U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the fiscal year ended December 31, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______ to ______
Commission File Number: 001-14498
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BLUEFLY, INC.
(Name of registrant as specified in its charter)
Delaware 13-3612110
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
42 West 39th Street, New York, NY 10018
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (212) 944-8000
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Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.01 per share
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Indicate by check mark whether disclosure of delinquent filers in response to
Item 405 of Regulation S-K is not contained in this form, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
As of March 17, 2003, there were 11,024,568 shares of Common Stock, $.01 par
value, of the registrant outstanding. The aggregate market value of the voting
and non-voting common equity held by non-affiliates as of such date, based upon
the last sale price of such equity reported on the National Associated of
Securities Dealers Automated Quotation SmallCap Market, was approximately
$4,750,000.
PART I
Item 1. Description of Business
General
Bluefly, Inc. is a leading Internet retailer of designer fashion and home
accessories at discount prices. We sell over 350 brands of designer apparel,
accessories and home products at discounts up to 75% off retail value. In the 12
months of calendar year 2002, we offered over 69,000 different types of items
for sale in categories such as men's, women's and accessories as well as house
and home accessories. Since its inception, www.bluefly.com has served over
385,000 customers and shipped to over 20 countries.
We were incorporated in 1991 under the laws of the state of New York as Pivot
Corporation. In 1994, we changed our name to Pivot Rules, Inc. In May of 1997,
we completed our initial public offering, and our common stock is listed on the
Nasdaq SmallCap Market under the symbol "BFLY." In May of 1998, our Board of
Directors approved the development of the Bluefly.com Web site (the "Web site").
In June 1998, we discontinued our golf sportswear division, Pivot Rules, in
order to devote all of our energy and resources to building Bluefly.com. We
launched our Web site in September 1998. In October 1998, shortly after selling
the Pivot Rules brand and trademarks, we changed our name to Bluefly, Inc. to
match the name of our Web site. On February 2, 2001, we reincorporated in
Delaware through a merger with a wholly owned subsidiary. Our executive offices
are located at 42 West 39th Street, New York, New York 10018, and our telephone
number is (212) 944-8000. Our Internet address is www.bluefly.com. We make
available, free of charge, through our Web site, our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the SEC.
In this report, the terms "we", "us", "Bluefly" and the "Company" refer to
Bluefly, Inc. and its predecessors and subsidiaries, unless the context
indicates otherwise.
Recent Developments
January 2003 Financing
In January 2003, we issued to Quantum Industrial Partners LDC, a Cayman Islands
limited duration company ("QIP"), and SFM Domestic Investments LLC, a Delaware
limited liability company ("SFMDI;" QIP and SFMDI are each affiliates of Soros
Private Equity Partners LLC and are collectively and individually sometimes
referred to herein as "Soros") $1 million of demand convertible promissory notes
that bore interest at a rate of 8% per annum and had a maturity date of July 28,
2003 (the "January 2003 Financing") and warrants to purchase 25,000 shares of
our Common Stock, exercisable at any time on or prior to January 28, 2007 at
$1.12 per share. The promissory notes together with any accrued interest were
convertible into equity securities that we might issue in any subsequent round
of financing, at the holder's option, at a price that was equal to the lowest
price per share accepted by any investor in such subsequent round of financing.
As described below, these promissory notes were converted into Series D
Preferred Stock in March 2003. For additional information on the terms of the
January 2003 Financing, see "Certain Relationships and Related Transactions."
March 2003 Financing
In March 2003, we entered into an agreement with Soros pursuant to which Soros:
(i) provided $2 million of new capital by purchasing 2,000 shares of Series D
Convertible Preferred Stock (the "Series D Preferred Stock"), (ii) converted the
promissory notes issued to it in the January 2003 Financing and all of its
Series 2002 Preferred Stock into 3,109.425 shares of Series D Preferred Stock,
and (iii) purchased 2,027.123 additional shares of Series D Preferred Stock for
approximately $2 million, with such $2 million in additional proceeds being
retained by Soros as payment in full of our obligations under the demand
promissory notes issued to Soros in September 2002 (the "March 2003 Financing").
For additional information on the terms of the March 2003 Financing, see
"Certain Relationships and Related Transactions."
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Additionally, Soros agreed to provide us with up to $1 million in additional
financing (the "2003 Standby Commitment Amount") on a standby basis at any time
prior to January 1, 2004, provided that our cash balances are less than $1
million (the "2003 Standby Commitment"). Such financing can be made in one or
more tranches as determined by the members of our Board of Directors who are not
Soros designees, and any and all draws against the 2003 Standby Commitment
Amount shall be effected through the purchase of newly-designated shares of
Series E Preferred Stock on terms and conditions substantially identical to the
Series D Preferred Stock, except that: (1) the conversion price of the Series E
Preferred Stock will be the lower of (a) the average closing price of the Common
Stock on the Nasdaq SmallCap Market for the ten trading days preceding the
issuance of the Series E Preferred Stock and (b) $0.76; and (2) the Series E
Preferred Stock will not be convertible into Common Stock (and will not be
entitled to vote with the Common Stock on matters submitted to a vote of the
holders of the Common Stock) until such time as the Company's stockholders
approve the conversion rights of the Series E Preferred Stock to the extent
required by the rules of the Nasdaq SmallCap Market or any other national
securities exchange or quotation system upon which the Common Stock may be
listed from time to time. Subject to certain limitations, the 2003 Standby
Commitment Amount shall be reduced on a dollar-for-dollar basis by the gross
cash proceeds received by the Company or any of its subsidiaries from the
issuance of any equity or convertible securities after March 12, 2003. To the
extent that a draw down on the 2003 Standby Commitment Amount results in the
conversion price of the Series E Preferred Stock being less than $0.76, Soros
has agreed to waive its right to readjust the conversion price on the Series B,
C and D Preferred Stock in connection with the issuance of the Series E
Preferred Stock.
As a result of the March 2003 Financing, the conversion price of the Series B
Preferred Stock and the Series C Preferred Stock, all of which is held by Soros,
automatically decreased from $0.93 to $0.76. In accordance with EITF 00-27, the
reduction in the conversion price of the Series C Preferred Stock will result in
us recording a beneficial conversion feature in the approximate amount of
$225,000. This non-cash charge, which is analogous to a dividend, will result in
an adjustment to our computation of Loss Per Share in the first quarter of 2003.
Amendments to Rosenthal Financing Agreement
In December 2002 and March 2003, we amended our Financing Agreement (the
"Rosenthal Financing Agreement") with Rosenthal & Rosenthal, Inc. ("Rosenthal"),
pursuant to which Rosenthal provides us with certain credit accommodations,
including loans and advances, factor-to-factor guarantees, letters of credit in
favor of suppliers or factors and purchases of payables owed to our suppliers
(the "Loan Facility"). Under the terms of these amendments, we: (i) extended the
term until June 30, 2004, (ii) increased the maximum amount available under the
Loan Facility (subject to an existing $10 million cap) to an amount equal to the
Soros Guarantee (as hereinafter defined) plus the lowest of (x) $2 million
(instead of the prior $1 million), (y) 20% of the book value of our inventory or
(z) the full liquidation value of our inventory, (iii) increased the tangible
net worth requirement to $5,000,000 from $1,500,000, (iv) redefined the working
capital definition to exclude short-term debt held by affiliates (effective as
of December 19, 2002), (v) increased the working capital requirement to
$4,000,000 from $3,500,000 , (vi) increased the annual fee we pay Rosenthal for
the Loan Facility to $30,000 from $10,000, (vii) agreed to maintain a cash
balance of at least $250,000 and (viii) obtained an agreement from Soros to
increase to $2.0 million from $1.5 million the amount of the standby letter of
credit that Soros is maintaining (the "Soros Guarantee") to help secure the Loan
Facility and to extend the term of the Soros Guarantee to November 15, 2004 from
November 15, 2003. In consideration for Soros' agreement to increase the amount
of and to maintain the Soros Guarantee until November 15, 2004, we issued to
Soros a warrant to purchase 25,000 shares of our Common Stock at an exercise
price equal to $0.78 per share (the 10 day trailing average of the closing sale
price of our Common Stock on the date of issuance), exercisable at any time
prior to March 17, 2013. For more information on the Loan Facility and the Soros
Guarantee, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources - Loan Facility" and
"Certain Relationships and Related Transactions."
Nasdaq
On March 11, 2003, we were advised by the Nasdaq Stock Market, Inc. ("Nasdaq")
that we were no longer in compliance with Nasdaq's continued listing
requirements (the "Listing Requirements") because shares of our common stock
have closed at a per share price of less than $1.00 for at least 30 days and
that, if we are unable to achieve compliance with the Listing Requirements by
September 8, 2003, the Nasdaq Staff will determine whether we meet certain of
the initial listing criteria of the Nasdaq SmallCap Market. In the event that we
meet such initial listing criteria, we will be granted an additional 180-day
grace period to regain compliance. In order to regain compliance, shares of the
Company's common stock would need to close at a price of $1.00 or more for at
least ten consecutive trading days. In the event that the Company does not
regain compliance within the requisite time period, it intends to appeal any
delisting. However, no assurance can be provided that any such appeal will be
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successful. The failure to maintain listing on the Nasdaq SmallCap Market may
have an adverse effect on the price and/or liquidity of the Company's common
stock.
General
Based on current plans and assumptions relating to our operations, we believe
that the proceeds from prior financings, together with the January 2003
Financing, the March 2003 Financing, the 2003 Standby Commitment, the Loan
Facility, existing resources and cash generated from operations, are sufficient
to satisfy our cash requirements through the end of 2003. Of course, there can
be no assurance that such expectations will prove to be correct. Moreover, we
may seek additional debt and/or equity financing in order to grow our business.
The environment for raising investment capital by companies in the Internet
industry has been difficult and there can be no assurance that additional
financing or other capital will be available upon terms acceptable to us, or at
all. The inability to obtain additional financing, if needed, would have a
material adverse effect on our business, prospects, financial condition and
results of operations. See, "Risk Factors -We Are Making A Substantial
Investment In Our Business And May Need To Raise Additional Funds" and "Risk
Factors -- Certain Events Could Result in Significant Dilution Of Your Ownership
Of Our Common Stock."
Business Strategy
Bluefly strives to be the "Store of First Resort for Fashion" by offering the
most compelling combination of selection, value, service and convenience. By
selectively acquiring end-of-season and excess inventory of high-end designer
fashion products and offering a friendly, convenient and upscale shopping
atmosphere, we believe that we are creating a hybrid retail environment that
combines the best of the three traditional retail channels: the selection of
full price department stores; the service and convenience of catalogs; and the
savings of traditional off-price stores.
Each of the three traditional retail channels offers something different to
consumers. Full price department stores typically offer a wide selection of top
designer products and make substantial efforts to provide good customer service.
Often missing from the full price department store experience are convenience
(of necessity, consumers must travel to and from the store, which in some
instances can take several hours) and discounts (while full price stores
generally have price mark-downs, the majority of their business is at full
price). While catalogs offer convenience and good customer service, they
generally do not offer discounts or a wide selection of designer products (many
catalogs, such as J.Crew, Lands' End, and Victoria Secret, are "vertical brands"
that sell only one brand of products). Off-price stores, such as T.J. Maxx and
Ross Stores, typically offer significant discounts to the customer but do not
offer the designer brand selection and customer service of full price department
stores or the convenience of catalogs.
Bluefly seeks to combine the best that these three traditional channels have to
offer with added benefits offered only by the Internet. At Bluefly.com, we aim
to offer the designer selection of a full price department store, the customer
service of a high-end retailer or catalog, the discounts of an off-price store,
the convenience of 24/7 shopping from home or the office, and sophisticated
search and sort functionality made possible by the Internet. We recognize that
we will not be able to satisfy all of our customers, all of the time, but then
no retailer can. Our proposition to the consumer is simply this: "Come to
Bluefly.com first for all of your fashion needs. We will do our best to exceed
your expectations and, if we have what you are looking for, you will receive top
designer merchandise at a discount and outstanding customer service in a
friendly, convenient, upscale environment. In those instances (which we hope to
be rare) where our designer selection does not meet your needs, the cost to you
will be the few minutes it took to browse or search our Web site. We, on the
other hand, will have the opportunity to complete many more sales with you if we
successfully build an experience that convinces you to visit us first to see if
we can fill your fashion needs." For these reasons, we hope to become the "Store
of First Resort for Fashion."
Our business is also designed to provide a compelling value proposition for our
suppliers and, in particular, the more than 350 top designer brands that we
offer on our Web site. We recognize that liquidating excess inventory can be a
"necessary evil" and that brand dilution can occur when a brand's product is
offered in a traditional discount environment. We would like to make the
liquidation of excess inventory a positive experience for our vendors rather
than a distasteful one. We intend to do this by treating our suppliers with
honesty and respect and by creating a high-end retail environment that offers
only a premium matrix of brands. In doing so, we hope that Bluefly's younger,
affluent customer base will come to understand our suppliers' brands as the
designer intended, thereby reducing the potential for brand dilution.
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We do not believe that we can become the "Store of First Resort for Fashion"
without using the Internet as a platform. The direct marketing of excess and
end-of-season apparel, fashion accessories and home products requires a
cost-effective medium that can display 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. We believe print catalogs are not well suited to this task.
The paper, printing, mailing and other production costs of a print catalog can
be significant and the lead times required to print a catalog make them
significantly inflexible in addressing inventory sell outs, price changes and
new styles. To work around these limitations, a traditional cataloger typically
requires products that are replenishable, available in a full range of sizes and
in substantial quantities. Similarly, retailing on television is costly and
requires substantial quantities of products that are available in all sizes in
order for it to be an economical medium. In addition, the number of items that
can be displayed on television is limited, and television does not allow viewers
to search for products that interest them. The availability of excess inventory
of high-end apparel and accessories is often at odds with these needs as such
merchandise is rarely replenishable and frequently offered in incomplete color
and size ranges.
The Internet, however, can be a far less expensive and far more effective
medium. By using the Internet as our platform, the number of items that we offer
is not limited by the high costs of printing and mailing catalogs. With the
Internet, we can automatically update product images as new products arrive and
other items sell out. By integrating real-time databases containing information
about both inventory and customers' size and brand preferences, we can create a
personalized shopping environment and allow our customers to search for the
products that specifically interest them, and more importantly, limit what they
see to the items that are available in their size. In addition, we believe that
we are able to more economically and consistently maintain an upscale
environment through the design of a single online storefront.
We believe that we have created a customer experience that is fundamentally
better than that offered by traditional off-price retailers. Similarly, we
believe that our upscale atmosphere, professional photography and premium brand
matrix create a superior distribution channel for designers who wish to
liquidate their end-of-season and excess merchandise without suffering the brand
dilution inherent in traditional off-price channels.
E-Commerce And The Online Apparel Market
The dramatic growth of e-commerce has been widely reported and is expected to
continue. In June 2002, The Boston Consulting Group estimated that U.S. online
retail sales would increase approximately 41% from $51.3 billion in 2001 to
$72.1 billion in 2002. According to Forrester Research, by the end of 2003 the
number of households that will have bought online will have increased by 53%
since the start of 2000, to 43.3 million from 28 million. We believe that a
number of factors will contribute to the growth of e-commerce, including (i)
shoppers' growing familiarity and comfort with shopping online; (ii) the
proliferation of devices to access the Internet, and (iii) technological
advances that make navigating the Internet faster and easier.
According to a Shop.org survey, online apparel sales reached $4.4 billion in
2001 and are expected to reach over $5.2 billion in 2002. We believe that the
market for online sales of apparel is growing faster than many other retail
categories as a result of a confluence of trends, including (i) the growth of
the number of women online, who account for a larger share of retail apparel
purchases, (ii) the expansion of online traffic from technology oriented users
to users with mainstream demographic, (iii) the development of sophisticated
tools to search complex product categories such as apparel and (iv) the growing
adoption of high speed access of cable modems and DSL, which makes viewing large
numbers of photos much faster. Of course, there can be no assurance that such
expectations will prove to be correct or that they will have a positive effect
on our business.
Catalog Sales As A Predictor of Future Growth
In many respects, shopping for apparel online is similar to purchasing apparel
through a print catalog. In both cases, the tactile experience is absent from
the transaction and shoppers must make purchase decisions on the basis of a
photograph and a textual description. While we believe that sophisticated
database technology, personalization technology, and the interactivity of the
Web will ultimately make the Internet a far more compelling medium than
catalogs, we also believe that the success of apparel sales via catalogs is a
good predictor of the future success of apparel sales via the Internet.
In this regard, it may be worth noting that, based on a 2000 report by the
Direct Marketing Association, of the $67.7 billion of U.S. catalog sales to
consumers, over $11 billion is attributable to apparel and apparel related
items. The success of companies such as J.Crew and Lands' End is perhaps the
best evidence that people are prepared to purchase clothing and accessories
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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.
Marketing
We are seeking to position ourselves as the fashion consumer's store of first
resort, combining the service and selection found at high-end retailers with
savings typically available only at off-price stores or company-owned outlet
stores. We seek to incorporate this branding effort into all aspects of our
operations, including advertising, customer service, site experience, packaging
and delivery. We acquire new customers through multiple channels, including
traditional and online advertising, direct marketing and print advertising.
Merchandising
Our merchandising efforts are led by a team of buyers who hail from such
venerable retailers as Saks Fifth Avenue, Barneys, Brooks Brothers and Henri
Bendel. We buy merchandise directly from designers as well as from retailers and
other third party, indirect resources. Currently, we offer products from more
than 350 name brand designers, which we believe to be the widest selection of
designers available from any online store. We have established direct supply
relationships with over 200 such designers. We believe that we have been
successful in opening up over 200 direct supply relationships, in part because
we have devoted substantial resources to establishing Bluefly.com as a high-end
retail environment. In this regard, we are committed to displaying all of our
merchandise in an attractive manner, offering superior customer service and
gearing all aspects of our business towards creating a better channel for top
designers to liquidate their excess inventory.
For a number of reasons, we believe that our inventory risk can be lower than
that of traditional retailers:
o By centralizing our inventory, we believe that we will be able to
optimize inventory turns because we will not be forced to anticipate
sales by region or allocate merchandise between multiple locations;
o Our Web site captures a tremendous amount of customer data that we can
use to optimize our purchase of inventory;
o Unlike traditional brick-and-mortar retailers and catalogs, we can
change the pricing of our products almost instantaneously and can
price products based on supply and demand; and
o Unlike traditional brick-and-mortar retailers, which have a limited
amount of shelf space, significant rent payments and attendant sales
personnel costs, we hold inventory in a warehouse with a lower per
square foot rental charge, lower personnel costs and more shelf space.
These factors can create lower inventory carrying costs. Of course, there can be
no assurance that we will be able to leverage successfully any of these
potential advantages.
Warehousing And Fulfillment
When we receive an order, the information is transmitted to our third party
warehouse and fulfillment center located in Virginia, where the items included
in the order are picked, packed and shipped directly to the customer. Our
inventory database is updated on a real-time basis, allowing us to display on
our Web site only those styles, sizes and colors of product available for sale.
Our heavy focus on customer satisfaction is felt throughout our organization. In
December 2002, during our peak weeks of the holiday season, of the total orders
shipped, approximately 99% were shipped by the next business day from receipt of
the customer's order.
Customer Service
We believe that a high level of customer service and support is critical to
differentiating ourselves from traditional off-price retailers and maximizing
customer acquisition and retention efforts. Our customer service effort starts
with our Web site, which is designed to provide an intuitive shopping
experience. An easy to use help center is available on the Web site and is
designed to answer many of our customers' most frequently asked questions. For
customers who prefer e-mail or telephone assistance,
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customer service representatives are available seven days a week to provide
assistance. To insure that customers are satisfied with their shopping
experience, we generally allow returns for any reason within 90 days of the sale
for a full refund.
Technology
We have implemented a broad array of state-of-the-art technologies that
facilitate Web site management, complex database search functionality, customer
interaction and personalization, transaction processing, fulfillment and
customer service functionality. Such technologies include a combination of
proprietary technology and commercially available, licensed technology. To
address the critical issues of privacy and security on the Internet, we
incorporate, for transmission of confidential personal information between
customers and our Web server, Secure Socket Layer Technology ("SSL") such that
all data is transmitted via a 128-bit encrypted session.
In March 2002, we moved to another co-location facility 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 and allow for rapid scaling of
hardware and bandwidth to accommodate sudden increases in site traffic. See,
"Risk Factor - We Are Heavily Dependent on Third-Party Relationships."
In March 2002, we also entered into a Software License and Service Agreement
with Blue Martini, Inc. ("Blue Martini"). Beginning in March 2002, with the
assistance of consultants from Blue Martini, we developed an improved version of
our Web site based on Blue Martini Software. The new version of Bluefly's Web
site was launched in the third quarter of 2002 and replaced the older version.
The launch of the new Web site involved the use of significant internal and
external resources and was a main focus of management's attention during the
second half of 2002. Among the improvements to the new Web site, are the
addition of keyword search, a more powerful version of the size finder tool that
enables shoppers to quickly locate products in their exact size, and more robust
analytical tools that should allow Bluefly to understand and serve its customers
better. In accordance with generally accepted accounting principles, costs
related to the development of the new Web site have been capitalized and are
being amortized over a 24-month period.
We expect that the more robust tools provided by the upgraded Web site will
allow us to better create and manage, and measure the performance of, on-site
marketing promotions. In addition, we believe that the new Web site is more
stable and provides a more efficient platform from which to scale our technology
infrastructure should any future growth in our business dictate such a need. Of
course, there can be no assurance that the new Web site will have a positive
effect on our business. See, "Risk Factor - The Implementation Of A New Web site
May Place A Significant Strain On Our Management And Certain Key Personnel."
Competition
Electronic commerce generally, and, in particular, the online retail apparel and
fashion accessories market, is a new, dynamic, high-growth market. Our
competition for online customers comes from a variety of sources, including
existing land-based retailers such as Neiman Marcus, Saks Fifth Avenue, The Gap,
Nordstrom, and Macy's, which are using the Internet to expand their channels of
distribution, and less established companies such as eLuxury, which are building
their brands online. In addition, our competition for customers comes from
traditional direct marketers such as L.L. Bean, Lands' End, J.Crew and
Spiegel's, television direct marketers such as QVC, and land-based off-price
retail stores, such as T.J. Maxx, Marshalls, Filene's Basement and Loehmanns,
which may or may not use the Internet in the future to grow their customer base.
Many of these competitors have longer operating histories, significantly greater
resources, greater brand recognition and more firmly established supply
relationships. Moreover, we expect additional competitors to emerge in the
future.
We believe that the principal competitive factors in our market include: brand
recognition, merchandise selection, price, convenience, customer service, order
delivery performance, site features, and content. Although we believe that we
compare favorably with our competitors, we recognize that this market is
relatively new and is evolving rapidly, and, accordingly, there can be no
assurance that this will continue to be the case.
Intellectual Property
We rely on various intellectual property laws and contractual restrictions to
protect our proprietary rights in services and technology, including
confidentiality, invention assignment and nondisclosure agreements with
employees and contractors.
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Despite these precautions, it may be possible for a third party to copy or
otherwise obtain and use our intellectual property without our authorization. In
addition, we pursue the registration of our trademarks and service marks in the
U.S. and internationally and the registration of our domain name and variations
thereon. However, effective intellectual property protection may not be
available in every country in which the services are made available online.
We rely on technologies that we license from third parties. These licenses may
not continue to be available to us on commercially reasonable terms in the
future. As a result, we may be required to obtain substitute technology of lower
quality or at greater cost, which could materially adversely effect our
business, financial condition, results of operations and cash flows.
We do not believe that our business, sales policies or technologies infringe the
proprietary rights of third parties. However, third parties have in the past and
may in the future claim that our business, sales policies or technologies
infringe their rights. We expect that participants in the e-commerce market will
be increasingly subject to infringement claims as the number of services and
competitors in the industry grows. Any such claim, with or without merit, could
be time consuming, result in costly litigation or require us to enter into
royalty or licensing agreements. Such royalty or licensing agreements might not
be available on terms acceptable to us, or at all. As a result, any such claim
of infringement against us could have a material adverse effect upon our
business, financial condition, results of operations and cash flows.
Governmental Approvals And Regulations
We are not currently subject to direct regulation by any domestic or foreign
governmental agency, other than regulations applicable to businesses generally,
and laws or regulations directly applicable to online commerce. We are not aware
of any permits or licenses that are required in order for us, generally, to sell
apparel and fashion accessories on the Internet, although licenses are sometimes
required to sell products made from specific materials. In addition, permits or
licenses may be required from international, federal, state or local
governmental authorities to operate or to sell certain other products on the
Internet in the future. No assurances can be given that we will be able to
obtain such permits or licenses. We may be required to comply with future
national and/or international legislation and statutes regarding conducting
commerce on the Internet in all or specific countries throughout the world. No
assurance can be made that we will be able to comply with such legislation or
statutes. Our Internet operations are not currently impacted by federal, state,
local and foreign environmental protection laws and regulations.
Employees
As of March 17, 2003, we had 80 full-time employees and three part-time
employees, as compared to 59 full-time and seven part-time employees as of March
15, 2002. None of our employees are represented by a labor union and we consider
our relations with our employees to be good.
Risk Factors
Forward-Looking Statements and Associated Risks. This Annual Report contains
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements include, without limitation, any statement that may
predict, forecast, indicate, or imply future results, performance, or
achievements, and may contain the words "believe," "anticipate," "expect,"
"estimate," "project," "will be," "will continue," "will likely result," or
words or phrases of similar meaning. Forward-looking statements involve risks
and uncertainties that may cause actual results to differ materially from the
forward-looking statements ("Cautionary Statements"). The risks and
uncertainties include, but are not limited to those matters addressed herein
under "Risk Factors." All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on the Company's behalf are
expressly qualified in their entirety by the Cautionary Statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of their dates. The Company undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
We Have A History Of Losses And Expect That Losses Will Continue In The Future.
As of December 31, 2002, we had an accumulated deficit of $85,742,000. We
incurred net losses of $6,479,000, $25,006,000 and $21,109,000 for the years
ended December 31, 2002, 2001 and 2000, respectively. We have incurred
substantial costs to develop our Web site and infrastructure. In order to expand
our business, we intend to invest in sales, marketing, merchandising,
operations, information systems, site development and additional personnel to
support these activities. We therefore expect to continue to incur substantial
operating losses for the foreseeable future. Our ability to become profitable
depends on our ability to generate and
8
sustain substantially higher net sales while maintaining reasonable expense
levels, both of which are uncertain. If we do achieve profitability, we cannot
be certain that we would be able to sustain or increase profitability on a
quarterly or annual basis in the future.
We Are Making A Substantial Investment In Our Business And May Need To Raise
Additional Funds. We may need additional financing to effect our business plan.
Soros provided us with approximately $3 million of additional capital in January
and March 2003 as well as a commitment to provide us with up to $1 million in
additional financing. See "Recent Developments." We anticipate, based on current
plans and assumptions relating to our operations, that the proceeds from prior
financings together with the 2003 Standby Commitment, the Loan Facility,
existing resources and cash generated from operations, should be sufficient to
satisfy our cash requirements through the end of fiscal 2003. However, we may
seek additional debt and/or equity financing in order to maximize the growth of
our business. The environment for raising investment capital by companies in the
Internet industry has been difficult and there can be no assurance that
additional financing or other capital will be available upon terms acceptable to
us, or at all. The inability to obtain additional financing, if capital is
needed, would have a material adverse effect on our business, prospects,
financial condition and results of operations. See, "Risk Factors - Certain
Events Could Result In Significant Dilution Of Your Ownership Of Common Stock."
We Have Granted Liens On Substantially All Of Our Assets. Under the terms of the
Loan Facility, Rosenthal provides us with certain credit accommodations,
including loans and advances, factor-to-factor guarantees, letters of credit in
favor of suppliers or factors and purchases of payables owed to our suppliers.
Pursuant to the Loan Facility, we gave a first priority lien to Rosenthal on
substantially all of our assets, including our cash balances. In connection with
the Loan Facility, we entered into a Reimbursement Agreement with Soros pursuant
to which Soros agreed to guarantee a portion of the Loan Facility, we agreed to
reimburse Soros for any amounts it paid to Rosenthal pursuant to such guarantee
and we granted Soros a subordinated lien on substantially all of our assets,
including our cash balances, in order to secure our reimbursement obligations.
If we were unable to meet certain obligations under the Loan Facility, Rosenthal
and Soros would be entitled, among other things, to sell the assets on which
liens have been granted to satisfy our obligations under the Loan Facility and
the Reimbursement Agreement. In addition, to the extent that Soros is required
to make any payments to Rosenthal under its guarantee of our obligations under
the Loan Facility, we would be required to issue an additional warrant to Soros,
which could result in a significant dilution of your ownership of our common
stock. See, "Risk Factors -- Certain Events Could Result In Significant Dilution
Of Your Ownership Of Our Common Stock."
We May Not Generate Sufficient Cash Flow To Pay Our Indebtedness Under The Loan
Facility. Our ability to make payments under the Loan Facility will depend on
our ability to generate cash in the future. To a certain extent, this is subject
to general economic, financial, competitive, legislative, regulatory and other
factors that are beyond our control. We cannot assure you that our business will
generate sufficient cash flow from operations to enable us to pay our
indebtedness under the Loan Facility throughout the term of the agreement. A
default under the Loan Facility could require us to issue an additional warrant
to Soros, which could result in a significant dilution of your ownership of our
common stock. See, "Risk Factors - We Have Granted Liens On Substantially All Of
Our Assets" and "- Certain Events Could Result In Significant Dilution of Your
Ownership of Our Common Stock."
We May Not Generate Sufficient Cash Flow To Comply With Our Financial Covenants
Under The Loan Facility. Our ability to comply with our financial covenants
under the Loan Facility depends on our ability to generate cash in the future.
To a certain extent, this is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control. We cannot assure you that our business will generate sufficient cash
flow from operations to enable us to comply with our financial covenants under
the Loan Facility. In December 2002, the tangible net worth requirement under
the Loan Facility was increased to $6.0 million from $1.5 million, and the
working capital requirement was increased to $5.0 million from $3.5 million. In
March 2003, the tangible net worth requirement was reduced to $5 million from $6
million, the working capital requirement was decreased to $4 million from $5
million and the definition of working capital was amended (effective as of
December 19, 2002) to exclude short-term debt held by affiliates. As of December
31, 2002, our tangible net worth was approximately $9.1 million and our working
capital was approximately $6.7 million (excluding the $2.0 million in short-term
debt held by Soros as of such date). A default under the Loan Facility could
require us to issue an additional warrant to Soros, which could result in a
significant dilution of your ownership of our common stock. See, "Risk Factors -
We Have Granted Liens On Substantially All Of Our Assets" and "- Certain Events
Could Result In Significant Dilution Of Your Ownership Of Our Common Stock."
9
Certain Events Could Result In Significant Dilution Of Your Ownership Of Our
Common Stock. As of March 17, 2003, there were outstanding options to purchase
9,525,412 shares of Common Stock issued under our 1997 and 2000 Stock Option
Plans, warrants to purchase 981,644 shares issued to Soros, and additional
warrants and options to purchase an aggregate of 137,500 shares of Common Stock.
The exercise of our outstanding options and warrants would dilute the then
existing stockholders' percentage ownership of our stock, and any sales in the
public market of Common Stock underlying such securities could adversely affect
prevailing market price of the Common Stock.
Moreover, if Rosenthal draws on the Soros Guarantee during the continuance of a
default under the Loan Facility, or if at any time the total amount outstanding
under the Loan Facility exceeds 90% of the undrawn amount of the Soros
Guarantee, we will be required to issue to Soros another warrant (each a
"Contingent Warrant") to purchase a number of shares of Common Stock equal to
the quotient of (a) any amounts drawn under the Soros Guarantee and (b) 75% of
the average closing price of our Common Stock on the ten days preceding the date
of issuance of such warrant. Each Contingent Warrant will be exercisable for ten
years from the date of issuance at an exercise price equal to 75% of the average
closing price of our Common Stock on the ten days after the date of issuance.
Stockholders could also experience significant dilution as the result of the
conversion of, and/or anti-dilution adjustments to, our Series A, B, C and D
Preferred Stock. As of March 17, 2003: (i) the 460,000 shares of Series A
Preferred Stock outstanding were convertible into an aggregate of 3,931,624
shares of Common Stock (plus any shares of Common Stock issued upon conversion
in payment of any accrued and unpaid dividends on the Series A Preferred Stock);
(ii) the 8,889,414 shares of Series B Preferred Stock outstanding were
convertible into an aggregate of 27,370,038 shares of Common Stock (plus any
shares of Common Stock issued upon conversion in payment of any accrued and
unpaid dividends on the Series B Preferred Stock); (iii) the 1,000 shares of the
Series C Preferred Stock outstanding were convertible into an aggregate of
1,315,788 shares of Common Stock (plus any shares of Common Stock issued upon
conversion in payment of any accrued and unpaid dividends on the Series C
Preferred Stock) and; (iv) the 7,136.548 shares of Series D Preferred Stock
outstanding were convertible into an aggregate of 9,390,194 shares of Common
Stock (plus any shares of Common Stock issued upon conversion in payment of any
accrued and unpaid dividends on the Series D Preferred Stock.) The Series B
Preferred Stock, the Series C Preferred Stock and the Series D Preferred Stock
contain anti-dilution provisions pursuant to which, subject to certain
exceptions, in the event that we issue or sell Common Stock or new securities
convertible into Common Stock in the future for less than $0.76 per share of
Common Stock, the number of shares of Common Stock to be issued upon the
conversion of the Series B Preferred Stock, the Series C Preferred Stock and the
Series D Preferred Stock would be increased to a number equal to the face amount
of the Series B, C and D Preferred Stock divided by the price at which such
Common Stock or other new securities are sold.
Finally, stockholders could be subject to significant dilution to the extent
that we raise additional equity financing, as a result of both the issuance of
additional equity securities and the anti-dilution provisions of the Series B, C
and D Preferred Stock described above. See "Certain Relationships and Related
Transactions" and "Recent Developments."
Our Limited Operating History Makes Forecasting Our Revenues Difficult. Having
launched Bluefly.com in September 1998, we have a limited operating history and
it is therefore difficult for us to forecast our revenues accurately. We base
our current and future expense levels and operating plans on expected revenues,
but in the short term a significant portion of our expenses are fixed.
Accordingly, we may be unable to adjust our spending in a timely manner to
compensate for any unexpected revenue shortfall. This inability could have a
negative impact on our operating results and cash flow in a given quarter, and
could also cause our operating results in some future quarter to fall below the
expectations of securities analysts and investors. In that event, the trading
price of our common stock could decline significantly.
We Purchase Product From Some Indirect Supply Sources, Which Increases Our Risk
of Litigation. We purchase merchandise both directly from brand owners and
indirectly from retailers and third party distributors. The purchase of
merchandise from parties other than the brand owners increases the risk that we
will mistakenly purchase and sell non-authentic or damaged goods. We have taken
steps to ensure that we sell only authentic, high quality name brand products
and to avoid selling any non-authentic or damaged goods. While we believe that
our procedures are effective, the possibility for error exists and therefore we
face potential liability under applicable laws, regulations, agreements and
orders for the sale of non-authentic or damaged goods. Moreover, any claims by a
brand owner, with or without merit, could be time consuming, result in costly
litigation, generate bad publicity for us, and have a material adverse impact on
our business, prospects, financial condition and results of operations.
10
Brand Owners Could Establish Procedures To Limit Our Ability To Purchase
Products Indirectly. Brand owners have implemented, and are likely to continue
to implement, procedures to limit or control off-price retailers' ability to
purchase products indirectly. In addition, several brand owners in the U.S. have
distinctive legal rights rendering them the only legal importer of their
respective brands into the U.S. If we acquire such product indirectly from
distributors and other third parties who may not have complied with applicable
customs laws and regulations, such goods could be subject to seizure from our
inventory by U.S. Customs Service, and the importer may have a civil action for
damages against us. See, "Risk Factors - We Do Not Have Long Term Contracts With
Our Vendors And Therefore The Availability Of Merchandise Is At Risk."
Our Growth May Place A Significant Strain On Our Management And Administrative
Resources And Cause Disruptions In Our Business. Our historical growth has
placed, and any further growth is likely to continue to place, a significant
strain on our management and administrative resources. Any failure to manage
growth effectively could have a material adverse effect on our business,
financial condition and results of operations. To be successful, we must
continue to implement information management systems and improve our operating,
administrative, financial and accounting systems and controls. We will also need
to train new employees and maintain close coordination among our executive,
accounting, finance, marketing, merchandising, operations and technology
functions. Moreover, our business is dependent upon our ability to expand our
third-party fulfillment operations, customer service operations, technology
infrastructure, and inventory levels to accommodate increases in demand,
particularly during the peak holiday selling season. Our planned expansion
efforts in these areas could cause disruptions in our business. Any failure to
expand our third-party fulfillment operations, customer service operations,
technology infrastructure or inventory levels at the pace needed to support
customer demand could have a material adverse effect on our business, prospects,
financial condition and results of operations.
The Implementation Of The New Web Site May Place A Significant Strain On Our
Management And Certain Key Personnel. During 2002, we entered into a Software
License and Service Agreement with Blue Martini. Beginning in March 2002, with
the assistance of consultants from Blue Martini, we developed an improved
version of our Web site based on Blue Martini Software. In the third quarter
2002 we launched the new Web site. We have begun, and will need to continue, to
develop new internal procedures to operate the new Web site and to make the most
effective use of the improvements available on the new Web site. As with any new
technology, we may experience instability and performance issues in the
foreseeable future. While we believe that this project was a wise investment in
our future, the return on this investment is not certain and the time and
attention required to build out and learn how to best use the new Web site could
result in our inability to undertake certain initiatives that could have a more
immediate, positive impact on our business and/or distract us from other areas
of our business that require the time and attention of those involved in the
continued development of the new Web site.
We Are Heavily Dependent On Third-Party Relationships. We are heavily dependent
upon our relationships with our fulfillment operations provider and Web hosting
provider, delivery companies like UPS and the United States Postal Service, and
credit card processing companies such as Paymentech and Cybersource to service
our customers' needs. To the extent that there is a slowdown in mail service or
package delivery services, whether as a result of labor difficulties, terrorist
activity or otherwise, our business, prospects, financial condition and results
of operations could be adversely impacted. We began using a new fulfillment
operations provider in August 2000 and a new Web hosting facility in March 2002
and have a limited operating history with each of these service providers. The
failure of our fulfillment operations provider, credit card processors or Web
hosting provider to properly perform their services for us could have a material
adverse effect on our business, prospects, financial condition and results of
operations. Our business is also generally dependent upon our ability to obtain
the services of other persons and entities necessary for the development and
maintenance of our business. If we fail to obtain the services of any such
person or entities upon which we are dependent on satisfactory terms, or we are
unable to replace such relationship, it would have a material adverse impact on
our business, prospects, financial condition and results of operations.
We Are In Competition With Companies Much Larger Than Ourselves. Electronic
commerce generally and, in particular, the online retail apparel and fashion
accessories market, is a new, dynamic, high-growth market and is rapidly
changing and intensely competitive. Our competition for customers comes from a
variety of sources including:
o existing land-based, full price retailers, such as Neiman Marcus, Saks
Fifth Avenue, Nordstrom, The Gap, and Macy's, which are using the
Internet to expand their channels of distribution;
o less established companies, such as eLuxury, which are building their
brands online;
o traditional direct marketers, such as L.L. Bean, Lands' End, J. Crew
and Spiegel's;
11
o television direct marketers such as QVC; and
o traditional off-price retail stores such as T.J. Maxx, Marshalls,
Ross, Filene's Basement and Loehmanns, which may or may not use the
Internet to grow their customer base.
We expect competition in our industry to intensify and believe that the list of
our competitors will grow. Many of our competitors and potential competitors
have longer operating histories, significantly greater resources, greater brand
name recognition and more firmly established supply relationships. We believe
that the principal competitive factors in our market include:
o brand recognition;
o merchandise selection;
o price;
o convenience;
o customer service;
o order delivery performance;
o site features; and
o content.
Although we believe we compare favorably with our competitors, we recognize that
this market is relatively new and is evolving rapidly. There can be no assurance
that we will be able to compete successfully against competitors and future
competitors, and competitive pressures faced by us may have a material adverse
effect on our business, prospects, financial condition and results of
operations.
We Do Not Have Long Term Contracts With Our Vendors And Therefore The
Availability Of Merchandise Is At Risk. Although we believe we can establish and
maintain relationships with brand owners and third-party distributors of
merchandise who will offer competitive sources of merchandise, there can be no
assurance that we will be able to obtain the quantity, selection or brand
quality of items that we believe is necessary. We have no agreements controlling
the long-term availability of merchandise or the continuation of particular
pricing practices. Our contracts with suppliers typically do not restrict such
suppliers from selling products to other buyers. There can be no assurance that
our current suppliers will continue to sell products to us on current terms or
that we will be able to establish new or otherwise extend current supply
relationships to ensure product acquisitions in a timely and efficient manner
and on acceptable commercial terms. Our ability to develop and maintain
relationships with reputable suppliers and obtain high quality merchandise is
critical to our success. If we are unable to develop and maintain relationships
with suppliers that would allow us to obtain a sufficient amount and variety of
quality merchandise on acceptable commercial terms, our business, prospects,
financial condition and results of operation would be materially adversely
affected. See, "Risk Factors - Brand Owners Could Establish Procedures to Limit
Our Ability to Purchase Products Indirectly."
We Need To Establish Brand Name Recognition. We believe that establishing,
maintaining and enhancing our brand is a critical aspect of our efforts to
attract and expand our online traffic. The number of Internet sites that offer
competing services, many of which already have well established brands in online
services or the retail apparel industry generally, increases the importance of
establishing and maintaining brand name recognition. Promotion of Bluefly.com
will depend largely on our success in providing a high quality online experience
supported by a high level of customer service, which cannot be assured. In
addition, to attract and retain online users, and to promote and maintain
Bluefly.com in response to competitive pressures, we may find it necessary to
increase substantially our advertising and marketing expenditures. If we are
unable to provide high quality online services or customer support, or otherwise
fail to promote and maintain Bluefly.com, or if we incur excessive expenses in
an attempt to promote and maintain Bluefly.com, our business, prospects,
financial condition and results of operations would be materially adversely
affected.
We May Not Be Able To Implement Our Growth Strategy. Our future success, and in
particular our revenues and operating results, depend upon our ability to
successfully execute several key aspects of our business plan. We must
continually increase
12
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 our online site who
purchase products, or through some combination thereof. We must also achieve a
high level of repeat purchasers and/or new customers and gross margin. In
addition, we must deliver a high level of customer service and compelling
content. There can be no assurance that we will be effective in increasing:
o the dollar volume of products purchased through Bluefly.com;
o traffic to Bluefly.com;
o the percentage of visitors who purchase products;
o the gross profit;
o the number of repeat purchasers; or
o the number of new customers.
The failure to do one or more of the foregoing would likely have a material
adverse effect on our business, prospects, financial condition and results of
operations.
Due To Our Use Of The Internet And Web Servers As Presentation Vehicles, Our
Success Depends On Continued Development And Maintenance Of These Technologies
By Other Companies. 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 technologies that provide access to the Internet and
improve the performance of Internet services. To the extent that the Internet
and other online services, such as AOL, continue to experience significant
growth in their 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 have sufficient bandwidth or other
technical features to support the increased 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 or if the infrastructure for the Internet and other
online services does not effectively support growth that may occur, our
business, prospects, financial condition and results of operations would be
materially adversely affected.
Unexpected Changes In Fashion Trends Can Affect Our Business. Fashion trends can
change rapidly, and our business is sensitive to such changes. There can be no
assurance that we will accurately anticipate shifts in fashion trends and adjust
our merchandise mix to appeal to changing consumer tastes in a timely manner. If
we misjudge the market for our products or are unsuccessful in responding to
changes in fashion trends or in market demand, we could experience insufficient
or excess inventory levels or higher markdowns, either of which would have a
material adverse effect on our business, financial condition and results of
operations.
We Will Be Subject To Cyclical Variations In The Apparel And E-Commerce Markets.
The apparel industry historically has been subject to substantial cyclical
variations. Furthermore Internet usage slows down in the summer months. We and
other apparel vendors rely on the expenditure of discretionary income for most,
if not all, sales. Recently, the retail apparel market has suffered a downturn
in sales requiring many retailers to significantly reduce prices and discount
merchandise. The current downturn and any future downturn, whether real or
perceived, in economic conditions or prospects could adversely affect consumer
spending habits and, therefore, have a material adverse effect on our business,
prospects, financial condition and results of operations. Alternatively, any
upturn, whether real or perceived, in economic conditions or prospects could
adversely impact our ability to acquire merchandise and, therefore, have a
material adverse effect on our business, prospects, financial condition and
results of operations, as our supply of merchandise is dependent on the
inability of designers and retailers to sell their merchandise in full-price
venues. See, "Risk Factors - We Do Not Have Long Term Contracts With Our Vendors
And Therefore The Availability of Merchandise Is At Risk."
There Can Be No Assurance That Our Technology Systems Will Be Able To Handle
Increased Traffic. A key element of our strategy is to generate a high volume of
traffic on, and use of, Bluefly.com. Accordingly, the satisfactory performance,
13
reliability and availability of Bluefly.com, transaction processing systems and
network infrastructure are critical to our reputation and our ability to attract
and retain customers, as well as maintain adequate customer service levels. Our
revenues will depend on the number of visitors who shop on Bluefly.com and the
volume of orders we can handle. Unavailability of our Web site or reduced order
fulfillment performance would reduce the volume of goods sold and could also
adversely affect consumer perception of our brand name. We may experience
periodic system interruptions from time to time. If there is a substantial
increase in the volume of traffic on Bluefly.com or the number of orders placed
by customers, we will be required to expand and upgrade further our technology,
transaction processing systems and network infrastructure. There can be no
assurance that we will be able to accurately project the rate or timing of
increases, if any, in the use of Bluefly.com or expand and upgrade our systems
and infrastructure to accommodate such increases on a timely basis.
We Operate In A Rapidly Changing, Highly Competitive Market And We May Not Have
Adequate Resources To Compete Successfully. To remain competitive, we must
continue to enhance and improve the responsiveness, functionality and features
of Bluefly.com. The online commerce industry is characterized by:
o rapid technological change;
o evolving user and customer requirements and preferences;
o frequent new product, service and technology introductions; and
o the emergence of new industry standards and practices.
Each of these characteristics could render the technology we use obsolete. Our
future success will depend, in part, on our ability to:
o license leading technologies useful in our business;
o enhance our Web site;
o develop new services and technologies that address the increasingly
sophisticated and varied needs of our prospective customers; and
o respond to technological advances and emerging industry standards and
practices on a cost effective and timely basis.
If we are unable, for technical, legal, financial or other reasons, to adapt in
a timely manner in response to changing market conditions or customer
requirements, our business, prospects, financial condition and results of
operations would be materially adversely affected.
Our Business Will Suffer If Online Apparel Commerce Is Not Widely Accepted. Our
future revenues and any future profits are 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. We rely, and will
continue to rely, on consumers who have historically used traditional means of
commerce to purchase merchandise. Our success depends on consumer acceptance and
utilization of the Internet as a place to shop for apparel.
We May Be Subject To Higher Return Rates. We recognize that purchases of apparel
and fashion accessories over the Internet may be subject to higher return rates
than traditional store bought merchandise. We have established a liberal return
policy in order to accommodate our customers and overcome any hesitancy they may
have with shopping via the Internet. If return rates are higher than expected,
our business, prospects, financial condition and results of operations could be
materially adversely affected.
Our Success Is Largely Dependent Upon Our Executive Personnel. We believe our
success will depend to a significant extent on the efforts and abilities of our
executive personnel. We have entered into employment agreements with each of our
executive officers, all of which expire on June 30, 2005. We maintain a
$1,200,000 key person life insurance policy on our
14
Chief Executive Officer. The loss of the services of any of our executive
officers could have a material adverse effect on our business, prospects,
financial condition and results of operations.
Our Success Is Dependent Upon Our Ability To Attract New Key Personnel. Our
operations will also depend to a great extent on our ability to attract new key
personnel with relevant experience and retain existing key personnel in the
future. The market for qualified personnel is extremely competitive. Our failure
to attract additional qualified employees could have a material adverse effect
on our business, prospects, financial condition and results of operations.
There Are Inherent Risks Involved In Expanding Our Operations. We may choose to
expand our operations by developing new Web sites, promoting new or
complementary products or sales formats, expanding the breadth and depth of
products and services offered, expanding our market presence through
relationships with third parties, adopting non-Internet based channels for
distributing our products, or consummating acquisitions or investments.
Expansion of our operations in this manner would require significant additional
expenses and development, operations and editorial resources and would strain
our management, financial and operational resources. There can be no assurance
that we would be able to expand our efforts and operations in a cost-effective
or timely manner or that any such efforts would increase overall market
acceptance. Furthermore, any new business or Web site that is not favorably
received by consumer or trade customers could damage our reputation.
We May Be Liable For Infringing The Intellectual Property Rights Of Others.
Third parties may assert infringement claims against us. From time to time in
the ordinary course of business we have been, and we expect to continue to be,
subject to claims alleging infringement of the trademarks and other intellectual
property rights of third parties. These claims and any resulting litigation, if
it occurs, could subject us to significant liability for damages. In addition,
even if we prevail, litigation could be time-consuming and expensive and could
result in the diversion of our time and attention. Any claims from third parties
may also result in limitations on our ability to use the intellectual property
subject to these claims unless we are able to enter into agreements with the
third parties making these claims.
We May Be Liable for Product Liability Claims. The Company sells products
manufactured by third parties, some of which may be defective. If any product
that we sell were to cause physical injury or injury to property, the injured
party or parties could bring claims against us as the retailer of the product.
Our insurance coverage may not be adequate to cover every claim that could be
asserted. If a successful claim were brought against the Company in excess of
our insurance coverage, it could have a material adverse effect on our business,
prospects, financial condition and results of operations. Unsuccessful claims
could result in the expenditure of funds and management time and could have a
negative impact on our business.
We Cannot Guarantee The Protection Of Our Intellectual Property. Our
intellectual property is critical to our success, and we rely on trademark,
copyright, domain names and trade secret protection to protect our proprietary
rights. Third parties may infringe or misappropriate our trademarks or other
proprietary rights, which could have a material adverse effect on our business,
prospects, results of operations or financial condition. While we enter into
confidentiality agreements with our employees, consultants and strategic
partners and generally control access to and distribution of our proprietary
information, the steps we have taken to protect our proprietary rights may not
prevent misappropriation. We are pursuing registration of various trademarks,
service marks and domain names in the United States and abroad. Effective
trademark, copyright and trade secret protection may not be available in every
country, and there can be no assurance that the United States or foreign
jurisdictions will afford us any protection for our intellectual property. There
also can be no assurance that any of our intellectual property rights will not
be challenged, invalidated or circumvented. In addition, we do not know whether
we will be able to defend our proprietary rights since the validity,
enforceability and scope of protection of proprietary rights in Internet-related
industries is uncertain and still evolving. Moreover, even to the extent that we
are successful in defending our rights, we could incur substantial costs in
doing so.
If The Co-Location Facility Where Substantially All Of Our Computer And
Communications Hardware Are Located Fails, Our Business, Results of Operations
and Financial Condition Will Be Harmed. The Company's ability to receive and
fulfill orders successfully and provide high-quality customer service, largely
depends on the efficient and uninterrupted operation of our computer and
communications hardware systems. Substantially all of our computer and
communications hardware is located at a single co-location facility in Secaucus,
New Jersey. Our systems and operations are vulnerable to damage or interruption
from fire, flood, power loss, telecommunications failure, terrorist attacks,
acts of war, break-ins, earthquake and similar events. We do not presently have
redundant systems in multiple locations or a formal disaster recovery plan and
our business interruption insurance may be insufficient to compensate us for
losses that may occur. The occurrence of
15
any of the foregoing could have a material adverse effect on our business,
prospects, financial condition and results of operations.
Security Breaches To Our Service Could Harm Our Business. A fundamental
requirement for online commerce and communications is the secure transmission of
confidential information over public networks. We rely 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, we 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 we use to protect
customer transaction and personal data contained in our customer database. A
party who is able to circumvent our security measures could misappropriate
proprietary information or cause interruptions in our operations. If any such
compromise of our security were to occur, it could have a material adverse
effect on our reputation, business, prospects, results of operations and
financial condition. In addition, we may be required to expend significant
capital and other resources to protect against such security breaches or to
alleviate problems caused by such breaches.
Our Business Could Be Harmed By Consumers' Concerns About The Security of
Transactions Over the Internet. Concerns over the security of transactions
conducted on the Internet and commercial online services, the increase in
identity theft and the privacy of users may also inhibit the growth of the
Internet and commercial online services, especially as a means of conducting
commercial transactions.
We Face Legal Uncertainties Relating To The Internet In General and To Our
Industry In Particular And May Become Subject To Costly Government Regulation.
We are not currently subject to direct regulation by any domestic or foreign
governmental agency, other than regulations applicable to businesses generally,
and laws or regulations directly applicable to online commerce. However, it is
possible that laws and regulations may be adopted that would apply to the
Internet and other online services. Furthermore, the growth and development of
the market for online commerce may prompt calls for more stringent consumer
protection laws that may impose additional burdens on those companies conducting
business online. The adoption of any additional laws or regulations may decrease
the growth of the Internet or other online services, which could, in turn,
decrease the demand for our products and services and increase our cost of doing
business, or otherwise have a material adverse effect on our business,
prospects, financial condition and results of operations.
The applicability to the Internet of existing laws in various jurisdictions
governing issues such as property ownership, sales and other taxes, libel and
personal privacy is uncertain and may take years to resolve. Any such new
legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to our business, or the
application of existing laws and regulations to the Internet and online commerce
could have a material adverse effect on our business, prospects, financial
condition and results of operations. If we were alleged to have violated
federal, state or foreign, civil or criminal law, even if we could successfully
defend such claims, it could have a material adverse effect on our business,
prospects, financial condition and results of operations.
We Face Uncertainties Relating To Sales And Other Taxes. We are not currently
required to pay sales or other similar taxes in respect of shipments of goods
into states other than Virginia, New Jersey and New York. However, one or more
states may seek to impose sales tax collection obligations on out-of-state
companies such as our company that engage in online commerce. In addition, any
new operation in states outside Virginia, New Jersey and New York could subject
shipments into such states to state sales taxes under current or future laws. A
successful assertion by one or more states or any foreign country that the sale
of merchandise by us is subject to sales or other taxes, could have a material
adverse effect on our business, prospects, financial condition and results of
operations.
Soros Owns A Majority Of Our Stock. As of March 17, 2003, through its holdings
of Common Stock, as well as Preferred Stock, and warrants convertible into
Common Stock, Soros beneficially owned, in the aggregate, approximately 89.7% of
our Common Stock. The holders of Preferred Stock vote on an "as-converted" basis
with the holders of the Common Stock. By virtue of their ownership of Preferred
Stock, Soros has the right to appoint two designees to our Board of Directors,
each of whom has seven votes on any matter voted upon by our Board of Directors.
Collectively, these two designees have 14 out of 19 possible votes on each
matter voted upon by our Board of Directors. In addition, we are required to
obtain the approval of holders of Preferred Stock prior to taking certain
actions. The holders of the Preferred Stock have certain pre-emptive rights to
participate in future equity financings and certain anti-dilution rights which
could result in the issuance of additional securities to such holders. In view
of their large percentage of ownership and rights as the holders of Preferred
Stock, Soros effectively
16
controls our management and policies, such as the election of our directors, the
appointment of new management and the approval of any other action requiring the
approval of our stockholders, including any amendments to our certificate of
incorporation, a sale of all or substantially all of our assets or a merger. The
draw down of funds by the Company under the 2003 Standby Commitment will result
in additional issuances of equity securities to Soros that will increase Soros'
ownership interest. See, "Risk Factors - Certain Events Could Result In
Significant Dilution of Your Ownership Of Common Stock" and "Recent
Developments."
Change Of Control Covenant And Liquidation Preference of Preferred Stock. We
have agreed with Soros, that for so long as any shares of their Preferred Stock
are outstanding, we will not take any action to approve or otherwise facilitate
any merger, consolidation or change of control, unless provisions have been made
for the holders of such Preferred Stock to receive from the acquirer an amount
in cash equal to the respective aggregate liquidation preferences of such
Preferred Stock. The aggregate liquidation preference of the Preferred Stock is
equal to the greater of (i) Approximately $55,000,000 (plus any accrued and
unpaid dividends) and (ii) the amount that the holders of shares of Preferred
Stock would receive if they were to convert such shares of Common Stock
immediately prior to liquidation.
The Holders Of Our Common Stock May Be Adversely Affected By The Rights Of
Holders Of Preferred Stock That May Be Issued In The Future. Our certificate of
incorporation and by-laws, as amended, contain certain provisions that may
delay, defer or prevent a takeover. Our Board of Directors has the authority to
issue up to 15,487,250 additional shares of preferred stock, and to determine
the price, rights, preferences and restrictions, including voting rights, of
those shares, without any further vote or action by the stockholders.
Accordingly, our Board of Directors is empowered, without approval of the
holders of Common Stock, to issue preferred stock, for any reason and at any
time, with such rates of dividends, redemption provisions, liquidation
preferences, voting rights, conversion privileges and other characteristics as
they 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.
Item 2. Properties
We lease approximately 26,000 square feet of office space in New York City. The
property is in good operating condition. The lease expires in 2010. Our total
lease payments for the current space during 2002 were approximately $412,000.
Item 3. Legal Proceedings
We currently, and from time to time, are involved in litigation incidental to
the conduct of our business. However, we are not party to any other lawsuit or
proceeding which in the opinion of management is likely to have a material
adverse effect on us.
Item 4. Submission Of Matters To A Vote Of Security Holders
On November 18, 2002, we held our annual meeting of stockholders. At the
meeting, our stockholders voted for five directors, electing E. Kenneth Seiff,
Josephine Esquivel, Alan Kane, Martin Miller and Robert Stevens as members of
our board of directors. In addition, our stockholders voted in favor of
proposals to (i) approve an amendment to our certificate of incorporation, which
increased the number of shares of common stock that we are authorized to issue
to 92,000,000 from 40,000,000 (the "Charter Amendment"), (ii) approve an
amendment to our 1997 Stock Option Plan, which increased the number of shares of
common stock that could be the subject of options granted under the plan to
12,200,000 from 5,400,000 (the "Plan Amendment"), (iii) approve the conversion
provisions of our Series 2002 Convertible Preferred Stock, (iv) approve the
conversion provisions of our Series C Convertible Preferred Stock and (v) ratify
the appointment of PricewaterhouseCoopers LLP ("PwC") as our independent
accountants for the fiscal year ending December 31, 2002. The results of the
voting were as follows:
Proposal Votes For Votes Withheld
-------- --------- --------------
Election of E. Kenneth Seiff 41,998,000 37,760
Election of Josephine Esquivel 41,998,000 37,760
Election of Alan Kane 41,998,000 37,760
17
Election of Martin Miller 41,998,000 37,760
Election of Robert Stevens 41,998,000 37,760
Votes For Votes Against Abstentions and
--------- ------------- ---------------
Broker Non-Votes
----------------
Approval of Charter Amendment 41,888,492 130,423 21,600
Approval of Plan Amendment 38,352,090 152,536 3,537,409
Approval of Conversion Provisions 37,303,414 114,753 3,544,243
of Series 2002 Preferred Stock
Approval of Conversion Provisions 37,303,314 116,133 3,542,963
of Series C Preferred Stock
Ratification of PwC as 42,005,118 19,842 10,900
Independent Accountants
In addition to the directors elected at the meeting, Neal Moszkowski and David
Wassong were elected to the Board of Directors as the designees of the Series A
Preferred Stock and the Series B Preferred Stock, respectively.
PART II
Item 5. Market For Common Equity And Related Stockholder Matters
Market Information
The Company's common stock, par value $.01 per share ("Common Stock"), is quoted
on The Nasdaq SmallCap Market and the Boston Stock Exchange. The following table
sets forth the high and low closing sale prices for the Common Stock for the
periods indicated, as reported by the Nasdaq SmallCap Market:
Fiscal 2002 High Low
----------- ----- -----
First Quarter $2.25 $1.30
Second Quarter $1.94 $1.15
Third Quarter $1.29 $0.55
Fourth Quarter $1.75 $0.63
Fiscal 2001 High Low
----------- ----- -----
First Quarter $2.41 $0.50
Second Quarter $1.82 $0.93
Third Quarter $1.09 $0.51
Fourth Quarter $2.65 $0.62
On March 11, 2003, we were advised by Nasdaq that we were no longer in
compliance with Nasdaq's continued listing requirements because shares of our
common stock have closed at a per share price of less than $1.00 for at least 30
days and that, if we are unable to achieve compliance with the Listing
Requirements by September 8, 2003, the Nasdaq Staff will determine whether we
meet certain of the initial listing criteria of the Nasdaq SmallCap Market. In
the event that we meet such initial listing criteria, we will be granted an
additional 180-day grace period to regain compliance. In order to regain
compliance, shares of our common stock would need to close at a price of $1.00
or more for at least ten consecutive trading days. In the event that we do not
regain compliance within the requisite time period,
18
we intend to appeal any delisting. However, no assurance can be provided that
any such appeal will be successful. The failure to maintain listing on the
Nasdaq SmallCap Market may have an adverse effect on the price and/or liquidity
of our common stock.
Holders
As of March 17, 2003, there were approximately 107 holders of record of the
Common Stock. We believe that there were more than 5,000 beneficial holders of
the Common Stock as of such date.
Dividends
We have never declared or paid cash dividends on our Common Stock. We currently
intend to retain any future earnings to finance future growth and, therefore, do
not anticipate paying any cash dividends in the foreseeable future.
Securities Authorized for Issuance Under Equity Compensation Plans
Equity Compensation Plan Information (as of December 31, 2002)
- ----------------------------------------------------------------------------------------------------------------------
Plan Category Number of securities to be Weighted-average exercise Number of securities
issued upon exercise of price of outstanding remaining available for
outstanding options, options, warrants and future issuance under
warrants and rights(a) rights (b) equity compensation plans
(excluding securities
reflected in column (a))
(c)
- ----------------------------------------------------------------------------------------------------------------------
Equity compensation plans 7,273,912 $2.45 4,926,088
approved by security holders
- ----------------------------------------------------------------------------------------------------------------------
Equity compensation plans not 1,234,500 $1.25 265,500
approved by security holders
- ----------------------------------------------------------------------------------------------------------------------
Total 8,508,412 $2.27 5,191,588
- ----------------------------------------------------------------------------------------------------------------------
The following is a summary of the material provisions of the Bluefly, Inc. 2000
Plan Stock Option Plan (the "2000 Plan"), our only equity compensation plan that
has not been approved by our stockholders.
Eligibility. Key employees of the Company who are not officers or directors of
the Company and its affiliates and consultants to the Company are eligible to be
granted options.
Administration of the 2000 Plan. The Option Plan/Compensation Committee
administers the 2000 Plan. The Option Plan/Compensation Committee has the full
power and authority, subject to the provisions of the 2000 Plan, to designate
participants, grant options and determine the terms of all options. The 2000
Plan provides that no participant may be granted options to purchase more than
1,000,000 shares of Common Stock in a fiscal year. The Option Plan/Compensation
Committee is required to make adjustments with respect to options granted under
the 2000 Plan in order to prevent dilution or expansion of the rights of any
holder. The 2000 Plan requires that the Option Plan/Compensation Committee be
composed of at least two directors.
Amendment. The 2000 Plan may be wholly or partially amended or otherwise
modified, suspended or terminated at any time or from time to time by the Board
of Directors, but no amendment without the approval of our stockholders shall be
made if stockholder approval would be required under any law or rule of any
governmental authority, stock exchange or other self-regulatory organization to
which we are subject. Neither the amendment, suspension or termination of the
2000 Plan shall, without the consent of the holder of an option under the 2000
Plan, alter or impair any rights or obligations under any option theretofore
granted.
19
Options Issued Under 2000 Plan. The Option Plan/Compensation Committee
determines the term and exercise price of each option under the 2000 Plan and
the time or times at which such option may be exercised in whole or in part, and
the method or methods by which, and the form or forms in which, payment of the
exercise price may be paid.
Upon the exercise of an option under the 2000 Plan, the option holder shall pay
us the exercise price plus the amount of the required federal and state
withholding taxes, if any. The 2000 Plan also allows participants to elect to
have shares withheld upon exercise for the payment of withholding taxes.
The unexercised portion of any option granted to a key employee under the 2000
Plan generally will be terminated (i) 30 days after the date on which the
optionee's employment is terminated for any reason other than (a) Cause (as
defined in the 2000 Plan), (b) retirement or mental or physical disability, or
(c) death; (ii) immediately upon the termination of the optionee's employment
for Cause; (iii) three months after the date on which the optionee's employment
is terminated by reason of retirement or mental or physical disability; or (iv)
(A) 12 months after the date on which the optionee's employment is terminated by
reason of his death or (B) three months after the date on which the optionee
shall die if such death occurs during the three-month period following the
termination of the optionee's employment by reason of retirement or mental or
physical disability. The Option Plan/Compensation Committee has in the past, and
may in the future, extend the period of time during which an optionee may
exercise options following the termination of his or her employment.
Under the 2000 Plan, an option generally may not be transferred by the optionee
other than by will or by the laws of descent and distribution. During the
lifetime of an optionee, an option under the 2000 Plan may be exercised only by
the optionee or, in certain instances, by the optionee's guardian or legal
representative, if any.
Recent Sale Of Unregistered Securities
In March 2003, we sold 4,027.123 shares of Series D Preferred Stock to Soros for
an aggregate purchase price of approximately $4 million, with Soros retaining
approximately $2 million of such proceeds as payment in full of our obligations
under the demand promissory notes issued to Soros in September 2002.
Additionally, Soros converted the promissory notes issued to it in January 2003
and all of its Series 2002 Preferred Stock into 3,199.425 shares of Series D
Preferred Stock. The Series D Preferred Stock is convertible, at any time and
from time to time, at the option of the holder, into Common Stock at the rate of
one to 1,315.79. The conversion price of the Series D Preferred Stock is subject
to an anti-dilution adjustment, pursuant to which, subject to certain
exceptions, to the extent that the Company issues Common Stock or securities
convertible into Common Stock at a price per share less than the Series D
Preferred Stock conversion price in the future, the conversion price of the
Series D Preferred Stock would be decreased so that it would equal the
conversion price of the new security or the price at which shares of Common
Stock are sold, as the case may be. However, to the extent required by the rules
of the Nasdaq SmallCap Market or any other national securities exchange or
quotation system upon which the Common Stock may be listed from time to time,
until such time as such conversion provisions are approved by our stockholders,
the total number of shares of Common Stock issuable upon conversion of the
Series D Preferred Stock may not exceed 2,204,803 shares (which represents
19.99% of our currently outstanding Common Stock), regardless of any adjustment
to the Series D Preferred Stock conversion price. See "Certain Relationships and
Related Transactions."
Also in March 2003, in exchange for Soros' agreement to maintain the Soros
Guarantee until November 15, 2004, we issued to Soros warrants to purchase
25,000 shares of our Common Stock at an exercise price of $0.78 per share,
exercisable at any time prior to March 17, 2013. See, "Certain Relationships and
Related Transactions."
On January 28, 2003 we sold $1,000,000 of demand convertible promissory notes
and warrants to purchase 25,000 shares of our Common Stock to Soros for an
aggregate purchase price of $1,000,000. The promissory notes, and any interest
accrued thereon, were convertible into equity securities that issued in any
subsequent round of financing, at the holder's option, at a price equal to the
lowest price per share paid by any investor in such subsequent round of
financing. The warrants are exercisable at any time on or prior to January 28,
2007 at an exercise price of $1.12 per share. As part of the March 2003
Financing, the January 2003 promissory notes were converted into Series D
Preferred Stock. See, "Certain Relationships and Related Transactions."
Each such sale was exempt from registration under the Securities Act of 1933, as
amended (the "Act"), pursuant to Section 4(2) of the Act, as it was a
transaction not involving a public offering.
20
Item 6. Selected Financial Data
The following selected consolidated financial data should be read in conjunction
with the consolidated financial statements and the notes thereto and the
information contained in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations". Historical results are not
necessarily indicative of future results. All data in thousands except share
data:
Year Ended December 31,
-----------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Statement of Operations Data:
Net sales $ 30,606 $ 22,950 $ 17,512 $ 5,109 $243
Cost of sales 20,571 15,954 14,018 4,554 297
-------- -------- -------- ------- ----
Gross profit (loss) 10,035 6,996 3,494 555 (54)
Selling, marketing and fulfillment expenses 11,493 13,765 18,797 10,794 1,118
General and administrative expenses 4,740 5,098 5,296 3,450 1,166
Internet business start up costs - - - - 332
-------- -------- -------- ------- ----
Total operating expenses 16,233 18,863 24,093 14,244 2,616
Operating loss from continuing operations (6,198) (11,867) (20,599) (13,689) (2,670)
Interest (expense)/other income (281) (13,139) (510) 430 142
Loss from continuing operations (6,479) (25,006) (21,109) (13,257) (2,478)
Net loss (6,479) (25,006) (21,109) (13,194) (3,656)
Basic and diluted loss from continuing $(2.44) $(3.41) $(4.45) $(2.83) $(0.89)
operations per share
Basic and diluted loss per share: $(2.44) $(3.41) $(4.45) $(2.82) $(1.32)
Basic and diluted weighted average number of
common shares outstanding available to common 9,927,027 8,185,065 4,924,906 4,802,249 2,770,869
stockholders
Balance Sheet Data:
As of December 31,
------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Cash $1,749 $ 5,419 $ 5,350 $ 7,934 $2,830
Inventories, net 10,868 6,388 7,294 7,020 429
Other current assets 1,473 1,671 1,614 739 601
Total assets 16,909 14,826 15,778 16,768 7,189
Current liabilities 7,386 6,242 6,041 6,182 733
Short-term convertible notes payable, net - - 19,698 - -
Long term liabilities 2,439 182 - - -
Redeemable preferred stock - - 11,088 10,286 -
Shareholders' equity (deficit) 7,084 8,402 (21,049) 300 6,392
21
Item 7. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
This discussion and analysis of our financial condition and results of
operations contains forward-looking statements that involve risks and
uncertainties. We have based these forward-looking statements on our current
expectations and projections of future events. However, our actual results could
differ materially from those discussed herein as a result of the risks that we
face, including but not limited to those risks stated in "Risk Factors," or
faulty assumptions on our part. In addition, the following discussion should be
read in conjunction with the audited consolidated financial statements and the
related notes thereto included elsewhere in this report.
Overview
We are a leading Internet retailer of designer fashions and home accessories at
outlet store prices. We sell over 350 brands of designer apparel, accessories
and home products at discounts up to 75% off retail value. We were incorporated
in 1991 under the laws of the state of New York as Pivot Corporation. In 1994,
we changed our name to Pivot Rules, Inc. We had our initial public offering in
May of 1997. In June 1998, we discontinued our golf sportswear line to devote
our time and resources to building Bluefly.com, a Web site to sell end of season
and excess inventory of apparel and accessories. We launched the Web site in
September 1998 and changed our name to Bluefly, Inc. in October 1998. In
February 2001, we changed our state of incorporation from New York to Delaware.
We have grown rapidly since launching our Web site in September 1998. Our net
sales increased over 33% to $30,606,000 for the year ended December 31, 2002
from $22,950,000 for the year ended December 31, 2001. In the fourth quarter of
2002, our net sales increased by approximately 25% to $9,856,000 from $7,906,000
in the fourth quarter of 2001. Our net loss for the year ended December 31, 2002
decreased by 74% to $6,479,000 from $25,006,000 for the year ended 2001,
although our net loss for the fourth quarter of 2002 increased by 20% to
$1,660,000 from $1,379,000 in the fourth quarter of 2001.
We believe that the launch of our new Web site on September 15, 2002 was the
most significant factor in the increase in net and operating losses for the
fourth quarter of 2002. Our costs were increased during the fourth quarter of
2002 as a result of the amortization of our investment in the new Web site
(which prior to the launch of the Web site were treated as a capitalized cost),
as well as additional technology and operational expenses incurred in connection
with resolving the post-launch problems we encountered in September and October
of 2002 and increased customer service costs associated with our efforts to
minimize the impact of these problems on our customers. Costs were also
increased as a result of the addition of 16 employees during 2002, four of whom
joined in the fourth quarter of 2002. In addition, while we believe that many of
the post-launch Web site problems were resolved in the second half of October,
we believe that the problems that customers faced in September and October had a
lingering effect throughout the fourth quarter of 2002, and, as a result, we
lost sales during the fourth quarter. However, we do not believe that those
problems will have any material adverse effect on our results in 2003.
We incurred a net loss of $6,479,000, for the year ended December 31, 2002 as
compared to $25,006,000 for the year ended December 31, 2001. This decrease in
net loss is primarily the result of the following: (i) the 2001 results include
a non-cash charge of $13,007,000 related to the conversion of debt and
redeemable preferred equity into permanent equity and (ii) an increase in gross
margin percentage in 2002 of over 2 percentage points (from 30.5% to 32.8%) and
a reduction in selling, marketing and fulfillment and general and administrative
expenses as a percentage of net sales of 22 percentage points (from 59.9% to
37.5%) and 6 percentage points (from 22.2% to 15.5%), respectively. At December
31, 2002 we had an accumulated deficit of $85,742,000. The net losses and
accumulated deficit resulted primarily from the costs associated with developing
and marketing our Web site and building our infrastructure. In order to expand
our business, we intend to invest in sales, marketing, merchandising,
operations, information systems, site development and additional personnel to
support these activities. We therefore expect to continue to incur substantial
operating losses for the foreseeable future. Although we have experienced
revenue growth in recent years, this growth may not be sustainable and therefore
should not be considered indicative of future performance.
Significant Accounting Policies
Management Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the reporting
22
periods. The most significant estimates and assumptions relate to the adequacy
of the allowances for returns and recoverability of inventories. Actual amounts
could differ significantly from these estimates.
Revenue Recognition
Gross sales consists primarily of revenue from product sales and shipping and
handling revenue on our Web site, and is net of promotional discounts. Revenue
is recognized when goods are received by our customers, which occurs only after
credit card authorization. Net sales represent gross sales, less provisions for
returns, credit card chargebacks, and adjustments for uncollected sales taxes.
Provision for Returns and Doubtful Accounts
We generally permit returns for any reason within 90 days of the sale.
Accordingly, we establish a reserve for estimated future returns and bad debt at
the time of shipment based primarily on historical data. However, our future
return and bad debt rates could differ significantly from historical patterns,
and, to the extent that these rates increase significantly, it could have a
material adverse effect on our business, prospects, financial condition and
results of operations.
Inventory Valuation
Inventories, which consist of finished goods, are stated at the lower of cost or
market value. Cost is determined by the first-in, first-out ("FIFO") method. We
review our inventory levels in order to identify slow-moving merchandise and use
markdowns to clear merchandise. Markdowns may be used if inventory exceeds
customer demand for reasons of style, changes in customer preference or lack of
consumer acceptance of certain items, or if it is determined that the inventory
in stock will not sell at its currently marked price. Such markdowns may have an
adverse impact on earnings, depending on the extent of the markdowns and amount
of inventory affected.
Deferred Tax Valuation Allowance
We assessed the future taxable income and have determined that a 100% deferred
tax valuation allowance is deemed necessary. In the event that we were to
determine that we would be able to realize our deferred tax asset, an adjustment
to the deferred tax valuation allowance would increase income in the period such
determination is made.
Results Of Operations
The following table sets forth our statement of operations data, for the years
ended December 31st. All data is in thousands except as indicated below:
2002 2001 2000
---- ---- ----
As a % of As a % of As a % of
Net Sales Net Sales Net Sales
Net sales $ 30,606 100.0% $ 22,950 100.0% $ 17,512 100.0%
Cost of sales 20,571 67.2% 15,954 69.5% 14,018 80.0%
-------- -------- --------
Gross profit 10,035 32.8% 6,996 30.5% 3,494 20.0%
Selling, marketing and fulfillment expenses 11,493 37.5% 13,765 59.9% 18,797 107.3%
General and administrative expenses 4,740 15.5% 5,098 22.2% 5,296 30.2%
-------- -------- --------
Total operating expenses 16,233 53.0% 18,863 82.1% 24,093 137.5%
Operating loss (6,198) (20.2)% (11,867) (51.6)% (20,599) (117.6)%
Interest (expense) other income (281) (0.9)% (13,139) (57.3)% (510) (2.9)%
Net loss $(6,479) (21.1)% $(25,006) (108.9)% $(21,109) (120.5)%
23
We also measure and evaluate ourselves against certain other key operational
metrics. The following table sets forth our actual results based on these other
metrics for the years ended December 31st, as indicated below:
2002 2001 2000
---- ---- ----
Average Order Size (including shipping & handling) $167.20 $143.71 $111.03
Average Order Size Per New Customer (including shipping & handling) $149.74 $127.41 $98.77
Average Order Size Per Repeat Customer (including shipping & handling) $177.31 $156.85 $128.67
Total Customers 388,700 287,637 185,240
Customers Added during the Year 101,063 102,397 130,359
Revenue from Repeat Customers as a % of total Revenue 67% 60% 48%
Customer Acquisition Costs $17.04 $39.32 $71.18
We define a "repeat customer" as a person who has bought more than once from us
during their lifetime. We calculate customer acquisition cost by dividing total
advertising expenditures (excluding staff related costs) during a given time
period by total new customers added during that period. All measures of the
number of customers are based on unique email addresses.
For The Year Ended December 31, 2002 Compared To The Year Ended December 31,
2001
Net sales: Gross sales for the year ended December 31, 2002 increased by
approximately 40% to $47,491,000, from $33,833,000 for the year ended December
31, 2001. For the year ended December 31, 2002, we recorded a provision for
returns and credit card chargebacks and other discounts of $16,885,000, or
approximately 36% of gross sales. For the year ended December 31, 2001, the
provision for returns and credit card chargebacks and other discounts was
$10,883,000, or approximately 32% of gross sales. The increase in this provision
as a percentage of gross sales was related primarily to an increase in the
return rate. We believe that the increase in return rate was partly the result
of a shift in our merchandise mix towards certain product categories that
historically have generated higher return rates, but also higher gross margins
and average order size. Accordingly, we believe that this shift has had a
positive impact on the per order economics.
After the necessary provisions for returns, credit card chargebacks and
adjustments for uncollected sales taxes, our net sales for the year ended
December 31, 2002 were $30,606,000. This represents an increase of approximately
33% compared to the year ended December 31, 2001, in which net sales totaled
$22,950,000. The growth in net sales was largely driven by the increases in
average order size and sales to repeat customers. We believe that the decrease
in the amount of advertising that we do that is directed at potential customers
contributed to the fact that the number of new customers acquired in 2002
decreased by 1% from that of 2001. We believe that the increase in sales to
repeat customers (67% of total sales in 2002, compared to 60% of total sales in
2001) was the result of increased marketing efforts to repeat customers.
Cost of sales: Cost of sales consists of the cost of product sold to customers,
in-bound and out-bound shipping costs, inventory reserves, commissions and
packing materials. Cost of sales for the year ended December 31, 2002 totaled
$20,571,000, resulting in gross margin of approximately 33%. Cost of sales for
year ended December 30, 2001 totaled $15,954,000, resulting in gross margin of
30.5%. Gross profit increased by 43%, to $10,035,000 for the year ended December
31, 2002 compared to $6,996,000 for the year ended December 31, 2001. The
increase in gross margin resulted primarily from improved product margins.
Selling, marketing and fulfillment expenses: Selling, marketing and fulfillment
expenses decreased by approximately 16.5% for the year 2002 compared to the year
ended 2001. As a percentage of net sales, our selling, marketing and fulfillment
expenses decreased to 37.5% in 2002 from approximately 60% in 2001. The decrease
resulted primarily from a more targeted marketing strategy aimed at our existing
customer base and the cost savings we derived from our move to a new web hosting
facility. Selling, marketing and fulfillment expenses were comprised of the
following:
Year Ended Year Ended Percentage Difference
December 31, 2002 December 31, 2001 increase (decrease)
----------------- ----------------- -------------------
Marketing $2,328,000 $4,858,000 (52.1%)
Operating 4,532,000 3,939,000 15.0%
Technology 3,552,000 3,733,000 (4.8%)
Creative Services 1,081,000 1,235,000 (12.5%)
----------- ----------- -------
$11,493,000 $13,765,000 (16.5%)
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Marketing expenses include expenses related to online and print advertising,
direct mail campaigns as well as staff related costs. The decrease in marketing
expenses of approximately 52% was largely related to a shift in our customer
acquisition strategy. Consistent with our streamlined operating plan announced
in June 2001, we significantly reduced our advertising expenditures and focused
more on email and direct mail programs. Primarily as a result of this shift, we
were able to decrease our customer acquisition costs for the year ended December
31, 2002 by approximately 57% to $17.04 per new customer from $39.32 per new
customer for the year ended December 31, 2001. However, in the event that we
attempt to accelerate revenue growth, it may be necessary to utilize less cost
efficient methods of customer acquisition, and accordingly there can be no
assurance that customer acquisition costs will not increase in the future.
Operating expenses include all costs related to inventory management,
fulfillment, customer service, and credit card processing. Operating expenses
increased in 2002 by approximately 15% compared to 2001 as a result of variable
costs associated with the increased sales volume (e.g., picking and packing
orders, processing returns and credit card fees).
Technology expenses consist primarily of Web site hosting and staff related
costs. For year ended December 31, 2002, technology expenses decreased by
approximately 5% compared to the year ended December 31, 2001. This reduction
was primarily related to a reduction in our Web site hosting costs in connection
with our move to a new web hosting facility. These cost savings were offset by
increased amortized expenses resulting from the launch of the new Site.
Effective September 15, 2002 (the launch date of the new Web site) costs that
were previously being capitalized are now being amortized over the estimated
useful life of the new Web site.
Creative services expenses include expenses related to our photo studio, image