<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number: 333-22895
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BLUEFLY, INC.
(Exact name of small business issuer as specified in its charter)
New York 13-3612110
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
42 West 39th Street, New York, NY 10018
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (212) 944-8000
---------------------------------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
As of August 10, 2000, the issuer had outstanding 4,924,906 shares of Common
Stock, $.01 par value.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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BLUEFLY, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2000 (unaudited) and
December 31, 1999 3
Consolidated Statements of Operations for the six months ended
June 30, 2000 and 1999 (unaudited) 4
Consolidated Statements of Operations for the three months ended
June 30, 2000 and 1999 (unaudited) 5
Consolidated Statements of Cash Flows for the six months ended
June 30, 2000 and 1999 (unaudited) 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Part II. Other Information 13
Item 2. Changes in Securities and Use Of Proceeds 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
BLUEFLY, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
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<S> <C> <C>
ASSETS
Current assets
Cash $ 3,933,000 $ 7,934,000
Inventories, net 7,496,000 7,020,000
Accounts receivable 862,000 381,000
Prepaid expenses 533,000 212,000
Other current assets 214,000 487,000
----------- ----------
Total current assets 13,038,000 16,034,000
Property and equipment, net 1,458,000 1,037,000
Other assets 38,000 38,000
----------- -----------
$14,534,000 $17,109,000
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable $ 3,708,000 $ 4,287,000
Accrued expenses and other current liabilities 2,178,000 2,236,000
----------- -----------
Total current liabilities 5,886,000 6,523,000
Note payable (net of $317,000 of unamortized discount) 8,683,000 --
----------- -----------
14,569,000 6,523,000
----------- -----------
Commitments (Note 5)
Redeemable preferred stock - $.01 par value; 2,000,000
shares authorized and 500,000 shares issued and
outstanding (liquidation preference: $20 per share plus 10,684,000 10,285,000
accrued dividends)
Shareholders' equity (deficit)
Common stock - $.01 par value; 15,000,000 shares
authorized and 4,924,906 shares issued and
outstanding 49,000 49,000
Additional paid-in capital 17,431,000 17,483,000
Accumulated deficit (28,199,000) (17,231,000)
----------- -----------
(10,719,000) 301,000
----------- -----------
$14,534,000 $17,109,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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BLUEFLY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------------------
2000 1999
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<S> <C> <C>
Net sales $ 7,885,000 $ 1,046,000
Cost of sales 5,982,000 799,000
------------- ------------
Gross profit 1,903,000 247,000
Selling, marketing and fulfillment expenses 10,421,000 3,603,000
General and administrative expenses 2,458,000 1,035,000
------------- --------------
Total (12,879,000) (4,638,000)
Operating loss from continuing operations (10,976,000) (4,391,000)
Interest income, net of interest expense 8,000 172,000
------------- --------------
Loss from continuing operations (10,968,000) (4,219,000)
------------- --------------
Discontinued operations - Note 2
Income from discontinued operations -- 63,000
------------ -------------
Net loss $(10,968,000) $ (4,156,000)
Preferred stock dividends (399,000) --
------------ -------------
Net loss available to common shareholders $(11,367,000) $ (4,156,000)
============ =============
Basic and diluted (loss) income per common share
Continuing operations $ (2.31) $ (0.90)
Discontinued operations -- .01
------- -------
Net loss per common share $ (2.31) $ (0.89)
======= =======
Weighted average common shares outstanding 4,924,906 4,692,587
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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BLUEFLY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
-----------------------------------
2000 1999
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<S> <C> <C>
Net sales $ 4,327,000 $ 741,000
Cost of sales 3,270,000 546,000
-------------- -------------
Gross profit 1,057,000 195,000
Selling, marketing and fulfillment expenses 5,104,000 2,740,000
General and administrative expenses 1,191,000 541,000
------------- -------------
Total (6,295,000) (3,281,000)
Operating loss (5,238,000) (3,086,000)
Interest (expense) income, net (63,000) 102,000
------------- -------------
Net loss $ (5,301,000) $ (2,984,000)
Preferred stock dividends (199,000) --
------------ ------------
Net loss available to common shareholders $ (5,500,000) $ (2,984,000)
============ ============
Basic and diluted loss per common share $(1.12) $ (0.61)
====== =======
Weighted average common shares outstanding 4,924,906 4,866,343
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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BLUEFLY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------------
2000 1999
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<S> <C> <C>
Cash flows from operating activities
Loss from continuing operations $(10,968,000) $ (4,219,000)
Adjustments to reconcile loss from continuing operations to net cash used in
operating activities:
Depreciation and amortization 308,000 49,000
Common stock issued for services -- 7,000
Changes in operating assets and liabilities:
(Increase) decrease in
Inventories (476,000) (1,879,000)
Accounts receivable (481,000) 36,000
Other current assets 273,000 (125,000)
Prepaid expenses (321,000) 71,000
Increase (decrease) in
Accounts payable (579,000) (120,000)
Accrued expenses and other current liabilities (58,000) 529,000
------------ -------------
Net cash used in operating activities - continuing operations (12,302,000) (5,651,000)
------------ -------------
Income from discontinued operations -- 63,000
Adjustments to reconcile income from discontinued operations to net cash provided
by operating activities:
Changes in operating assets and liabilities:
(Increase) decrease in
Non-factored receivables -- 187,000
Increase (decrease) in
Income taxes payable -- 195,000
------------ ------------
Net cash provided by operating activities - discontinued operations -- 445,000
------------ ------------
Net cash used in operating activities (12,302,000) (5,206,000)
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
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BLUEFLY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------------
2000 1999
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<S> <C> <C>
Cash flows from investing activities
Purchase and placement into service of property and equipment (699,000) (216,000)
Funds deposited with factor -- 2,264,000
---------- ----------
Net cash (used in) provided by investing activities (699,000) 2,048,000
---------- ----------
Cash flows from financing activities - continuing operations
Proceeds from notes payable 9,000,000 --
Net proceeds from warrant redemption -- 7,062,000
Net proceeds from unit purchase option and option exercises -- 197,000
---------- ----------
Net cash provided by financing activities - continuing operations 9,000,000 7,259,000
---------- ----------
Cash flows from financing activities - discontinued operations
Net change in due to/from factor -- 171,000
---------- ----------
Net cash provided by financing activities - discontinued operations -- 171,000
---------- ----------
Net cash provided by financing activities 9,000,000 7,430,000
---------- ----------
Net (decrease) increase in cash (4,001,000) 4,272,000
Cash balance - beginning of period 7,934,000 2,830,000
---------- ----------
Cash balance - end of period $3,933,000 $7,102,000
========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes $ -- $ 1,000
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
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BLUEFLY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Bluefly, Inc. and its wholly owned subsidiary (the "Company"). All significant
intercompany balances and transactions have been eliminated in consolidation.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Rule 310 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. The results of
operations of any interim period are not necessarily indicative of the results
of operations to be expected for the fiscal year. For further information, refer
to the consolidated financial statements and accompanying footnotes included in
the Company's Form 10-KSB/A for the year ended December 31, 1999. There have
been no changes in significant accounting policies since December 31, 1999. The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. The Company has sustained net
losses and negative cash flows from operations since the formation of
Bluefly.com. The Company's ability to meet its obligations in the ordinary
course of business is dependent on its ability to establish profitable
operations or raise additional financing through public or private equity
financing, collaborative or other arrangements with corporate sources, or other
sources to fund operations. There can be no assurance that any additional
financing or other sources of capital will be available to the Company upon
acceptable terms, or at all. The inability to obtain additional financing, when
needed, would have a material adverse effect on the Company's business,
financial condition and results of operations.
NOTE 2 - THE COMPANY
The Company is a leading Internet retailer of designer fashions and home
accessories at outlet store prices. The full service Web store ("Bluefly.com" or
"Web Site") sells over 350 brands of designer apparel, accessories and house and
home products at discounts of up to 75%. Bluefly.com, which launched in
September 1998, also offers information on current fashion trends.
In June 1998, the Company's Board of Directors voted to discontinue the
operations of its golf sportswear division and devote all of the Company's
energy and resources to building Bluefly.com.
NOTE 3 - NOTES PAYABLE
In March 2000, the Company obtained a commitment from affiliates of Soros
Private Equity Partners ("Soros") to provide, at the Company's option, up to $15
million of financing at any time during 2000 on terms reflecting market rates
for such financings at the time such financing is provided (the "Soros
Commitment"). As of June 30, 2000, Soros had provided the Company with an
aggregate of $9 million in debt financing pursuant to the Soros Commitment, in
the form of notes that bear interest at a rate of 8% per annum and are due in
January 2002 (the "Soros Notes"). The Soros Notes provide that amounts due
thereunder will convert into securities sold in the Company's next round of
equity financing in which it raises at least $10 million (the "Next Round of
Financing"). In connection with the Soros Commitment and Soros Notes, the
Company has granted Soros warrants (the "Soros Warrants") pursuant to which
Soros has the right to purchase up to 275,000 shares of Common Stock at an
exercise price equal to the value of a share of Common Stock as determined in
the Company's Next Round of Financing, exercisable at any time during the 5
years following issuance. The Soros Warrants have been valued at $347,000 using
the Black Scholes option model and, accordingly, the Company has recorded a
charge to additional paid in capital and related debt discount.
NOTE 4 - EARNINGS (LOSS) PER SHARE
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share." Basic earnings (loss) per share excludes dilution and
is computed by dividing earnings (loss) available to common shareholders by the
weighted average number of common shares outstanding for the period.
Diluted earnings (loss) per share is computed by dividing earnings (loss)
available to common shareholders by the weighted average number of common shares
outstanding for the period, adjusted to reflect potentially dilutive securities.
Due to the loss from continuing operations, options and warrants to purchase
1,463,290 shares of Common Stock and Preferred Stock convertible into 952,381
shares were not included in the computation of diluted earnings per share
because the result of the exercise of such would be antidilutive.
8
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BLUEFLY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 5 - COMMITMENTS
MARKETING AND ADVERTISING COMMITMENTS
The Company has advertising and marketing commitments through December 31, 2000
of approximately $900,000. These amounts include payments due in connection with
the Company's online marketing relationships as well as print advertising
commitments.
NOTE 6 - RECLASSIFICATIONS
Certain amounts in the consolidated financial statements of the prior period
have been reclassified to conform to the current period presentation for
comparative purposes.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company is a leading Internet retailer of designer fashions and home
furnishings at outlet store prices. The Company offers an extensive selection of
designer products from over 350 brands.
The Company derives revenue primarily from the sale of designer products on its
Web Site. Merchandise revenue is recognized when goods are shipped to the
Company's customers from its third party warehouse, which occurs only after
credit card authorization. For sales of merchandise, the Company is responsible
for pricing, processing and fulfilling the orders. The Company processes
merchandise returns and bears the credit risk for these transactions. The
Company generally permits returns for any reason within 90 days of the sale.
Accordingly, the Company reserves for estimated future returns and bad debt at
the time of shipment based on historical data. However, the Company's future
return and bad debt rates could differ significantly from historical figures.
The Company has incurred substantial costs to develop its Web Site and
infrastructure. In order to expand its business, the Company intends to invest
heavily in sales, marketing, merchandising, operations, information systems,
site development and additional personnel to support these activities. The
Company, therefore, expects to continue to incur substantial operating losses
for the foreseeable future.
The Company's quarterly net sales increased to $4,327,000 for the second quarter
of 2000, an increase of over 480% compared to net sales during the second
quarter of 1999 of $741,000, and an increase of approximately 22% compared to
net sales during the first quarter of 2000 of $3,558,000.
According to Media Metrix data, Bluefly.com had 402,000 average monthly unique
visitors during the second quarter of 2000, approximately 9% higher than the
369,000 average monthly unique visitors attracted during the second quarter of
1999 and approximately 4% higher than the 387,333 average monthly unique
visitors attracted during the first quarter of 2000. During the quarter, the
Company added more than 36,000 new customers, over a 365% increase over the
7,700 customers added in the second quarter of 1999 and a 10% increase over the
32,600 customers added in the first quarter of 2000. Repeat customers accounted
for approximately 46% of the Company's revenues, up from 40% in the second
quarter of 1999 and 41% in the first quarter of 2000.
Gross revenue per unique visitor was $4.92 for the second quarter, 429% higher
than the $0.93 gross revenue per unique visitor generated in the second quarter
of 1999 and 17% higher than the $4.20 gross revenue per unique visitor generated
in the first quarter of 2000. Customer acquisition costs (which the Company
defines as total advertising expenditures during the quarter (excluding staff
related costs) divided by new customers acquired in the quarter) decreased to
$73.21 during the second quarter of 2000. This represents an improvement of
approximately 70% from the Company's $239.46 customer acquisition costs during
the second quarter of 1999 and an improvement of approximately 30% from the
Company's $103.89 customer acquisition costs during the first quarter of 2000.
In order to accommodate increased inventory levels and higher volumes of order
fulfillment, the Company is in the process of moving to a larger more robust
fulfillment center. The Company expects the move to be complete by the end of
the summer with minimal disruption to its fulfillment operations, although there
can be no assurance that this will be the case.
9
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BLUEFLY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
Bluefly.com was launched in September 1998. In June 1998, prior to the launch of
Bluefly.com, the Company discontinued its Pivot Rules division, which marketed a
collection of golf sportswear in order to devote all of its resources to
building Bluefly.com.
RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX MONTHS ENDED
JUNE 30, 1999
NET SALES: For the six months ended June 30, 2000, gross sales (revenue from
product sales before any adjustment for reserves) totaled $10,865,000. The
Company recorded a provision for returns and credit card chargebacks and other
discounts of $2,980,000, or approximately 27% of gross sales. The reserve
allowance takes into account the Company's 90-day return policy and actual
experience to date, which may vary over time. After the necessary provisions for
returns, credit card chargebacks and adjustments for uncollected sales taxes,
the Company's net sales for the six months ended June 30, 2000 were $7,885,000.
This represents an increase of over 653% compared to net sales for the same
period in 1999, in which net sales totaled $1,046,000.
COST OF SALES: Cost of sales for the six months ended June 30, 2000 totaled
$5,982,000, resulting in gross margin of approximately 24.1%. Cost of sales
consists of the cost of product sold to customers, in-bound shipping costs,
inventory reserves, commissions and packing materials. Cost of sales for the six
months ended June 30, 1999 were $799,000, resulting in gross margin of 23.6%.
The Company believes that the increase in gross margin is the result of
improvements in the Company's bad debt recovery as well as revenue generated
from certain promotional activities, partially offset by commission costs that
were not incurred in 1999.
SELLING, MARKETING AND FULFILLMENT EXPENSES: Selling, marketing and fulfillment
expenses totaled $10,421,000 for the six months ended June 30, 2000,
representing costs associated with online strategic marketing relationships,
print advertising, Web Site hosting, inventory management, including outbound
shipping costs (net of shipping revenue), fulfillment costs and customer
service. Of the total selling, marketing and fulfillment expenses for the six
months ended June 30, 2000, approximately $690,000 relates to fulfillment costs,
and approximately $392,000 represents outbound shipping costs (net of shipping
revenue). Marketing expenses related to online and print advertising for the six
months ended June 30, 2000, totaled approximately $6,030,000 while Web site
hosting costs totaled approximately $1,044,000. Selling, marketing and
fulfillment expenses for the same period in 1999 were approximately $3,603,000.
Of the total selling, marketing and fulfillment expenses for the six months
ended June 30, 1999, approximately $127,000 relates to fulfillment costs, and
approximately $25,000 represents outbound shipping costs (net of shipping
revenue). Marketing expenses related to online and print advertising totaled
approximately $2,166,000 while Web site hosting costs totaled approximately
$449,000 for the six months ended June 30, 1999.
The increase in fulfillment costs and outbound shipping costs in this period
compared to 1999, is largely attributable to increased sales volume, while the
increase in Web site hosting costs results from the Company's desire to improve
the speed of its Web site and effectively handle growth in traffic to the Web
site. Marketing expenses as a percentage of total selling marketing and
fulfillment expenses, increased for the six month period ended June 30, 2000 by
approximately 2% as compared to the same period in 1999.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses were
$2,458,000 for the six months ended June 30, 2000 compared to $1,035,000 for the
same period in 1999. General and administrative expenses include salaries and
related expenses, insurance costs, accounting and legal fees, depreciation and
other office related expenses. The increase in general and administrative
expenses in this period, as compared to 1999, was largely the result of an
increase in employees, and their related benefits as well as increased
professional fees. The Company has increased its head count across all
departments, growing the Company from 39 employees as of June 30, 1999 to 90 as
of June 30, 2000.
FOR THE THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 1999
NET SALES: For the three months ended June 30, 2000, gross sales (revenue from
product sales before any adjustment for reserves) totaled $5,987,000. The
Company recorded a provision for returns and credit card chargebacks and other
discounts of $1,660,000, or approximately 28% of gross sales. The reserve
allowance takes into account the Company's 90-day return policy and actual
experience to date, which may vary over time. After the necessary provisions for
returns, credit card chargebacks and adjustments for uncollected sales taxes,
the Company's net sales for the second quarter of 2000 were $4,327,000. This
represents an increase of over 480% compared to net sales for the three month
period ended June 30, 1999, in which net sales totaled $741,000.
COST OF SALES: Cost of sales for the three months ended June 30, 2000 totaled
$3,270,000, resulting in gross margin of approximately 24.4%. Cost of sales
consists of the cost of product sold to customers, in-bound shipping costs,
inventory reserves and packing materials. Cost of sales for the three months
ended June 30, 1999 were $546,000, resulting in gross margin of 26.3%. The
Company believes that the
10
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BLUEFLY, INC.
JUNE 30, 2000
gross margin decrease is the result of increased inventory reserves, commissions
and cost of packing materials for the three months ended June 30, 2000 compared
to the same period last year. These increases in cost were partially offset by
improvements in the Company's bad debt reserves and revenue from certain
promotional activities.
SELLING, MARKETING AND FULFILLMENT EXPENSES: Selling, marketing and fulfillment
expenses totaled $5,104,000 for the three months ended June 30, 2000,
representing costs associated with online strategic marketing relationships,
print advertising, Web Site hosting, inventory management, including outbound
shipping costs (net of shipping revenue), fulfillment and customer service.
Fulfillment expenses for the three months ended June 30, 2000 totaled
approximately $387,000, while the costs of outbound shipping net of the related
shipping revenue totaled $214,000. Marketing expenses related to online and
print advertising totaled approximately $2.6 million. Selling, marketing and
fulfillment expenses for the same period in 1999 were approximately $2,740,000.
Fulfillment expenses for the three months ended June 30, 1999 totaled
approximately $80,000, while the costs of outbound shipping net of the related
shipping revenue totaled $23,000. Marketing expenses related to online and print
advertising for the three months ended June 30, 1999 were approximately
$1,852,000.
The increase in fulfillment costs and outbound shipping costs in this period
compared to 1999, is largely attributable to increased sales volume, while the
increase in Web site hosting costs results from the Company's desire to improve
the speed of its Web site and effectively handle the growth in traffic to the
Web site. Marketing expenses as a percentage of total selling marketing and
fulfillment expenses, decreased for the three month period ended June 30, 2000
by approximately 16% as compared to the same period in 1999.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses were
$1,191,000 for the three months ended June 30, 2000 compared to $541,000 for the
same period in 1999. General and administrative expenses include salaries and
related expenses, insurance costs, accounting and legal fees, depreciation and
other office related expenses. The increase in general and administrative
expenses in the second quarter 2000, as compared to 1999, was largely the result
of an increase in employees, and their related benefits as well as increased
professional fees. The Company has increased its head count across all
departments, growing the Company from 39 employees as of June 30, 1999 to 90 as
of June 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, the Company had approximately $7.15 million of working
capital, of which approximately $3.9 million was in the form of cash. In
addition, as of June 30, 2000, the Company had $6.0 million of cash available
under the Soros Commitment described below.
In March 2000, the Company obtained a commitment from affiliates of Soros
Private Equity Partners ("Soros") to provide, at the Company's option, up to $15
million of financing at any time during 2000 on terms reflecting market rates
for such financings at the time such financing is provided (the "Soros
Commitment"). As of June 30, 2000, Soros had provided the Company with an
aggregate of $9 million in debt financing pursuant to the Soros Commitment, in
the form of notes that bear interest at a rate of 8% per annum and are due in
January 2002 (the "Soros Notes"). The Soros Notes provide that amounts due
thereunder will convert into securities sold in the Company's next round of
equity financing in which it raises at least $10 million (the "Next Round of
Financing"). In connection with the Soros Commitment and Soros Notes, the
Company has granted Soros warrants (the "Soros Warrants") pursuant to which
Soros has the right to purchase up to 275,000 shares of Common Stock at an
exercise price equal to the value of a share of Common Stock as determined in
the Company's Next Round of Financing, exercisable at any time during the 5
years following issuance. The Soros Warrants have been valued at $347,000 using
the Black Scholes option model and, accordingly, the Company has recorded a
charge to additional paid in capital and related debt discount.
The Company has been advised by the Nasdaq Stock Market, Inc. ("Nasdaq") and the
Boston Stock Exchange, that it is not in compliance with their respective
continued listing requirements because of its failure to satisfy Nasdaq's
minimum net tangible assets requirement and the Boston Stock Exchange's minimum
shareholders' equity requirement. Nasdaq and the Boston Stock Exchange have
taken the position that, for purposes of continued listing requirements, the
Company's Series A Convertible Preferred Stock, par value $.01 per share (the
"Series A Preferred Stock"), should not be included among the tangible assets or
shareholders' equity of the Company because it is redeemable preferred stock.
The Company has responded by stating, that among other things, that it has
entered into a letter of intent with the principal holder of the Series A
Preferred Stock, pursuant to which the parties have mutually agreed to
negotiate, in good faith, within forty-five days of the date of such letter, an
amendment to the Series A Preferred Stock that enables the Company to reflect
the Series A Preferred Stock as shareholders' equity on its balance sheet. The
Company is currently in negotiations with respect to such amendment, although
there can be no assurances that such negotiations will result in an appropriate
amendment. Based upon the Company's net worth as of June 30, 2000, continued
compliance with Nasdaq's net tangible asset requirement and the Boston Stock
Exchange's minimum shareholders' equity requirement will also require, in
addition to the amendment of the Series A Preferred Stock, the conversion into
shareholders' equity of the Soros Notes or additional equity financing from a
third party. The Company is currently in discussions with respect to the
conversion of the Soros Notes into an equity instrument, but there can be no
assurance that such discussions will result in the conversion of the Soros Notes
into shareholders'
11
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BLUEFLY, INC.
JUNE 30, 2000
equity. At the current market price of the Common Stock, conversion of the $9.0
million indebtedness into Common Stock would result in Soros owning greater than
50% of the outstanding Common Stock. Any such negotiated arrangement would
require shareholder approval under applicable Nasdaq rules.
As of June 30, 2000, the Company has marketing and advertising commitments of
approximately $900,000 through December 31, 2000. In addition, the Company
believes that in order to grow the business, the Company will need to make
additional marketing and advertising commitments in the future. However, the
Company's marketing budget is subject to a number of factors, including it's
results of operations as well as it's ability to raise additional capital.
In order to continue to expand its product offerings, the Company intends to
expand its relationships with suppliers of end-of-season and excess name brand
apparel and fashion accessories. The Company expects that its suppliers will
continue to include designers and retail stores that sell excess inventory as
well as third party end-of-season apparel aggregators. To achieve 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 may
explore leasing or partnering select departments with strategic partners and
distributors. Due to the Company's limited working capital, a number of its
suppliers have limited the Company's payment terms and, in some cases, have
required the Company to pay for merchandise in advance of delivery.
The Company expects to hire and train additional employees for the operations
and development of Bluefly.com. However, the Company's ability to hire such
employees is subject to a number of factors, including the Company's results of
operations as well as the Company's ability to raise additional capital.
The Company anticipates, based on current plans and assumptions relating to its
operations, that the proceeds from the Soros Note, and the remaining amount of
the Soros Commitment, together with existing resources and cash generated from
operations, should be sufficient to satisfy the Company's current cash
requirements through the end of 2000. However, the Company intends to seek
additional debt and/or equity financing during 2000 through a public offering,
private placement or otherwise in order to maximize the growth of its business.
There can be no assurance that any additional financing or other sources of
capital will be available to the Company upon acceptable terms, or at all. The
inability to obtain additional financing, when needed, would have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Board of Directors has authorized a special committee, consisting of
independent members of the Board, to review and evaluate the Company's strategic
alternatives for maximizing shareholder value. Those alternatives include, but
are not limited to, raising additional equity, entering into a strategic
partnership or joint venture and/or a sale of the Company. The special committee
has engaged Credit Suisse First Boston as its financial advisor.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Commission issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 summarizes
certain of the Commission's views in applying generally accepted accounting
principles to revenue recognition in financial statements. SAB 101 is not a rule
or interpretation of the Commission; however, it represents interpretations and
practices followed by the Division of Corporate Finance and Office of the Chief
Accountant in administering the disclosure requirements of the Federal
securities laws.
The Emerging Issues Task Force ("EITF") of the Financial Accounting Standards
Board has addressed the "Accounting Treatment for Shipping and Handling Revenue
and Costs" in Issue 00-10. During its meetings it has reached a final consensus
that amounts billed, if any, for shipping and handling should be included in
revenue. However the EITF did not reach a conclusion on the treatment of the
related costs of shipping and handling.
According to SAB 101B, the implementation date for Issue 00-10, is the fourth
quarter of a registrant's fiscal year beginning after December 15, 1999 and
requires companies to reclassify all prior periods to conform with the current
period presentation. The Company will apply the interpretations outlined in SAB
101, and EITF Issue 00-10, and believes that the application will not have a
significant impact on the Company's revenue recognition policies.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This report may include statements that constitute "forward-looking" statements,
usually containing the words "believe," "project," "expect," or similar
expressions. These statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation
12
<PAGE>
BLUEFLY, INC.
JUNE 30, 2000
Reform Act of 1995. Forward-looking statements inherently involve risks and
uncertainties that could cause actual results to differ materially from the
forward-looking statements. The risks and uncertainties are detailed from time
to time in reports filed by the company with the Securities and Exchange
Commission, including Forms 8-A, 8-K, 10-QSB, and 10-KSB. These risks and
uncertainties include, but are not limited to, the following: the Company's
limited working capital, need for additional capital and potential inability to
raise such capital; the competitive nature of the business and the potential for
competitors with greater resources to enter such business; risks of litigation
for sale of unauthentic or damaged goods and litigation risks related to sales
in foreign countries; consumer acceptance of the Internet as a medium for
purchasing apparel; recent losses and anticipated future losses; the startup
nature of the Internet business; the capital intensive nature of such business
(taking into account the need for advertising to promote such business); the
dependence on third parties and certain relationships for certain services; the
successful hiring and retaining of personnel; the dependence on continued growth
of online commerce; rapid technological change; online commerce security risks;
governmental regulation and legal uncertainties; management of potential growth;
and unexpected changes in fashion trends.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In connection with the Soros Commitment and the Soros Notes, the Company has
granted Soros warrants to purchase an aggregate of 275,000 shares of Common
Stock. The Soros Warrants will have an exercise price equal to the value of a
share of Common Stock as determined in the Company's Next Round of Financing,
and are exercisable for a period of five years from issuance. The issuance of
the Soros Warrants was deemed to be exempt from registration under the
Securities Act of 1933, as amended (the "Act") in reliance on Section 4(2) of
the Act as a transaction by an issuer not involving any public offering. Soros
represented their intentions to acquire the securities for investment only and
not with any distribution thereof and appropriate legends were fixed to the
Soros Warrants in connection therewith. The proceeds of the Soros Notes are
being used for working capital purposes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following is a list of exhibits filed as part of this Report:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
10.14 Lease by and between the Company and Adams & Co. Real Estate, Inc. dated May 4, 2000
10.15 Note and Warrant Purchase Agreement, dated May 16, 2000, by and among the Company, Quantum
Industrial Partners LDC and SFM Domestic Investments LLC
10.16 Note and Warrant Purchase Agreement, dated June 28,
2000, by and among the Company, Quantum Industrial
Partners LDC and SFM Domestic Investments LLC
10.17 Bluefly, Inc. 2000 Stock Option Plan
10.18 Letter Agreement, dated as of June 22, 2000, by and
between the Company and Soros Private Equity
Partners, LLC
27 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the period covered by this
report.
13
<PAGE>
BLUEFLY, INC.
JUNE 30, 2000
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
BLUEFLY, INC.
By: /s/ E. Kenneth Seiff
---------------------
E. Kenneth Seiff
President
By: /s/ Patrick C. Barry
---------------------
Patrick C. Barry
Chief Financial Officer
August 14, 2000
14
