in accounting and auditing.
- 33 -
<PAGE>
PIVOT RULES, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Reports
M.R.Weiser&Co.LLP F-2
Grant Thornton LLP F-3
Balance Sheet as of December 31, 1997 (Restated) F-4
Statements of Operations for the years ended December 31, 1997
and 1996 (Restated) F-5
Statements of Changes in Shareholders' Equity for the years ended
December 31, 1997 and 1996 (Restated) F-6
Statements of Cash Flows for the years ended December 31, 1997
and 1996 (Restated) F-7
Notes to Financial Statements - December 31, 1997 and 1996 F-9
Condensed Balance Sheets as of March 31, 1998 (Restated) (Unaudited)
and December 31, 1997 F-19
Condensed Statements of Operations for the three months ended
March 31, 1998 and 1997 (Restated) (Unaudited) F-20
Condensed Statements of Cash Flows for the three months ended
March 31, 1998 and 1997 (Restated) (Unaudited) F-21
Notes to Condensed Financial Statements - March 31, 1998 and 1997 F-23
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Pivot Rules, Inc.
We have audited the accompanying balance sheet of Pivot Rules, Inc. as of
December 31, 1997 and the related statements of operations, changes in
shareholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pivot Rules, Inc. as of
December 31, 1997, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
As more fully discussed in note N, on June 25, 1998, the Company's Board of
Directors adopted a plan to discontinue its golf sportswear division.
Historical assets and operations of the golf sportswear division have
represented a substantial portion of the Company's assets and result of
operations.
/s/ M.R.Weiser&Co.LLP
Certified Public Accountants
February 25, 1998, except as to the last paragraph above and Note N, which are
as of June 25, 1998
New York, N.Y.
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
To the Shareholders
Pivot Rules, Inc.
We have audited the accompanying statements of operations, changes in
shareholders' equity, and cash flows of Pivot Rules, Inc. for the year then
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Pivot Rules,
Inc. for the year ended December 31, 1996, in conformity with generally
accepted accounting principles.
As more fully discussed in Note N, on June 25, 1998 the Company's Board of
Directors adopted a plan to discontinue the golf sportswear division. The
assets and operations of the golf sportswear division represent substantially
all of the assets and operations of the company.
/s/ GRANT THORNTON LLP
New York, New York
February 18, 1997, except as the last paragraph above and Note N which are as
of August 7, 1998.
F-3
<PAGE>
PIVOT RULES, INC.
BALANCE SHEET
DECEMBER 31, 1997
(RESTATED)
(NOTE N)
ASSETS
Current assets
Cash $ 55,000
Funds deposited with factor 1,857,000
Prepaid expenses and other current assets 128,000
Current assets of discontinued operations 4,182,000
-----------
Total current assets 6,222,000
Property and equipment, net 500,000
Deferred costs and other assets 15,000
Assets of discontinued operations 414,000
-----------
$ 7,151,000
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable, accrued expenses and other current
liabilities $ 1,092,000
Deferred income taxes 9,000
-----------
1,101,000
-----------
Commitments and contingencies
Shareholders' equity
Preferred stock -$.01 par value; 2,000,000 authorized
and no shares issued
Common stock -$.01 par value; 15,000,000 authorized and 27,000
2,700,000 issued and outstanding
Additional paid-in capital 6,404,000
Accumulated deficit (381,000)
-----------
6,050,000
-----------
$ 7,151,000
-----------
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
PIVOT RULES, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
(RESTATED)
(NOTE N)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
General and administrative expenses $ 819,000 $ 537,000
----------- -----------
Operating loss from continuing operations (819,000) (537,000)
Interest income (expense) 123,000 (180,000)
----------- -----------
Loss from continuing operations before taxes (696,000) (717,000)
Income tax benefit 227,000 244,000
----------- -----------
Loss from continuing operations (469,000) (473,000)
----------- -----------
Discontinued operations - Note N
Income from operations, net of income tax provision of
$45,000 and $314,000, respectively 88,000 608,000
----------- -----------
Net (loss) income $ (381,000) $ 135,000
=========== ===========
Basic and diluted (loss) income per share
Continuing operations $ (.22) $ (.40)
Discontinued operations .04 .51
----------- -----------
Net (loss) income $ (.18) $ .11
=========== ===========
Weighted average shares outstanding 2,149,315 1,200,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
PIVOT RULES, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
(RESTATED)
(NOTE N)
<TABLE>
<CAPTION>
Common Stock, Common Stock,
no par value $.01 par value Retained Treasury Stock
-------------------- ------------------ earnings/ -------------------
Number of Number of Paid-in (Accumulated Number of
shares Amount shares Amount capital deficit) Shares Amount Total
------ ------ ------ ------ ------- -------- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 200 $ 955,000 -- $ -- $ -- $ 191,000 (64) $(872,000) $ 274,000
Stock-split recapitalization (200) (955,000) 1,200,000 12,000 397,000 (326,000) 64 872,000 --
Net income 135,000 -- 135,000
---- --------- --------- ------- ---------- --------- ---- --------- ----------
Balance at December 31, 1996 -- -- 1,200,000 12,000 397,000 -- -- -- 409,000
Issuance of warrants-bridge
financing 138,000 138,000
Cancellation of warrants-bridge
financing (55,000) (55,000)
Sale of units-($5.00 per share) 1,500,000 15,000 5,924,000 5,939,000
Net loss (381,000) (381,000)
---- --------- --------- ------- ---------- --------- ---- --------- ----------
Balance at December 31, 1997 -- $ -- 2,700,000 $27,000 $6,404,000 $(381,000) -- $ $6,050,000
==== ========= ========= ======= ========== ========= ==== ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
PIVOT RULES, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
(RESTATED)
(NOTE N)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities
Loss from continuing operations $ (469,000) $ (473,000)
Adjustments to reconcile loss from Continuing Operations to net cash provided by
(used in) operating activities:
Loss on equipment disposition 10,000 8,000
Depreciation and amortization 31,000 23,000
Changes in operating assets and liabilities
Increase in prepaid expenses and other current assets (128,000) --
Increase in accounts payable and accrued expenses 756,000 183,000
----------- -----------
Net cash provided by (used in) operating activities - Continuing operations 200,000 (259,000)
----------- -----------
Income from Discontinued Operations 88,000 608,000
Adjustments to reconcile income from Discontinued Operations to net cash (used in)
provided by operating activities:
Amortization of deferred costs for bridge financing 293,000 --
Amortization of debt discount 83,000 --
Depreciation and amortization 45,000 32,000
Deferred income taxes -- (40,000)
Changes in operating assets and liabilities
(Increase) decrease in
Inventories (578,000) 792,000
Non-factored receivables (10,000) 37,000
Prepaid expenses and other current assets (84,000) 52,000
Increase (decrease) in
Income taxes receivable/payable (315,000) 184,000
----------- -----------
Net cash (used in) provided by operating activities - Discontinued Operations (478,000) 1,665,000
----------- -----------
Net cash (used in) provided by operating activities (278,000) 1,406,000
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
PIVOT RULES, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
(RESTATED)
(NOTE N)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash flows from investing activities - Continuing Operations
Purchase of property and equipment (519,000) (6,000)
Funds deposited with factor from initial public offering (4,920,000) --
Increase of funds deposited with factor 3,063,000
----------- -----------
Net cash used in investing activities - Continuing Operations (2,376,000) (6,000)
----------- -----------
Cash flows from investing activities - Discontinued Operations
Purchase of property and equipment (236,000) (36,000)
Trademark costs (7,000) --
----------- -----------
Net cash used in investing activities - Discontinued Operations (243,000) (36,000)
----------- -----------
Net cash used in investing activities (2,619,000) (42,000)
----------- -----------
Cash flows from financing activities - Continuing Operations
Net proceeds from initial public offering 5,939,000 --
Deferred costs associated with initial public offering 53,000 (53,000)
----------- -----------
Net cash provided by (used in) financing activities - Continuing Operations 5,992,000 (53,000)
----------- -----------
Cash flows from financing activities - Discontinued Operations
Deferred costs associated with bridge financing 75,000 (75,000)
Proceeds from notes payable -- 240,000
Net proceeds from bridge financing 1,207,000 --
Repayments of notes payable and short-term loan (644,000) (492,000)
Repayments of bridge financing (1,500,000) --
Net change in due to/from factor (2,211,000) (1,005,000)
----------- -----------
Net cash used in financing activities - Discontinued Operations (3,073,000) (1,332,000)
----------- -----------
Net cash provided by (used in) financing activities 2,919,000 (1,385,000)
----------- -----------
Net increase (decrease) in cash 22,000 (21,000)
Cash balance - January 1 33,000 54,000
----------- -----------
Cash balance - December 31 $ 55,000 $ 33,000
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 75,000 $ 209,000
=========== ===========
Income taxes $ 125,000 $ --
=========== ===========
Non-cash financing activities:
Issuance of warrants in connection with bridge financing $ 138,000 $ --
=========== ===========
Cancellation of warrants in connection with bridge financing $ 55,000 $ --
=========== ===========
Reclassification of former shareholder notes payable $ -- $ 279,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
PIVOT RULES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE A - THE COMPANY
Pivot Rules, Inc. (the "Company") designs, sources and markets a full
collection of golf sportswear with a fun attitude and style for men under the
Pivot Rules brand name. The Company sells its products to department stores,
sporting goods stores, catalogs, corporations and promotionally oriented
retailers, including discounters, throughout the United States.
In May 1998, the Company's Board of Directors approved the formation of an
Internet division to develop, operate and promote a Web site (the "Web site")
that will offer men's, women's and children's name brand apparel and
accessories at significant discounts as well as provide information on current
trends and other fashion related content.
In June 1998, the Company determined to discontinue the operations of its golf
sportswear division and to devote all of the Company's energy and resources to
building the Web site. See Note N.
NOTE B - SIGNIFICANT ACCOUNTING POLICIES
1. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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 disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. INVENTORIES
Inventories, which consist of finished goods, are valued at the lower of cost
or market. Cost is determined by the first-in, first-out ("FIFO") method.
3. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Equipment is depreciated on a
straight-line basis over five to seven years. Leasehold improvements are
amortized over the shorter of their estimated useful lives or the term of the
lease. Maintenance and repairs are expensed as incurred.
4. DEFERRED COSTS
Deferred costs consist of trademark and organization costs. The trademark and
organization costs are amortized on a straight-line basis over their estimated
useful lives of 10 years.
5. LONG-LIVED ASSETS
The Company's policy is to evaluate long-lived assets and certain identifiable
intangibles for possible impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable. This
evaluation is based on a number of factors, including expectations for
operating income and undiscounted cash flows that will result from the use of
such assets. The Company has not identified any such impairment of losses.
F-9
<PAGE>
PIVOT RULES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
6. INCOME TAXES
Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
7. PREPAID EXPENSES
Sample costs for upcoming seasons are deferred and charged to expenses in the
season to which they pertain. Costs are deferred for a period of approximately
six to nine months.
8. ADVERTISING EXPENSE
Advertising costs are expensed as incurred. Advertising expense for the years
ended December 31, 1997 and 1996 amounted to approximately $908,000 and
$176,000 respectively.
9. CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.
10. REVENUE RECOGNITION
Revenue is recognized when merchandise is shipped to a customer.
11. EARNINGS (LOSS) PER SHARE
As of December 31, 1997, the Company adopted Statement of Financial Accounting
Standards No. ("SFAS") 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. Options and warrants were not included in the computation of
diluted earnings per share because the exercise price was greater than the
market price of the stock.
12. STOCK BASED COMPENSATION
The Company applies SFAS 123 "Accounting for Stock Based Compensation" in
accounting for its stock based compensation plan. In accordance with SFAS 123,
the Company applies Accounting Principles Board opinion No. 25 and related
Interpretations for expense recognition. No compensation expense has been
recorded in 1997, because the exercise price of employee stock options equals
or exceeds the market price of the underlying stock on the date of grant.
13. NEW ACCOUNTING PRONOUNCEMENTS
In 1997, SFAS 130, "Reporting Comprehensive Income" and SFAS 131, "Disclosures
about Segments of an Enterprise and Related Information" were issued. These
standards which will become effective in 1998 expand or modify disclosures and
accordingly will have no effect on the Company's financial position, results of
operations or cash flows.
F-10
<PAGE>
PIVOT RULES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
14. RECLASSIFICATION
The 1996 financial statements have been reclassified in order to conform with
the 1997 presentation. See Note N relating to the restatement of the financial
statements to reflect the discontinuation of the golf sportswear division.
NOTE C - BRIDGE FINANCING
On January 2, 1997, the Company issued 15 units, each consisting of one
convertible subordinated secured promissory note in the principal amount of
$100,000 per unit ("Note") and warrants to purchase 40,000 shares of common
stock of the Company, no par value, at an exercise price of $2.50 ("Bridge
Warrants"), for gross proceeds of $1,500,000. Net proceeds amounted to
$1,207,000 after agency expenses and brokerage fees, but before additional debt
issuance costs. A portion of the gross proceeds has been allocated to the
Bridge Warrants based on an estimate of their fair market value, resulting in
approximately $138,000 of original issue discount and a $138,000 increase in
paid-in capital.
The Notes bore interest at the rate of 10% per annum from January 2, 1997
through April 30, 1997, and thereafter at the rate of 12% per annum until such
notes were repaid from the proceeds of the Company's initial public offering
("IPO") in May 1997.
In May 1997, the Bridge Warrant holders surrendered 237,000 out of the 600,000
Bridge Warrants issued in connection with the bridge financing. The
cancellation of such Bridge Warrants resulted in a reduction of interest
expense and additional paid-in capital of $55,000. The remaining Bridge
Warrants were converted in May 1997 (on a one-for-one basis) into warrants with
the same terms as the warrants sold in the IPO.
NOTE D - FACTORING AGREEMENT
In April 1992, the Company entered into a factoring and financing agreement
whereby the Company sells substantially all of its trade receivables without
recourse to a commercial factor ("Factor"). In November 1997, the agreement was
amended whereby advances will bear interest at 1% above the Chase Manhattan
Bank, N.A. prime rate ("Prime"). In addition, the Company receives interest at
1.75% below Prime on funds deposited with the Factor. Any amounts due to the
Factor are collateralized by accounts receivable, inventories, and other
assets. As of the balance sheet date, funds deposited with the Factor represent
the net proceeds from the IPO, net of amounts transferred to operations.
The Company incurred $188,000 and $363,000 of factoring commissions and
interest charges for receivables sold and for advances for the years ended
December 31, 1997 and 1996, respectively.
NOTE E - PROPERTY AND EQUIPMENT
As of December 31, 1997, property and equipment for continuing operations
consist of the following:
Leasehold improvements $ 278,000
Office equipment 116,000
Computer equipment and software 123,000
----------
517,000
Less accumulated depreciation 17,000
----------
$ 500,000
==========
F-11
<PAGE>
PIVOT RULES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
The Company assessed that certain assets specifically relate to the golf
sportswear division. The net book amount of these assets as of December 31,
1997 are as follows:
PROPERTY AND EQUIPMENT
----------------------
Leasehold improvements $ 31,000
Concept area fixtures 264,000
Office equipment 49,000
Computer hardware and software 55,000
----------
399,000
Less accumulated depreciation 125,000
----------
$ 274,000
==========
NOTE F - DEFERRED COSTS AND OTHER ASSETS
As of December 31, 1997, deferred costs and other assets consist of the
following:
Deposits $ 15,000
==========
The Company assessed that certain assets specifically relate to the golf
sportswear division. The net book amount of these assets as of December 31,
1997 are as follows:
Trademarks $ 166,000
Organization costs 7,000
Deposits 14,000
----------
187,000
Less accumulated amortization 47,000
----------
$ 140,000
==========
NOTE G - ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
As of December 31, 1997, accounts payable, accrued expenses and other current
liabilities consist of the following:
Accounts payable $ 828,000
Accrued advertising costs 147,000
Other accounts payable 117,000
----------
$1,092,000
==========
F-12
<PAGE>
PIVOT RULES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE H - INCOME TAXES
Income taxes receivable represents the anticipated refund from the carry back
of the current net operating loss.
The components of deferred tax assets and liabilities as of December 31, 1997
are as follows:
Deferred tax asset
Accounts receivable reserves
(Discontinued Operations) $94,000
Deferred tax liability
Tax over book depreciation
(Continuing Operations) (9,000)
-------
Net deferred tax asset $85,000
=======
Differences between book and tax are primarily due to temporary differences
resulting from use of accelerated depreciation for income tax purposes and
using the direct write-off method for receivables for tax purposes.
The provision (benefit) for income taxes is comprised of the following:
1997 1996
---- ----
Current
Federal $ (189,000) $ 92,000
State 7,000 5,000
Foreign -- 13,000
----------- ---------
(182,000) 110,000
----------- ---------
Deferred
Federal (1,000) (45,000)
State 1,000 5,000
----------- ---------
-- (40,000)
----------- ---------
$ (182,000) $ 70,000
=========== =========
The statutory Federal income tax rate and the effective rate of the provision
for income taxes for the years ended December 31, 1997 and December 31, 1996 is
reconciled as follows:
1997 1996
---- ----
Statutory Federal income tax rate (34.0)% 34.0%
State taxes, net of Federal tax benefit 1.7 3.2
Other -- (3.1)
------ ----
Effective tax rate (32.3)% 34.1%
====== ====
NOTE I - COMMITMENTS AND CONTINGENCIES
1. LETTERS OF CREDIT
The Company had outstanding letters of credit in the aggregate amount of
$859,000 as of December 31, 1997, of which $490,000 has been provided as a
liability in the year-end balance sheet. The Company's letter of credit
facility with the Factor provides that the Factor has sole discretion with
regard to the extension of such credit.
F-13
<PAGE>
PIVOT RULES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
2. EMPLOYMENT CONTRACTS
The Company has an employment contract, which was amended on May 21, 1997, with
the Chief Executive Officer and shareholder ("CEO"). The amended employment
agreement, which expires on January 1, 2000, provides for a base salary plus
annual bonuses at the discretion of the Board of Directors based upon operating
profits before taxes and financing costs. In addition, the Company maintains a
$1.2 million key person life insurance policy on the life of the CEO.
In March 1997, the Company entered into an employment agreement with its
Executive Vice President of Sales ("VP of Sales"). The employment agreement
expires on March 16, 2002. Pursuant to the employment agreement, the VP of
Sales is entitled to a base salary and is eligible for a discretionary annual
bonus in 1997 and in subsequent years a bonus contingent on achieving certain
performance objectives. Pursuant to the employment agreement, the VP of Sales
is also entitled to annual raises to be determined by the Board of Directors in
its discretion, but subject to certain specified minimum amounts, as well as an
annual option grant.
In September 1997, the Company entered into an employment agreement with its
Chief Creative Officer, which expires on December 31, 2000. The employment
agreement provides for a base salary, discretionary annual bonuses, and a
one-time bonus. Such bonuses are contingent on achieving certain targeted sales
requirements. In addition, the employment agreement provides for annual raises
to be determined by the Board of Directors in its discretion but subject to
certain specified minimums, and an option grant upon commencement of
employment.
In October 1997, the Company entered into an employment agreement with its Vice
President of Corporate Sales, which expires on December 31, 2000. The
employment agreement provides for a base salary and annual bonuses contingent
on achieving certain specified performance objectives. In addition, the
employment agreement provides for annual raises and option grants, each
contingent upon meeting certain targeted sales requirements.
As of December 31, 1997, the Company's aggregate commitment for future base
salary is:
1998 $ 549,000
1999 575,000
2000 438,000
2001 178,000
2002 53,000
-----------
Total $ 1,793,000
===========
3. OPERATING LEASES
In May 1997, the Company signed a lease for a new office and showroom. The term
of the lease is from September 1, 1997 through May 31, 2008. The Company also
leases a warehouse under an operating lease, which expires in August 1999. Rent
expense aggregated approximately $159,000 and $126,000 for the years ended
December 31, 1997 and 1996.
F-14
<PAGE>
PIVOT RULES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
As of December 31, 1997, future minimum rentals, excluding utilities, are as
follows:
1998 $ 150,000
1999 127,000
2000 81,000
2001 81,000
2002 81,000
Thereafter 484,000
-----------
Total $ 1,004,000
===========
NOTE J - SHAREHOLDERS' EQUITY
1. RECAPITALIZATION AND TREASURY STOCK
In December 1996, the Board of Directors approved a plan of recapitalization
through the use of a stock split. The recapitalization, which was effected on
January 2, 1997, resulted in the authorization of 10,000,000 shares of $.01 par
value common stock. Shareholders received 8,862.6292 shares for each share of
the previous no par value common stock.
In connection with the recapitalization, the Company's Board of Directors
approved the retirement of the 64.6 shares of treasury stock (572,526 after
giving effect to the stock split). Of the $872,000 in treasury stock, $546,000
was first offset against the common stock account with the remainder, totaling
$326,000, reducing retained earnings.
2. AUTHORIZED SHARES
In May 1997, the Company's Board of Directors authorized a new class of
2,000,000 shares of preferred stock, $.01 par value per share, and increased
the aggregate number of shares of Common Stock, $.01 par value per share
("Common Stock"), authorized for issuance from 10,000,000 shares to 15,000,000
shares.
3. INITIAL PUBLIC OFFERING
In May 1997, the Company completed an initial public offering of 1,500,000
units ("Units"), each Unit consisting of one share of the Company's Common
Stock and one redeemable common stock purchase warrant ("Warrants"). The
Company received net proceeds of $5,939,000, (which are net of underwriting
costs and expenses) of which approximately $2,032,000 was used to repay Company
indebtedness, including the repayment of notes issued by the Company in
connection with the bridge financing. The funds from the IPO were deposited
with the Company's Factor and invested at a rate of 1.75% below prime. As a
result of the satisfaction of the bridge financing, the Company has written-off
$83,000 of unamortized debt discount and $256,000 of unamortized debt issuance
costs.
4. WARRANTS
The Company has 1,863,000 Warrants outstanding as of December 31, 1997
consisting of 1,500,000 Warrants offered in the IPO and 363,000 converted from
the bridge financing (see Note C). These Warrants entitle the holders to
purchase one share of Common Stock at $5.00 per share during the four-year
period commencing May 15, 1998; all Warrants become exercisable on such date.
The Company may redeem the Warrants at any time after they become exercisable,
at a price of $.01 per Warrant, provided that the market price of the stock
exceeds 165% of the exercise price of the Warrants for a specific period of
time, and upon specific notice provisions.
F-15
<PAGE>
PIVOT RULES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
5. UNIT PURCHASE OPTION
In May 1997, the Company sold to the underwriter of the IPO, for an aggregate
purchase price of $100, a Unit Purchase Option ("UPO") consisting of the right
to purchase up to an aggregate of 150,000 Units, which is the equivalent of
300,000 shares of Common Stock. The UPO is exercisable initially at a per-Unit
price equal to 160% of $5.00 per share during the four-year period commencing
May 15, 1998.
6. RESERVED SHARES
The Company has reserved an aggregate of 2,250,000 shares of Common Stock for
the exercise of the Warrants and the UPO.
7. STOCK OPTION PLAN
In May 1997, the Company's Board of Directors adopted a stock option plan (the
"Plan") for the purpose of encouraging key employees, consultants and directors
who are not employees to acquire a proprietary interest in the growth and
performance of the Company. The maximum number of shares that may be granted
under the Plan is 200,000.
Activity in the stock option plan is summarized as follows:
SHARES UNDER WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
------- --------------
Options granted 117,000 $5.00
Options canceled (24,500) $5.00
--------
Balance at December 31, 1997 92,500 $5.00
========
Eligible for exercise at December 31, 1997 -- N/A
========
The stock options are exercisable in different periods commencing in 1998
through 2007.
The Company does not recognize compensation expense for stock options granted
at or above fair market value, as permitted by the accounting standards. The
fair value of options granted during 1997 was $112,000. Fair value is estimated
based on the Black-Scholes option-pricing model with the following assumptions
for grants in 1997: expected volatility of 40%; risk-free interest rates
ranging from 5.98% through 6.67% and expected lives of 6 years. Had
compensation expense been determined based on the fair value of the options on
the grant dates, the Company's net loss would have been increased by $112,000
($.05 per share) in 1997.
On January 16, 1998 and February 26, 1998, additional options for an aggregate
of 69,500 shares of Common Stock were granted, of which options for 44,000
shares were granted at an exercise price of $2.16, options for 500 shares were
granted at an exercise price of $5.00, and the remaining options for 25,000
shares were granted at an exercise price of $2.17. The exercise price of these
options were equal to or greater than the market price of the Common Stock as
of the date of grant.
NOTE K - CONCENTRATIONS
Prior to the discontinuation of the golf sportswear division the Company had
customer concentration follows:
The Company sells its products to department stores, sporting goods stores,
catalogs, corporations and promotionally oriented retailers, including
discounters. The Company uses a Factor to evaluate the creditworthiness of most
of its customers. The Company sells substantially all of its receivables to the
Factor. For approved accounts, the Factor assumes all credit risk. For
F-16
<PAGE>
PIVOT RULES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
approved accounts, the Factor has recourse in cases of disputes, chargebacks
and reserves. For nonapproved accounts, the Factor has full recourse. For
non-factored sales, credit losses have been within management's expectations.
As of December 31, 1997, all accounts were approved by the Factor. For the year
ended December 31, 1997, four customers accounted for an aggregate of 72.0% of
the Company's sales, of which individually such customers accounted for
approximately 22.8%, 19.1%, 17.6%, and 12.5%, respectively, of the Company's
sales. For the year ended December 31, 1996, four customers accounted for 45%
of the Company's sales, including one customer accounting for approximately
24.7% of the Company's sales. Based upon the Company's refocus on the
department store channel (and specialty stores, catalogs, resorts, etc.) and
away from the more promotionally oriented retailers, there can be no assurance
that the Company will continue to sell product to these customers in the
future. Any inability to reestablish the department store channel may have a
material adverse impact on the Company's business, financial condition, and
operating results.
Substantially all of the Company's products are manufactured by third parties
in the Far East and India. The use of contractors and the resulting lack of
direct control could make it difficult for the Company to obtain timely
delivery of products of acceptable quality. Delays in shipments to the Company,
inconsistent or inferior garment quality and other factors beyond the Company's
control could adversely affect the Company's relationship with its customers,
its reputation in the industry and its sales and operating results. Moreover,
foreign manufacturing is subject to numerous risks, including work stoppages,
transportation delays, political instability, foreign currency fluctuations,
the imposition of tariffs and import and export controls, customs laws, changes
in governmental policies and other factors that could have a material adverse
effect on the Company's business, financial condition and operating results.
NOTE L - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and Funds deposited with factor - the carrying amount
approximates fair value due to the short-term maturities of these instruments.
Letters of Credit - letters of credit collateralize the Company's
obligations to the Factor and have terms ranging from 30 days to 120 days; the
face amount of the letters of credit approximate fair value since the value for
each is fixed over a relatively short period of time.
The carrying amount approximates the fair value of the Company's financial
instruments as of December 31, 1997.
NOTE M - LEGAL PROCEEDINGS
The Company is, from time to time, a party to routine litigation arising in the
normal course of its business. The Company believes that none of these actions
will have a material adverse effect on the business, financial condition or
operating results of the Company.
NOTE N - SUBSEQUENT EVENTS
DISCONTINUED OPERATIONS
On June 25, 1998, the Company's Board of Directors adopted a plan to
discontinue operations of the golf sportswear division. The Company intends to
complete its existing sales commitments and liquidate its remaining inventory.
F-17
<PAGE>
PIVOT RULES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
The disposal of the golf sportswear division has been accounted for as a
discontinued operation and, accordingly, its net assets have been segregated
from continuing operations in the accompanying balance sheets, and its
operating results are segregated and reported as discontinued operations in the
accompanying statements of operations and cash flows. Interest was allocated to
the discontinued operations from the debt that was repaid from the cash flow of
the discontinued operations. Income taxes were allocated based on the Company's
effective income tax rate.
Information relating to the discontinued operations of the golf sportswear
division for the fiscal years ended December 31, 1997 and 1996 are as follows:
DECEMBER 31, DECEMBER 31,
1997 1996
---- ----
Net sales $ 10,323,000 $ 8,596,000
Cost of sales 7,392,000 6,571,000
------------ ------------
Gross profit 2,931,000 2,025,000
Selling, marketing, design and administrative 2,200,000 965,000
------------ ------------
Operating income 731,000 1,060,000
Other income (expense) (305,000) (138,000)
Amortization and write-off of deferred costs for
bridge financing (293,000) --
------------ ------------
Income before provision for income taxes 133,000 922,000
Provision for income taxes (45,000) (314,000)
------------ ------------
Net income $ 88,000 $ 608,000
============ ============
The net assets of the golf sportswear division included in the accompanying
balance sheet as of December 31, 1997 is as follows:
DECEMBER 31, 1997
Due from factor $ 2,264,000
Non-factored receivables 51,000
Inventories 1,413,000
Prepaid expenses and other current assets 157,000
Income taxes receivable 203,000
Deferred income taxes 94,000
-----------
Total current assets of discontinued
operations $ 4,182,000
===========
Property and equipment, net $ 274,000
Deferred costs and other assets 140,000
-----------
Total other assets of discontinued
operations $ 414,000
===========
The Company's liabilities will not be assumed by others, therefore, in
accordance with the accounting standards for the presentation of discontinued
operations all liabilities are recorded as continuing operations.
F-18
<PAGE>
PIVOT RULES, INC.
CONDENSED BALANCE SHEETS
(RESTATED)
(NOTE E)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash $ 122,000 $ 55,000
Funds deposited with factor 2,336,000 1,857,000
Inventories -- --
Prepaid expenses and other current assets 120,000 128,000
Current assets of discontinued operations 2,787,000 4,182,000
----------- -----------
Total current assets 5,365,000 6,222,000
Property and equipment, net 511,000 500,000
Deferred costs and other assets 15,000 15,000
Assets of discontinued operations 406,000 414,000
----------- -----------
$ 6,297,000 $ 7,151,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable, accrued expenses and other current
liabilities $ 536,000 $ 1,092,000
Deferred income taxes 9,000 9,000
----------- -----------
545,000 1,101,000
----------- -----------
Commitments and contingencies
Shareholders' equity
Preferred stock -$.01 par value; 2,000,000 authorized
and no shares issued -- --
Common stock -$.01 par value; 15,000,000 authorized and
2,700,000 issued and outstanding 27,000 27,000
Additional paid-in capital 6,404,000 6,404,000
Accumulated deficit (679,000) (381,000)
----------- -----------
5,752,000 6,050,000
----------- -----------
$ 6,297,000 $ 7,151,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
PIVOT RULES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(RESTATED)
(UNAUDITED)
(NOTE E)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1998 1997
---- ----
<S> <C> <C>
General and administrative expenses $ 239,000 $ 162,000
----------- -----------
Operating loss from continuing operations (239,000) (162,000)
Interest income 42,000 --
----------- -----------
Loss from continuing operations (197,000) (162,000)
----------- -----------
Discontinued operations - Note E
(Loss) income from operations, net of income tax provision of
$10,000 in 1997 (101,000) 181,000
----------- -----------
Net (loss) income $ (298,000) $ 19,000
=========== ===========
Basic and diluted (loss) income per share
Continuing operations $ (.07) $ (.13)
Discontinued operations
(Loss) income from operations (.04) .15
----------- -----------
Net (loss) income $ (.11) $ .02
=========== ===========
Weighted average shares outstanding 2,700,000 1,200,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
PIVOT RULES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(RESTATED)
(UNAUDITED)
(NOTE E)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities
Loss from Continuing Operations $(197,000) $(162,000)
Adjustments to reconcile loss from continuing operations to net cash (used in)
provided by operating activities:
Depreciation and amortization 20,000 4,000
Changes in operating assets and liabilities
(Increase) decrease in
Prepaid expenses and other current assets 8,000 (14,000)
Increase (decrease) in
Accounts payable and accrued expenses (556,000) 285,000
--------- ---------
Net cash (used in) provided by operating activities - Continuing Operations (725,000) 113,000
--------- ---------
Loss income from Discontinued Operations (101,000) 181,000
Adjustments to reconcile (loss) income to net cash provided by operating activities:
Amortization of deferred costs for bridge financing -- 36,000
Amortization of debt discount -- 56,000
Depreciation and amortization 23,000 7,000
Changes in operating assets and liabilities
(Increase) decrease in
Inventories 290,000 121,000
Non-factored receivables (140,000) (157,000)
Prepaid expenses and other current assets (46,000) (99,000)
Increase (decrease) in
Income taxes receivable/payable (1,000) (99,000)
--------- ---------
Net cash provided by operating activities - Discontinued Operations 25,000 46,000
--------- ---------
Net cash (used in) provided by operating activities (700,000) 159,000
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
PIVOT RULES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(RESTATED)
(UNAUDITED)
(NOTE E)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from investing activities - Continuing Operations
Purchase of property and equipment (31,000) (3,000)
Increase in funds deposited with factor (479,000) (1,274,000)
----------- -----------
Net cash used in investing activities - Continuing Operations (510,000) (1,277,000)
----------- -----------
Cash flows from investing activities - Discontinued Operations
Purchase of property and equipment (17,000) (26,000)
Trademark costs (1,000) (1,000)
----------- -----------
Net cash used in investing activities - Discontinued Operations (18,000) (27,000)
----------- -----------
Net cash used in investing activities (528,000) (1,304,000)
----------- -----------
Cash flows from financing activities - Continuing Operations
Deferred costs associated with initial public offering -- (200,000)
----------- -----------
Net cash used in financing activities - Continuing Operations -- (200,000)
----------- -----------
Cash flows from financing activities - Discontinued Operations
Net proceeds from bridge financing -- 1,207,000
Unamortized debt discount -- 83,000
Repayments of notes payable and short-term loan -- (142,000)
Net change in due to/from factor 1,295,000 176,000
----------- -----------
Net cash provided by financing activities - Discontinued Operations 1,295,000 1,324,000
----------- -----------
Net cash provided by financing activities 1,295,000 1,124,000
----------- -----------
Net increase (decrease) in cash 67,000 (21,000)
Cash balance - December 31 55,000 33,000
----------- -----------
Cash balance - March 31 $ 122,000 $ 12,000
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 16,000 $ 23,000
=========== ===========
Income taxes $ 1,000 $ 99,000
=========== ===========
Non-cash financing activities:
Issuance of warrants in connection with bridge financing -- $ 138,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
PIVOT RULES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
NOTE A - BASIS OF PRESENTATION
The condensed financial statements included herein have been prepared by Pivot
Rules, Inc. (the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although management of the
Company believes that the disclosures are adequate to make the information
presented not misleading. These condensed financial statements should be read
in conjunction with the condensed notes thereto. In the opinion of management
of the Company, the accompanying unaudited condensed financial statements
include all adjustments, consisting of only normal recurring adjustments,
necessary to fairly present the results for the interim periods to which these
financial statements relate.
These financial statements should be read in conjunction with the Registration
Statement filed with the Securities and Exchange Commission on Form 8-A and
Form 8-A/A and the Annual Report filed with the Securities and Exchange
Commission on Form 10-KSB. Subsequent to the filing of documents incorporated
by reference herein, the Company discontinued the operations of its golf
sportswear division. Accordingly, financial statements, management's
discussions and analysis or plan of operations contained therein do not reflect
the effect of the discontinued operations.
On June 25, 1998, the Company's Board of Directors adopted a plan to
discontinue operations of the golf sportswear division. The Company intends to
complete its existing sales commitments and liquidate its remaining inventory.
The condensed statements of operations for the three month periods ended March
31, 1998 and 1997 and for the condensed balance sheet as of December 31, 1997
have been restated. The financial statements have been prepared in accordance
with accounting standards for the presentation of discontinued operations.
The results of operations of the Company for the three months ended March 31,
1998 are not necessarily indicative of the results to be expected for the full
year.
NOTE B - THE COMPANY
The Company designs, sources and markets a full collection of golf sportswear
with a fun attitude and style for men under the Pivot Rules brand name. The
Company sells its products to department stores, sporting goods stores,
catalogs, corporations and promotionally oriented retailers, including
discounters, throughout the United States. In May 1998, the Company created a
new independent division that will design and build a website on the Internet
through which it will operate and market an Internet retail business that will
sell discounted brand name apparel and accessories.
NOTE C - SIGNIFICANT ACCOUNTING POLICIES
1. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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 disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-23
<PAGE>
PIVOT RULES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
2. INVENTORIES
Inventories, which consist of finished goods, are valued at the lower of cost
or market. Cost is determined by the first-in, first-out ("FIFO") method.
3. EARNINGS (LOSS) 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. Options and warrants were not
included in the computation of diluted earnings per share because the exercise
price was greater than the market price of the stock.
NOTE D - CONCENTRATIONS
The Company sells its products to department stores, sporting goods stores,
catalogs, corporations and promotionally oriented retailers, including
discounters. The Company uses a factor ("Factor") to evaluate the
creditworthiness of most of its customers. The Company sells substantially all
of its receivables to the Factor. For approved accounts, the Factor assumes all
credit risk. For approved accounts, the Factor has recourse in cases of
disputes, chargebacks and reserves. For nonapproved accounts, the Factor has
full recourse. For non-factored sales, credit losses have been within
management's expectations. As of March 31, 1998, all accounts were approved by
the Factor. Historically, the Company has had a heavy concentration of sales
with promotionally oriented retailers. By the end of 1997, the Company
recognized that the Pivot Rules brand could not co-exist across several
retailer categories. As a result, the Company has since modified its strategy
to refocus its sales efforts on the department store channel (and specialty
stores, catalogs, resorts, etc.) and away from the more promotionally oriented
retailers. If the Company cannot reestablish the department store channel it
will have a material adverse impact on the Company's business, financial
condition, and operating results.
NOTE E - SUBSEQUENT EVENTS
Effective May 1, 1998, the Company was awarded a contract with Knight Ridder
Shared Services, Inc. ("KRI"), the nations second largest newspaper publisher,
to become one of three promotional merchandise suppliers for KRI logoed
products. The Company is in the process of establishing a joint venture with a
promotional products distribution company to assist in the execution of the
contract with KRI. The Company will receive a portion of the gross profits
generated from the sales of such joint venture.
In May 1998, the Company's Board of Directors approved the reorganization of
the Company into two divisions. These divisions will function independently of
each other.
The Company's second division will design and build a website (the "Website")
on the Internet through which it will operate and market an Internet retail
business that will sell discounted brand name apparel and accessories. The
Company's buyers will take advantage of their relationships in the industry to
opportunistically purchase first quality excess and end-of-season merchandise
to sell directly to consumers.
DISCONTINUED OPERATIONS
The disposal of the golf sportswear division has been accounted for as a
discontinued operation and, accordingly, its net assets have been segregated
from continuing operations in the accompanying condensed balance sheets, and
its operating results are segregated and reported as discontinued operations in
the accompanying condensed statements of operations and cash flows.
F-24
<PAGE>
PIVOT RULES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
Information relating to the discontinued operations of the golf sportswear
division for the three months ended March 31, 1998 and 1997 is as follows:
MARCH 31, MARCH 31,
1998 1997
---- ----
(Unaudited) (Unaudited)
Net sales $ 1,515,000 $ 2,396,000
Cost of sales 1,154,000 1,784,000
----------- -----------
Gross profit 361,000 612,000
Selling, marketing, design and administrative 446,000 247,000
----------- -----------
Operating (loss) income (85,000) 365,000
Other income (expense) (16,000) (138,000)
Amortization and write-off of deferred costs for -- (36,000)
bridge financing ----------- -----------
Loss before provision for income taxes (101,000) 191,000
Provision for income taxes -- 10,000
----------- -----------
Net loss $ (101,000) $ 181,000
=========== ===========
The net assets of the golf sportswear division included in the accompanying
condensed balance sheets as of March 31, 1998 and December 31, 1997 are as
follows:
MARCH 31, DECEMBER 31,
1998 1997
---- ----
(Unaudited)
Due from factor $ 969,000 $2,264,000
Non-factored receivables 191,000 51,000
Inventories 1,123,000 1,413,000
Prepaid expenses and other current assets 206,000 157,000
Income taxes receivable 204,000 203,000
Deferred income taxes 94,000 94,000
----------- -----------
Total current assets of discontinued $ 2,787,000 $ 4,182,000
operations =========== ===========
Property and equipment, net $ 273,000 $ 274,000
Deferred costs and other assets 133,000 140,000
----------- -----------
Total other assets of discontinued $ 406,000 $ 414,000
operations =========== ===========
The Company's liabilities will not be assumed by others, therefore, in
accordance with the accounting standards for the presentation of discontinued
operations all liabilities are recorded as continuing operations.
F-25
<PAGE>
PIVOT RULES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
LONG LIVED ASSETS - DISCONTINUED OPERATIONS
The Company's policy is to evaluate long-lived assets and certain identifiable
intangibles for possible impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable. This
evaluation is based on a number of factors, including expectations for
operating income and undiscounted cash flows that will result from the use of
such assets.
The Company has identified certain long-lived assets specifically relating to
the golf sportswear division. The net book amount of these assets as of March
31, 1998 are as follows:
PROPERTY AND EQUIPMENT
----------------------
Leasehold improvements $ 31,000
Concept area fixtures 270,000
Office equipment 60,000
Computer hardware and software 54,000
----------
415,000
Less accumulated depreciation 142,000
----------
$ 273,000
==========
DEFERRED COSTS AND OTHER ASSETS
-------------------------------
Trademarks $ 173,000
Less accumulated amortization 52,000
----------
$ 121,000
==========
F-26
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE
REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF,
ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR WOULD BE UNLAWFUL. THE DELIVERY OF THIS PROSPECTUS AND/OR ANY
SALE MADE HEREUNDER SHALL NOT, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE OF THIS PROSPECTUS.
2,163,000 SHARES OF
COMMON STOCK
513,000 REDEEMABLE
COMMON
STOCK PURCHASE WARRANTS
BLUEFLY, INC.
TABLE OF CONTENTS
Page
Available Information...........................2
Incorporation of Certain Documents by
Reference....................................2
The Company.....................................5
The Offering....................................7
Risk Factors....................................8 PROSPECTUS
Business.......................................18
Use of Proceeds................................30
Dividend Policy................................30
Selling Securityholders .......................30
Plan of Distribution...........................31
Indemnification of Officers and
Directors...................................32
NOVEMBER __, 1998
Legal Matters..................................33
Experts........................................33
Financial Statements..........................F-1
================================================= =====================
<PAGE>
PART II
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses in connection with the Offering are:
Blue sky fees and expenses $ 15,000
Legal fees and expenses 35,000
Printing costs 15,000
Miscellaneous 10,000
--------
Total $75,000
=======
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 722 and 726 of the BCL grant the Company broad powers to
indemnify and insure its directors and officers against liabilities they may
incur in such capacities. In accordance therewith, the Restated Certificate and
the Restated By-Laws provide for the fullest indemnification of an officer or a
director of the Company under the BCL. The Restated Certificate also eliminates
personal liability for any breach of directors' duty to the Company and its
shareholders, provided that such breach does not result from (a)(i) an act or
omission in bad faith, (ii) intentional misconduct or (iii) a knowing violation
of law, (b) a transaction from which a director personally gained in fact, a
financial profit or other advantage to which the director was not entitled, (c)
acts of the director in violation of Section 719 of the BCL or (d) an act or
omission prior to the adoption of such provision in the Restated Certificate.
The Company has entered into agreements with an officer that requires
the Company to indemnify such person against any loss, cost, damage, injury or
other expense, including attorneys' fees, incurred by reason of the fact that
such person served as a director of officer of the Company, provided that such
indemnification is consistent with the BCL.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
3.1 Restated Certificate of Incorporation.(1)
3.2 Amended and Restated By-laws.(1)
3.3 Amendment to Amended and Restated By-Laws.(1)
3.4 Certificate of Amendment of the Company's Restated Certificate
of Incorporation. (3)
4.1 Specimen Common Stock certificate.(1)
4.2 Form of Unit Purchase Option.(1)
4.3 Form of Subscription Agreement, dated as of January 2, 1997,
by and between the Company and certain purchasers.(1)
4.4 Form of Bridge Warrant.(1)
4.5 Specimen Redeemable Common Stock Purchase Warrant.(1)
4.6 Form of Warrant Agreement.(1)
II-1
<PAGE>
5.1 Opinion of Swidler Berlin Shereff Friedman, LLP (formerly
Shereff, Friedman, Hoffman & Goodman, LLP)(1)
23.1 Consent of M.R. Weiser&Co. LLP
23.2 Consent of Grant Thornton LLP(2)
23.3 Consent of Swidler Berlin Shereff Friedman, LLP (formerly
Shereff, Friedman, Hoffman & Goodman, LLP) (contained in
Exhibit 5.1)
24 Power of Attorney (contained in Post-Effective Amendment
No. 1 to Form SB-2 on Form S-3)
- - -----------------------
(1) Exhibits to the Company's Registration Statement on Form SB-2 and
amendments thereto (File No. 333-22895).
(2) Exhibits to the Company's Post-Effective Amendment No. 1 to Form SB-2
on Form S-3.
(3) Exhibits to the Company's Quarterly Report on Form 10-QSB for the
fiscal quarter ended September 30, 1998, filed with the Commission on
November 16, 1998.
ITEM 17. UNDERTAKINGS.
(a) Indemnification
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of
the Commission such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
small business issuer will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(b) The undersigned small business issuer hereby undertakes that it
will:
(1) file, during any period in which it offers or sell
securities, a post-effective amendment to this
registration statement to include any additional or
changed material information on the plan of
distribution.
(2) for determining liability under the Securities Act,
treat each post-effective amendment as a new
registration statement of the securities offered,
and the offering of securities at that time to be
the initial bona fide offering.
(3) file a post-effective amendment to remove from
registration any of the securities that remain
unsold at the end of the Offering.
II-2
<PAGE>
(4) for purposes of determining any liability under the
Securities Act, treat the information omitted from
the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A
and contained in a form of prospectus filed by the
small business issuer pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act as part of
this registration statement as of the time the
Commission declared it effective.
(5) for the purpose of determining any liability under
the Securities Act, treat each post-effective
amendment that contains a form of prospectus as a
new registration statement for the securities
offered in the registration statement, and that
offering of such securities at that time as the
initial bona fide offering of those securities.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements of filing on Form S-3 and has authorized this Amendment
No. 3 to Registration Statement to be signed on its behalf by the undersigned
thereunto duly authorized, in the City of New York, State of New York, on
November 27, 1998.
BLUEFLY, INC.
By:/s/ E. Kenneth Seiff
--------------------------
E. Kenneth Seiff
President, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 3 to Registration Statement has been signed by the following
persons in the capacities and on this 27th day of November, 1998.
<TABLE>
<CAPTION>
Signature Titles
- - --------- ------
<S> <C>
/s/ E. Kenneth Seiff
- - ----------------------------
E. Kenneth Seiff President, Chief Executive Officer and
Director (Principal Executive Officer)
- - ----------------------------
Goldie Burns Director
*
- - ----------------------------
Martin Miller Director
*
- - ----------------------------
Robert Stevens Director
/s/ Patrick C. Barry
- - ----------------------------
Patrick C. Barry Chief Financial Officer (Principal
Financial & Accounting Officer)
* By: /s/ E. Kenneth Seiff
- - ----------------------------
E. Kenneth Seiff
Attorney in Fact
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibits
- - ----------- --------
23.1 Consent of M.R. Weiser&Co. LLP
<PAGE>
EXHIBIT 23.1
------------
CONSENT OF INDEPENDENT AUDITORS
-------------------------------
We hereby consent to the use in the prospectus constituting part of this
Registration Statement on Form S-3 of our report dated February 25, 1998,
except for Note N which is as of June 25, 1998, relating to the financial
statements of Bluefly, Inc. (formerly known as Pivot Rules, Inc.) which are
included elsewhere in such Prospectus. We also consent to the reference to us
under the heading "Experts" in such Prospectus.
/s/ M.R. WEISER&CO. LLP
M.R. WEISER&CO. LLP
New York, New York
November 27, 1998
