UNITED STATES
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, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ______ to ______
Commission File Number: 001-14498
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BLUEFLY, INC.
(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: Common Stock, par
value $.01 per share
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 February 24, 2005, there were 15,329,097 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 June 30, 2004, based
upon the last sale price of such equity reported on the National Associated of
Securities Dealers Automated Quotation SmallCap Market, was approximately
$9,933,000.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Bluefly, Inc. is a leading Internet retailer that sells over 350 brands of
designer apparel, accessories and home products at discounts up to 75% off
retail value. During 2004, we offered over 27,000 different styles for sale in
categories such as men's, women's and accessories as well as house and home
accessories. We launched the Bluefly.com Web site (the "Web site") in September
1998. Since its inception, www.bluefly.com has served over 640,000 customers and
shipped to over 20 countries.
Our common stock is listed on the Nasdaq SmallCap Market under the symbol "BFLY"
and on the Boston Stock Exchange under the symbol "BFL" and we are incorporated
in Delaware. 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
In February 2005, we extended the maturity dates on the Convertible Promissory
Notes issued to affiliates of Soros Private Equity Partners, LLC (collectively,
"Soros") that collectively own a majority of our capital stock in July and
October 2003 (the "Notes"). The maturity dates of the Notes were each extended
for one year, from May 1, 2005 to May 1, 2006. Also in February 2005, we renewed
our credit facility (the "Loan Facility") with Rosenthal & Rosenthal, Inc.
("Rosenthal") for an additional year, from March 30, 2005 to March 30, 2006.
BUSINESS STRATEGY
Our goal is to offer our customers the best designer brands, hottest fashion
trends and superior values. We strive to offer the same types of on trend and
in-season designer merchandise as are sold in luxury department stores such as
Saks Fifth Avenue and Bergdorf Goodman at discounts normally found only at
outlet stores and off-price stores such as T.J. Maxx and Ross Stores. We are
able to acquire our products at significantly lower prices than a luxury
department store (and pass these discounts on to our customers) because we
purchase our inventory slightly later in the season than a typical full price
retailer, at a time when vendors consider it to be excess inventory. Similarly,
we are able to offer an upscale shopping experience not available at off-price
stores or outlet malls because of our merchandise selection and the presentation
and product search capabilities offered by our Web site.
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 the best designer brands and the most current trends. In doing so, we hope
to support our vendors' brands, rather than diluting them as traditional off-
price channels do.
We do not believe that we can accomplish these goals without using the Internet
as a platform. The direct marketing of products that are available in limited
quantities and sizes, and that are not replenishable, 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
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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 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 using a real-time inventory database, we can create a
personalized shopping environment and allow our customers to search for the
products that specifically interest them and 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
merchandise offering 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. According to the ComScore Networks, online sales grew in 2004 by 26%
over the $93.2 billion spent in 2003. During the holiday shopping season alone,
consumers spent $23.6 billion, a 28% increase over the $18.3 billion spent in
the previous year, according to ComScore. 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.
Forrester Research predicts that online sales of apparel will top $13.8 billion
in 2004, which makes it the single largest category of merchandise sold online.
According to Forrester, 12% of all apparel sales will be made online by 2010, up
from 7% in 2004. 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.
MARKETING
Our marketing efforts are focused both on acquiring new customers and retaining
existing customers. During the past several years, we have acquired new
customers primarily through online advertising, word-of-mouth, sweepstakes and
our affiliate program. Although we have not allocated significant resources to
branding or to more traditional advertising channels such as print during this
time, we may begin to do so as we seek to more aggressively promote the growth
of our business. A significant portion of our sales to existing customers are
driven by our customer emails, which highlight new promotions and products and
provide special previews to customers who have asked to be included in our email
list. In addition, we believe that our sales to existing customers are driven by
all aspects of our customer experience, including our Web site design,
packaging, delivery and customer service.
MERCHANDISING
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. 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.
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During 2004, we re-focused our merchandising strategy to offer more in-season
merchandise and to cover the latest trends, while continuing to offer a premium
selection of brands. As a result of this merchandise strategy, we were able to
increase our gross margins to their highest levels ever - 37.5%, from 29.9%,
32.8% and 30.5% in 2003, 2002 and 2001, respectively.
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.
We focus on customer satisfaction throughout our organization. In December 2004,
during our peak weeks of the holiday season, the vast majority of our orders
were shipped within one 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, customer service
representatives are available seven days a week to provide assistance. We
utilize customer representatives from a third party call center that has a team
dedicated to our business. We also maintain a team of premiere representatives
in our New York office, who provide special services and assist in the training
and management of the other representatives. 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. The computer and
communications equipment on which our Web site is hosted are currently located
at a single third party co-location facility in New Jersey. During the first
half of 2005 we intend to move to a new co-location facility owned by a
different third party located in New York.
COMPETITION
Electronic commerce generally, and, in particular, the online retail apparel and
fashion accessories market, is a relatively 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, Bergdorf
Goodman, The Gap, Nordstrom, and Macy's that are using the Internet to expand
their channels of distribution, established Internet companies such as
Amazon.com, Overstock.com and ebay.com and less established companies such as
eLuxury and Yoox. In addition, our competition for customers comes from
traditional direct marketers such as L.L. Bean, Lands' End, and J.Crew, designer
brands that may attempt to sell their products directly to consumers through the
Internet 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 and site features. 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.
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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. 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 February 18, 2005, we had 73 full-time employees and 4 part-time
employees, as compared to 89 full-time and 3 part-time employees as of February
18, 2004. None of our employees are represented by a labor union and we consider
our relations with our employees to be good.
RISK FACTORS
We Have A History Of Losses And Expect That Losses Will Continue In The Future.
As of December 31, 2004, we had an accumulated deficit of $96,127,000. We
incurred net losses of $3,791,000, $6,369,000 and $6,479,000 for the years ended
December 31, 2004, 2003 and 2002, 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 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
and accelerate our customer acquisition. The environment for raising investment
5
capital 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. In the event that we are unable to obtain additional financing, if needed,
we could be forced to decrease expenses that we believe are necessary for us to
realize on our long-term prospects for growth and profitability and/or liquidate
inventory in order to generate cash. Moreover, any additional equity financing
that we may raise could result in significant dilution of the existing holders
of common stock. See "Risk Factors - Certain Events Could Result In Significant
Dilution Of Your Ownership Of Common Stock."
Our Lenders Have Liens On Substantially All Of Our Assets And Could Foreclose In
The Event That We Default Under Our Loan Facility. 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. If we default
under the Loan Facility, Rosenthal would be entitled, among other things, to
foreclose on our assets in order to satisfy our obligations under the Loan
Facility.
Our Ability To Comply With Our Financial Covenants And Pay Our Indebtedness
Under Our Loan Facility Is Dependent Upon Meeting Our Business Plan. We are
required to pay interest under our Loan Facility on a monthly basis. In
addition, we are required, under the facility, to maintain working capital of at
least $6.0 million and net tangible worth of at least $7.0 million as of the end
of each fiscal year. Assuming we meet our business plan, we will satisfy these
covenants. To a certain extent, however, our ability to meet our business plan,
is subject to general economic, financial, competitive, legislative, regulatory
and other factors that are beyond our control, and therefore we cannot assure
you that based on our business plan we will generate sufficient cash flow from
operations to enable us to pay our indebtedness under the Loan Facility and
maintain compliance with our net working capital covenant throughout the term of
the agreement or that we will be able to maintain compliance with the net worth
covenant. If we fall short of our business plan and are unable to raise
additional capital, we could default under our Loan Facility. In the event of a
default under the Loan Facility, Rosenthal would be entitled, among other
things, to foreclose on our assets (whether inside or outside a bankruptcy
proceeding) in order to satisfy our obligations under the Loan Facility. See
"Risk Factors - Our Lenders Have Liens On Substantially All Of Our Assets And
Could Foreclose In The Event That We Default Under Our Loan Facility."
Certain Events Could Result In Significant Dilution Of Your Ownership Of Our
Common Stock. 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, the potential conversion of the
convertible promissory notes described below and the anti-dilution provisions of
our Series B, C, D and E preferred stock described below, which provide for the
issuance of additional securities to the holders thereof, under certain
circumstances, to the extent that the Preferred Stock is converted at any time
after a sale of Common Stock at less than $0.76 per share.
Moreover, as of February 18, 2005, there were outstanding options to purchase
8,750,680 shares of our Common Stock issued under our Stock Option Plans,
warrants to purchase 981,644 shares of our Common Stock issued to Soros, and
additional warrants and options to purchase 723,301 shares of our Common Stock.
In addition, as of such date, our outstanding Preferred Stock was convertible
into an aggregate of 43,323,430 shares of our Common Stock (plus any shares of
our Common Stock issued upon conversion in payment of any accrued and unpaid
dividends). The exercise of our outstanding options and warrants and/or the
conversion of our outstanding Preferred Stock would dilute the then existing
stockholders' percentage ownership of our common stock, and any sales in the
public market of our Common Stock underlying such securities, could adversely
affect prevailing market price of our Common Stock. In the event that all of the
securities described above were converted to Common Stock, the holders of the
Common Stock immediately prior to such conversion would own approximately 22% of
the outstanding Common Stock immediately after such conversion, excluding the
effect of accrued dividends on Preferred Stock.
As described above, our Series B, C, D and E Preferred Stock contain
anti-dilution provisions pursuant to which, subject to certain exceptions, in
the event that we issue or sell our Common Stock or new securities convertible
into our Common Stock in the future for less than $0.76 per share, the number of
shares of our Common Stock to be issued upon the conversion of such Preferred
Stock would be increased to a number equal to the face amount of such Preferred
Stock divided by the price at which such Common Stock or other new securities
are sold.
In addition, Soros owns $4 million of convertible promissory notes issued by us
that bear interest at the rate of 12% per annum and are convertible, at Soros'
option, into our equity securities sold in any subsequent round of financing at
a price that is equal
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to the lowest price per share accepted by any investor (including Soros or any
of its affiliates) in such subsequent round of financing.
Soros Owns A Majority Of Our Stock And Therefore Effectively Controls Our
Management And Policies. As of February 18, 2005, through its holdings of our
common stock, as well as our preferred stock, and warrants convertible into our
common stock, Soros beneficially owned, in the aggregate, approximately 84% of
our common stock. The holders of our preferred stock vote on an "as converted"
basis with the holders of our common stock. By virtue of its ownership of our
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 our preferred stock prior to taking certain
actions. The holders of our preferred stock have certain pre-emptive rights to
participate in future equity financings and certain anti-dilution rights that
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 our
preferred stock, Soros effectively 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. In addition, Soros has demand
registration rights with respect to the shares of our common stock that it
beneficially owns. Any decision by Soros to exercise such registration rights
and to sell a significant amount of our shares in the public market could have
an adverse effect on the price of our common stock. See "Risk Factors - Certain
Events Could Result In Significant Dilution of Your Ownership Of Common Stock."
If We Are Not Accurate In Forecasting Our Revenues, We May Be Unable To Adjust
Our Operating Plans In A Timely Manner. Because our business has not yet reached
a mature stage, it is 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 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. In addition any such unexpected
revenue shortfall could significantly affect our short-term cash flow and our
net worth, which could require us to seek additional financing and/or cause a
default under our credit facility. See "Risk Factors - We Are Making A
Substantial Investment In Our Business And May Need To Raise Additional Funds"
and "Risk Factors -Our Ability To Comply With Our Financial Covenants And Pay
Our Indebtedness Under Our Loan Facility Is Dependent Upon Meeting Our Business
Plan."
Unexpected Changes In Fashion Trends Could Cause Us To Have Either Excess or
Insufficient Inventory. 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. In the first three quarters of 2003, the retail apparel
market experienced sluggish growth, requiring many retailers to significantly
reduce prices and discount merchandise. We lowered our prices during the first
quarter of 2003, in part, as the result of this sluggish growth, and maintained
lower pricing levels in the second and third quarters of 2003 in order to
generate cash from excess out-of-season inventory. While the retail apparel
market improved modestly during the fourth quarter of 2003 and the 2004 calendar
year, any future decrease in growth rates or 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 revenue,
cash flow and results of operations. Alternatively, any improvement, 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 The Majority Of Our
Vendors And Therefore The Availability of Merchandise Is At Risk."
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We Purchase Product From Some Indirect Supply Sources, Which Increases Our Risk
of Litigation Involving The Sale Of Non-Authentic Or Damaged Goods. 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, which could result in potential liability under
applicable laws, regulations, agreements and orders. 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.
If Our Co-Location Facility, Third Party Distribution Center Or Third Party Call
Center Fails, Our Business Could Be Interrupted For A Significant Period Of
Time. Our 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 and
fulfillment center. Substantially all of our computer and communications
hardware is located at a single co-location facility owned by a third party in
New Jersey, and during the first half of 2005, we intend to move to a new
co-location facility owned by a different third party in New York. Primarily all
of our inventory is held, and our customer orders are filled, at a third party
distribution center located in Virginia, and a large majority of our customer
service representatives are employees of a third party call center in Ohio.
These 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. Accordingly, a
failure at one of these facilities could interrupt our business for a
significant period of time, and our business interruption insurance may be
insufficient to compensate us for losses that may occur. Any such interruption
would negatively impact our sales, results of operations and cash flows for the
period in which it occurred, and could have a long-term adverse effect on our
relationships with our customers and suppliers.
Security Breaches To Our Systems And Database Could Cause Interruptions to Our
Business And Impact Our Reputation With Customers, And We May Incur Significant
Expenses to Protect Against Such Breaches. A fundamental requirement for online
commerce and communications is the secure transmission of confidential
information over public networks. 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 with customers, thereby affecting
our long-term growth prospects. 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.
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
The Majority of 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. 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. Any failure to implement such systems and training, and to maintain
such coordination, could affect our ability to plan for, and react quickly to,
changes in our business and, accordingly, could cause an adverse impact on our
cash flow and results of operations in the periods during which such changes
occur. In addition, as our workforce grows, our exposure to potential employment
liability issues increases, and we will need to continue to improve our human
resources functions in order to protect against such increased exposure.
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.
8
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
cash flow and results of operations during the period in which such failures
occur and could have a long-term effect on our reputation with our customers.
We Are Heavily Dependent On Third-Party Relationships, And Failures By A Third
Party Could Cause Interruptions To Our Business. We are heavily dependent upon
our relationships with our fulfillment operations provider, third party call
center 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 cash flow and results
of operations would be negatively impacted during such slowdown, and the results
of such slowdown could have a long-term negative effect on our reputation with
our customers. The failure of our fulfillment operations provider, third party
call center, credit card processors or Web hosting provider to properly perform
their services for us could cause similar effects. 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,
we would have to expend additional resources to develop such capabilities
ourselves, which could have a material adverse impact on our short-term cash
flow and results of operations and our long-term prospects.
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:
. existing land-based, full price retailers, such as Neiman Marcus, Saks
Fifth Avenue, Bergdorf Goodman, Nordstrom, The Gap, and Macy's that
are using the Internet to expand their channels of distribution;
. less established online companies, such as eLuxury and Yoox;
. internet sites such as Amazon.com, Overstock.com and ebay.com
. traditional direct marketers, such as L.L. Bean, Lands' End and J.
Crew; and
. 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:
. brand recognition;
. merchandise selection;
. price;
. convenience;
. customer service;
. order delivery performance; and
. site features.
There can be no assurance that we will be able to compete successfully against
competitors and future competitors, and competitive pressures faced by us could
force us to increase expenses and/or decrease our prices at some point in the
future.
We Do Not Have Long Term Contracts With Our Vendors And Therefore The
Availability Of Merchandise Is At Risk. We have few agreements controlling the
long-term availability of merchandise or the continuation of particular pricing
9
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 ability to satisfy our
customer's needs, and therefore our long-term growth prospects, would be
materially adversely affected. See "Risk Factors - Brand Owners Could Establish
Procedures to Limit Our Ability to Purchase Products Indirectly."
We Need To Further Establish Brand Name Recognition. We believe that further
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 long-term growth
prospects, would be materially adversely affected.
There Can Be No Assurance That Our Technology Systems Will Be Able To Handle
Increased Traffic; Implementation Of Changes To Web Site. A key element of our
strategy is to generate a high volume of traffic on, and use of, Bluefly.com.
Accordingly, the satisfactory performance, reliability and availability of
Bluefly.com, transaction processing systems and network infrastructure are
critical to 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. In order to remain competitive, we must
continue to enhance and improve the responsiveness, functionality and features
of Bluefly.com, which is particularly challenging given the rapid rate at which
new technologies, customer preferences and expectations and industry standards
and practices are evolving in the online commerce industry. Accordingly, we
redesign and enhance various functions on our Web site on a regular basis, and
we may experience instability and performance issues as a result of these
changes. In addition, during the first half of 2005, we plan to move to a new
co-location facility and in connection with the move will need to rebuild our
systems with new hardware at the new co-location facility. This move may also
result in short-term instability and performance issues, although in the long
term we believe that it will provide us a more robust and stable environment.
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, cash flows 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. In particular, we rely upon their strategic guidance, their
relationships and credibility in the vendor and financial communities and their
ability to recruit key operating personnel. The loss of the services of any of
our executive officers could have a material adverse effect on our credibility
in the vendor communities and our ability to recruit new key operating
personnel.
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
10
market for qualified personnel is extremely competitive. Our failure to attract
additional qualified employees could have a material adverse effect on our
prospects for long-term growth.
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. For example, we have
historically expended significant internal resources in connection with the
redesign of our Web site and the implementation of our online strategic
alliances. Moreover, in the event that we expand upon our efforts to open
brick-and-mortar outlet stores, we will be required to devote significant
internal resources and capital to such efforts. 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. We sell 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 cash flow and on our
reputation with customers. 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.
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. Moreover, although we have developed systems and
processes that are designed to protect consumer information and prevent
fraudulent credit card transactions and other security breaches, failure to
mitigate such fraud or breaches could have a material adverse effect on our
business, prospects, financial condition and results of operations.
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
11
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 increase our cost of doing business and/or decrease the
demand for our products and services and increase our cost of doing business.
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 also increase our cost of doing business. In addition, if we were alleged
to have violated federal, state or foreign, civil or criminal law, we could face
material liability and damage to our reputation and, even if we successfully
defend any such claim, we incur significant costs in connection with such
defense.
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, Ohio, 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, Ohio, 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 subject
us to material liabilities and, to the extent that we pass such costs on to our
customers, could decrease our sales.
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 $49,100,000 (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 15,486,250 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.
We Rely On The Effectiveness Of Our Internal Controls. Section 404 of the
Sarbanes-Oxley Act of 2002 requires that we establish and maintain an adequate
internal control structure and procedures for financial reporting and assess on
an on-going basis the design and operating effectiveness of our internal control
structure and procedures for financial reporting. Our independent registered
accounting firm will be required to audit both the design and operating
effectiveness of our internal controls and management's assessment of the design
and the effectiveness of its internal controls for the year ended December 31,
2005. It is possible that, in preparation for this audit, we could discover
certain deficiencies in the design and/or operation of our internal controls
that could adversely affect our ability to record, process, summarize and report
financial data. We have invested and will continue to invest significant
resources in this process. Because management's assessment of internal controls
has not been required to be reported in the past, we are uncertain as to what
impact a conclusion that deficiencies exist in our internal controls over
financial reporting would have on the trading price of our common stock.
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
12
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.
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 expense for the current office space during 2004 was approximately
$442,000.
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 lawsuit or
proceeding which in the opinion of management is likely to have a material
adverse effect on us.
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 bid prices for the Common Stock for the periods
indicated, as reported by the Nasdaq SmallCap Market:
FISCAL 2004 HIGH LOW
-------------- ------ ------
First Quarter $ 4.93 $ 3.07
Second Quarter $ 3.44 $ 1.92
Third Quarter $ 2.30 $ 1.40
Fourth Quarter $ 3.56 $ 1.75
FISCAL 2003 HIGH LOW
-------------- ------ ------
First Quarter $ 1.69 $ 0.67
Second Quarter $ 1.60 $ 0.72
Third Quarter $ 1.80 $ 0.76
Fourth Quarter $ 5.96 $ 1.20
HOLDERS
As of February 18, 2005, there were approximately 109 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.
13
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
EQUITY COMPENSATION PLAN INFORMATION (AS OF DECEMBER 31, 2004)
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
FUTURE ISSUANCE UNDER
NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE EXERCISE EQUITY COMPENSATION PLANS
ISSUED UPON EXERCISE OF PRICE OF OUTSTANDING (EXCLUDING SECURITIES
OUTSTANDING OPTIONS, OPTIONS, WARRANTS AND REFLECTED IN COLUMN (a))
PLAN CATEGORY WARRANTS AND RIGHTS(a) RIGHTS (b) (c)
- ----------------------------- -------------------------- ------------------------- -------------------------
Equity compensation plans 8,911,789 $ 2.35 2,877,431
approved by security holders
Equity compensation plans not 901,590 $ 1.60 294,922
approved by security holders
Total 9,813,379 $ 2.28 3,172,353
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.
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
14
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.
15
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 is in thousands, except share
data:
STATEMENT OF OPERATIONS DATA:
Year Ended December 31,
-------------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ ------------
Net sales $ 43,799 $ 37,928 $ 30,606 $ 22,950 $ 17,512
Cost of sales 27,393 26,603 20,571 15,954 14,018
------------ ------------ ------------ ------------ ------------
Gross profit 16,406 11,325 10,035 6,996 3,494
Selling, marketing and fulfillment expenses 13,996 12,061 11,547 13,765 18,797
General and administrative expenses 6,333 5,239 4,686 5,098 5,296
------------ ------------ ------------ ------------ ------------
Total operating expenses 20,329 17,300 16,233 18,863 24,093
Operating loss (3,923) (5,975) (6,198) (11,867) (20,599)
Interest (expense)/other income 132 (394) (281) (13,139) (510)
Net loss (3,791) (6,369) (6,479) (25,006) (21,109)
Basic and diluted loss per share: $ (0.55) $ (0.88) $ (2.44) $ (3.41) $ (4.45)
Basic and diluted weighted average number of
common shares outstanding available to common
stockholders 14,586,752 11,171,018 9,927,027 8,185,065 4,924,906
BALANCE SHEET DATA:
As of December 31,
-------------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents $ 7,938/(1)/ $ 7,721 $ 1,749 $ 5,419 $ 5,350
Inventories, net 12,958 11,340 10,868 6,388 7,294
Other current assets 2,559 1,863 1,159 1,417 1,510
Total assets 25,541 22,998 16,595 14,572 15,674
Current liabilities 9,413 8,459 7,072 5,988 5,937
Short-term convertible notes payable, net - - - 19,698
Long term liabilities 4,739 4,260 2,439 182 -
Redeemable preferred stock - - - - 11,088
Shareholders' equity (deficit) 11,389 10,279 7,084 8,402 (21,049)
/(1)/ Includes restricted cash of $1,253
16
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 that sells over 350 brands of designer
apparel, accessories and home products at discounts up to 75% off retail value.
The Bluefly.com Web site was launched in September 1998.
Our gross profit increased by approximately 45% to $16,406,000 in 2004, from
$11,325,000 in 2003. This growth was driven by increases in both net sales and
gross margins, and allowed us to decrease our net loss by approximately 40%, to
$3,791,000 in 2004, from $6,369,000 in 2003.
Our net sales increased approximately 15% to $43,799,000 for the year ended
December 31, 2004 from $37,928,000 for the year ended December 31, 2003. For the
first three quarters of 2004, our net sales increased by approximately 35%, 27%
and 6%, respectively, as compared to the same periods in 2003. For the entire
fourth quarter of 2004, our net sales increased by approximately 4% to
$14,515,000 from $13,993,000 in the fourth quarter of 2003. Our net sales
actually decreased in October 2004, but rebounded strongly in November and
December 2004, which resulted in net sales growth for the quarter.
Net sales attributable to the Company's Web site increased by approximately 7%
during the quarter, to $14,230,000 in the fourth quarter of 2004 from
$13,356,000 in the fourth quarter of 2003, while net sales attributable to the
Company's temporary Manhattan store, which opened in late November, decreased to
approximately $251,000 compared to $465,000 for the same period in 2003.
Our gross margin increased to 37.5% from 29.9% in 2003, 32.8% in 2002 and 30.5%
in 2001. The increase in 2004 was driven by a merchandising strategy that
focused on negotiating better prices with vendors as well as selling more
in-season product which has more value to our customer and therefore demands
higher margins. In 2003 the lower margins resulted from our decision to turn
more of our out-of-season merchandise, as well as inventory items that we were
particularly deep in, into cash that could be used to purchase new inventory,
rather than holding the inventory for the next season.
For the fourth quarter of 2004, we had net income of $7,000 as compared to net
income of $111,000 in the fourth quarter of 2003. The decrease in net income was
partly the result of the Company's temporary Manhattan store, which contributed
significantly to our profitability during the fourth quarter of 2003, but did
not contribute to our profit in any material respect during the fourth quarter
of 2004. We believe that the store did not perform as well financially in 2004
as it did in 2003 because we tested pricing and branding strategies that were
more in line with those of our Web site. While the performance of the store was
not as strong during 2004 as it was during 2003, we believe that the relatively
small investment provided us with valuable experience that we can use in the
future in an effort to build a store strategy that is in line with our brand
strategy and offers stronger financial performance.
Our reserve for returns and credit card chargebacks decreased slightly to 36.6%
in 2004 from 37.1% in 2003 and it had been 35.5% in 2002. We believe that the
slight improvement in the return rate is attributable to more detailed analysis
on customer purchase and return habits as well as initiatives related to the way
we photograph and describe our product and improved buying by the merchant team.
The increase in return rates in prior years was primarily driven by shifts in
our merchandise mix towards products that generate higher return rates, but also
higher gross margins and average order sizes. While we are testing initiatives
to reduce our return rates, we believe that the overall shift in merchandise mix
has been beneficial to the overall gross profit realized per order. Accordingly,
we do not expect return rates to decrease to 2002 levels in the near term.
At December 31, 2004, we had an accumulated deficit of $96,127,000. The net
losses and accumulated deficit resulted primarily from the costs associated with
developing and marketing our Web site, building our infrastructure and non-cash
charges in connection with automatic decreases in the conversion price of our
Preferred Stock. In order to expand our business,
17
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.
CRITICAL ACCOUNTING POLICIES
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the reporting periods. The
most significant estimates and assumptions relate to the adequacy of the
allowances for sales returns, recoverability of inventories, useful lives of
property and equipment and the realization of deferred tax assets. Actual
amounts could differ significantly from these estimates.
REVENUE RECOGNITION
We recognize revenue in accordance with Staff Accounting Bulletin ("SAB") No.
101 "Revenue Recognition in the Financial Statements" as amended. Gross sales
consists primarily of revenue from product sales and shipping and handling
charges and is net of promotional discounts. Net sales represent gross sales,
less provisions for returns, credit card chargebacks, and adjustments for
uncollected sales taxes. Revenue is recognized when all the following criteria
are met:
. A customer executes an order.
. The product price and the shipping and handling fee have been
determined.
. Credit card authorization has occurred and collection is reasonably
assured.
. The product has been shipped and received by the customer.
Shipping and handling billed to customers are classified as revenue in
accordance with Financial Accounting Standards Board ("FASB") Task Force's
Emerging Issues Task Force ("EITF") No. 00-10, "Accounting for Shipping and
Handling Fees and Costs" ("EITF No. 00-10").
PROVISION FOR RETURNS AND DOUBTFUL ACCOUNTS
We generally permit returns for any reason within 90 days of the sale.
Accordingly, we establish a reserve for estimated future returns and bad debt at
the time of shipment based primarily on historical data. We perform credit card
authorizations and check the verification of our customers prior to shipment of
merchandise. However, our future return and bad debt rates could differ from
historical patterns, and, to the extent that these rates increase significantly,
it could have a material adverse effect on our business, prospects, cash flows,
financial condition and results of operations.
INVENTORY VALUATION
Inventories, which consist of finished goods, are stated at the lower of cost or
market value. Cost is determined by the first-in, first-out ("FIFO") method. We
review our inventory levels in order to identify slow-moving merchandise and
establish a reserve for such merchandise.
DEFERRED TAX VALUATION ALLOWANCE
We recognize deferred income tax assets and liabilities on the differences
between the financial statement and tax bases of assets and liabilities using
enacted statutory rates in effect for the years in which the differences are
expected to reverse. The effect on deferred taxes of a change in tax rates is
realized in income or loss in the period that included the enactment date. We
have assessed the future taxable income and determined that a 100% deferred tax
valuation allowance is deemed necessary. In the event
18
that we were to determine that we would be able to realize our deferred tax
assets, an adjustment to the deferred tax valuation allowance would increase
income in the period such determination is made.
RESULTS OF OPERATIONS
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:
2004 2003 2002
----------------------- ----------------------- -----------------------
AS A % OF AS A % OF AS A % OF
NET SALES NET SALES NET SALES
----------------------- ----------------------- -----------------------
Net sales $ 43,799 100.0% $ 37,928 100.0% $ 30,606 100.0%
Cost of sales 27,393 62.5% 26,603 70.1% 20,571 67.2%
---------- ---------- ----------
Gross profit 16,406 37.5% 11,325 29.9% 10,035 32.8%
Selling, marketing and fulfillment expenses 13,996 32.0% 12,061 31.8% 11,547 37.7%
General and administrative expenses 6,333 14.4% 5,239 13.8% 4,686 15.3%
---------- ---------- ----------
Total operating expenses 20,329 46.4% 17,300 45.7% 16,233 53.0%
Operating loss (3,923) (8.9)% (5,975) (15.8)% (6,198) (20.2)%
Interest (expense) other income 132 0.3% (394) (1.0)% (281) (0.9)%
---------- ---------- ----------
Net loss $ (3,791) (8.6)% $ (6,369) (16.8)% $ (6,479) (21.1)%
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:
2004 2003 2002
------------ ------------ ------------
Average Order Size (including shipping & handling) $ 188.51 $ 174.99 $ 167.20
Average Order Size Per New Customer (including shipping & handling) $ 159.38 $ 158.38 $ 149.74
Average Order Size Per Repeat Customer (including shipping & handling) $ 205.10 $ 184.95 $ 177.31
Total Customers 640,125 512,948 388,700
Customers Added during the Year 127,177 124,248 101,063
Revenue from Repeat Customers as a % of total Revenue 70% 66% 67%
Customer Acquisition Costs $ 11.41 $ 10.22 $ 17.04
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, 2004 COMPARED TO THE YEAR ENDED DECEMBER 31,
2003
Net sales: Gross sales for the year ended December 31, 2004 increased by
approximately 15% to $69,032,000, from $60,279,000 for the year ended December
31, 2003. The provision for returns and credit card chargebacks and other
discounts was approximately 37% for both 2004 and 2003, resulting in a provision
of $25,233,000 for the year ended December 31, 2004 and $22,351,000 for the year
ended December 31, 2003.
After the necessary provisions for returns, credit card chargebacks and
adjustments for uncollected sales taxes, our net sales for the year ended
December 31, 2004 were $43,799,000. This represents an increase of approximately
15% compared to the year ended
19
December 31, 2003, in which net sales totaled $37,928,000. The growth in net
sales was largely driven by the increase in gross average order size
(approximately 8% higher than the full year 2003) and a slight increase in the
number of new customers acquired (approximately 2% higher than the full year
2003). Shipping and handling revenue (which is included in net sales) increased
by 14% to $3,353,000 for the year ended December 31, 2004, from $2,939,000 for
the year ended December 31, 2003.
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, 2004 totaled
$27,393,000, resulting in gross margin of approximately 38%. Cost of sales for
the year ended December 31, 2003 totaled $26,603,000, resulting in gross margin
of 30%. The increase in gross margin was driven by a merchandising strategy that
focused on negotiating better prices with vendors as well as selling more
in-season product, which has more value to our customer and therefore demands
higher margins. The gross margin in 2003 was impacted negatively by our decision
to reduce our product margin during the first three quarters of 2003 on certain
merchandise in an effort to reduce prior season inventory levels.
Gross Profit: As a result of the increases in net sales and gross margin, gross
profit increased by 45%, to $16,406,000 for the year ended December 31, 2004,
from $11,325,000 for the year ended December 31, 2003.
Selling, marketing and fulfillment expenses: Selling, marketing and fulfillment
expenses increased by approximately 16% for the year 2004 compared to the year
ended 2003. As a percentage of net sales, our selling, marketing and fulfillment
expenses remained relatively unchanged at approximately 32% for both 2004 and
2003. The selling, marketing and fulfillment expenses were comprised of the
following:
YEAR ENDED YEAR ENDED PERCENTAGE DIFFERENCE
DECEMBER 31, 2004 DECEMBER 31, 2003 INCREASE (DECREASE)
----------------- ----------------- ---------------------
Marketing $ 2,213,000 $ 1,898,000 16.6%
Operating 5,848,000 5,223,000 12.0%
Technology 4,086,000 3,420,000 19.5%
E-Commerce 1,849,000 1,520,000 21.6%
------------ ------------
$ 13,996,000 $ 12,061,000 16.0%
Marketing expenses include expenses related to online and print advertising,
direct mail campaigns as well as staff related costs. The increase in marketing
expenses of approximately 17% was primarily driven by the donation of the net
proceeds from the sale of "hope." collection products to St. Jude Children's
Research Hospital ("St. Jude"). Pursuant to a charitable program with St. Jude,
we were the exclusive retailer of the "hope." t-shirt and agreed to donate the
net proceeds (i.e., the revenue less the cost of goods sold and the costs of
processing and filling the orders) from the sale of all "hope." collection
products on our Web site to St. Jude. For the year ended December 31, 2004,
approximately $141,000 was donated and has been recorded as a marketing expense
in our financial statements. A portion of the increase also resulted from
increased consulting expenses, which were offset slightly by a decrease in staff
related expenses. 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 further in the future.
Operating expenses include all costs related to inventory management,
fulfillment, customer service, credit card processing and during the fourth
quarters, the costs associated with the Company's temporary Manhattan store.
Operating expenses increased in 2004 by approximately 12% compared to 2003 as a
result of variable costs associated with the increased sales volume (e.g.,
picking and packing orders, processing returns and credit card fees) as well as
the overhead costs associated with the store.
Technology expenses consist primarily of Web site hosting and staff related
costs. For the year ended December 31, 2004, technology expenses increased by
approximately 20% compared to the year ended December 31, 2003. This increase
was related to an increase in headcount, overall web hosting costs and
consulting costs and was slightly offset by a decrease in depreciation expense.
The department employed an average of 18 people per month in 2004 compared to 12
people per month in 2003.
E-Commerce expenses include expenses related to our photo studio, image
processing, and Web site design. For the year ended December 31, 2004, this
amount increased by approximately 22% as compared to the year ended December 31,
2003. This increase is to the result of an increase in staff related costs,
temporary help and the purchase of licenses for new search functionality and Web
site analytics.
20
General and administrative expenses: General and administrative expenses include
merchandising, finance and administrative salaries and related expenses,
insurance costs, accounting and legal fees, depreciation and other office
related expenses. General and administrative expenses for the year ended
December 31, 2004 increased by approximately 21% to $6,333,000 as compared to
$5,239,000 for the year ended December 31, 2003. As a percentage of net sales,
general and administrative expenses increased to 14.4% in 2004 from 13.8% in
2003. The increase in general and administrative expenses was the result of
increased salary and benefit expenses of approximately 45% (including $325,000
of expenses incurred in connection with the Separation Agreement that we entered
into with our former CEO) as well as an increase in public company fees. These
increases were slightly offset by a reduction in consulting and professional
fees. Due to the cost of compliance of Sarbanes-Oxley we anticipate that
professional and public company fees will continue to increase in 2005.
Loss from operations: Operating loss decreased by approximately 34% in 2004, to
$3,923,000 from $5,975,000 in 2003 as a result of the increase in gross profit.
Interest expense and Interest and other income, net: Interest and other income
for year ended December 31, 2004 increased to $847,000 from $38,000 for the year
ended December 31, 2003. The increase resulted from $564,000 recognized to
adjust a liability associated with warrants issued by us to their fair value as
of June 17, 2004 (at which time the warrants were re-classified as equity as
described in Note 3 to our financial statements), the $169,000 realized in
connection with the judgment we received in the Breider Moore litigation and an
increase in interest income earned on our cash balance.
Interest expense for the year ended 2004 totaled $715,000, and related primarily
to fees paid in connection with the Loan Facility and interest expense on
Convertible Notes held by Soros. Interest expense for the year ended December
31, 2003 totaled $432,000, and related to fees paid in connection with our Loan
Facility as well as amortization of warrants issued in connection with the
January 2003 Financing.
FOR THE YEAR ENDED DECEMBER 31, 2003 COMPARED TO THE YEAR ENDED DECEMBER 31,
2002
Net sales: Gross sales for the year ended December 31, 2003 increased by
approximately 27% to $60,279,000, from $47,491,000 for the year ended December
31, 2002. For the year ended December 31, 2003, we recorded a provision for
returns and credit card chargebacks and other discounts of $22,351,000, or
approximately 37% of gross sales. For the year ended December 31, 2002, the
provision for returns and credit card chargebacks and other discounts was
$16,885,000, or approximately 36% 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.
After the necessary provisions for returns, credit card chargebacks and
adjustments for uncollected sales taxes, our net sales for the year ended
December 31, 2003 were $37,928,000. This represents an increase of approximately
24% compared to the year ended December 31, 2002, in which net sales totaled
$30,606,000. The growth in net sales was largely driven by the increase in the
numbers of new customers acquired (approximately 23% higher than the full year
2002) and the increase in gross average order size (approximately 5% higher than
the full year 2002). In addition, our shipping and handling revenue increased as
we raised our standard shipping rate from $5.95 per order to $7.95 per order in
the first quarter of 2003. For the year ended December 31, 2003, revenue from
shipping and handling (which is included in net sales) increased by 44% to
$2,939,000 from $2,048,000 for the year ended December 31, 2002.
Cost of sales: Cost of sales for the year ended December 31, 2003 totaled
$26,603,000, resulting in gross margin of approximately 30%. Cost of sales for
the year ended December 30, 2002 totaled $20,571,000, resulting in gross margin
of 33%. The decrease in gross margin resulted primarily from our decision to
reduce our product margin during the first three quarters of 2003 on certain
merchandise in an effort to reduce prior season inventory levels.
Gross Profit: Gross profit increased by 13%, to $11,325,000 for the year ended
December 31, 2003, compared to $10,035,000 for the year ended December 31, 2002.
The increase in gross profit was the result of net sales growth, partially
offset by the decrease in gross margin.
Selling, marketing and fulfillment expenses: Selling, marketing and fulfillment
expenses increased by approximately 5% for the year 2003 compared to the year
ended 2002. As a percentage of net sales, our selling, marketing and fulfillment
expenses
21
decreased to 32% in 2003 from approximately 37.7% in 2002. The decrease resulted
primarily from refinements to our marketing strategy that allowed us to better
target potential new customers and convert repeat customers, as well as 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, 2003 DECEMBER 31, 2002 INCREASE (DECREASE)
----------------- ----------------- ---------------------
Marketing $ 1,898,000 $ 2,275,000 (16.6)%
Operating 5,223,000 4,533,000 15.2%
Technology 3,420,000 3,552,000 (3.7)%
E-Commerce 1,520,000 1,187,000 28.1%
------------ ------------
$ 12,061,000 $ 11,547,000 4.5%
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 17% was largely related to a shift in our customer
acquisition strategy. We reduced our advertising expenditures and focused more
on email, affiliate programs and other performance based programs. Primarily as
a result of this shift, we were able to decrease our customer acquisition costs
for the year ended December 31, 2003 by approximately 40% to $10.22 per new
customer from $17.04 per new customer for the year ended December 31, 2002.
Operating expenses include all costs related to inventory management,
fulfillment, customer service, credit card processing and during the fourth
quarter of 2003, the costs associated with the Company's temporary Manhattan
store. Operating expenses increased in 2003 by approximately 15% compared to
2002 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 the year ended December 31, 2003, technology expenses decreased by
approximately 4% compared to the year ended December 31, 2002. This decrease was
related to a decrease in overall web hosting costs offset by accelerated
depreciation of equipment acquired under a capital lease due to a change in the
estimated useful life, along with increased amortization expense incurred as a
result of capitalized costs incurred in connection with the upgraded version of
the Web Site. Depreciation and amortization for the year ended December 31, 2003
represented approximately 40% of the total technology expense, while
depreciation and amortization for the year ended December 31, 2002 represented
approximately 17% of the total technology expense. These amounts were partially
offset by a reduction of approximately 61% in our Web Site hosting costs in
connection with our move to a new web hosting facility.
E-Commerce expenses include expenses related to our photo studio, image
processing, and Web Site design. For the year ended December 31, 2003, this
amount increased by approximately 28% as compared to the year ended December 31,
2002, primarily due to the creation of an Online Retail Group within the
E-Commerce department. The department employed an average of 17 employees per
month in 2003, compared to an average of 13 per month in 2002. The Online Retail
Group is, among other things, responsible for leveraging the Web Site technology
to improve the on-site customer experience. In September 2003, we launched a
redesigned Web Site. The redesigned Web Site provided a new look and, we
believe, more intuitive navigation. The costs of the new site were primarily
included in E-Commerce and expensed as incurred.
General and administrative expenses: General and administrative expenses include
merchandising, finance and administrative salaries and related expenses,
insurance costs, accounting and legal fees, depreciation and other office
related expenses. General and administrative expenses for the year ended
December 31, 2003 increased by approximately 12% to $5,239,000 as compared to
$4,686,000 for the year ended December 31, 2002. As a percentage of net sales,
general and administrative expenses decreased to 13.8% in 2003 from 15.3% in
2002. The increase in general and administrative expenses was the result of
increased salary and benefit expenses of approximately 7% as well as an increase
in professional fees of 50%.
Loss from operations: Operating loss decreased by approximately 4% in 2003, to
$5,975,000 from $6,198,000 in 2002 as a result of the increase in sales and
gross margin dollars and decreases in selling, marketing and fulfillment
expenses and general and administrative expenses as a percentage of net sales.
Interest expense and other income, net: Interest expense for the year ended
December 31, 2003 totaled $432,000, and related to fees paid in connection with
our Loan Facility, amortization of warrants issued in connection with the
January 2003
22
Financing, and interest on the notes issued in connection with the July 2003
Financing. For the year ended December 31, 2002, interest expense totaled
$349,000, and related primarily to fees paid in connection with the Loan
Facility.
Interest income for the year ended December 31, 2003 decreased to $38,000 from
$68,000 for the year ended December 31, 2002. The decrease is related to the
decrease in our cash balance as interest income primarily represents interest
earned on our cash balance.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
At December 31, 2004, we had approximately $6.7 million of liquid assets,
entirely in the form of cash and cash equivalents, and working capital of
approximately $12.8 million (both amounts exclude the $1.25 million of
restricted cash). In addition, as of December 31, 2004, we had approximately
$2.3 million of borrowings committed under the Loan Facility, leaving
approximately $1.2 million of availability. At December 31, 2003, we had
approximately $2.3 million of borrowings committed, leaving $2.1 million of
availability.
In February 2005, we extended the maturity dates on the Convertible Promissory
Notes issued to Soros in July and October 2003. The maturity dates of the Notes,
which were originally January and April 2004, respectively, were each extended
for one year, from May 1, 2005 to May 1, 2006. Also in February 2005, we renewed
the Loan Facility with Rosenthal for an additional year, from March 30, 2005 to
March 30, 2006.
We fund our operations through cash on hand, operating cash flow, as well as the
proceeds of any equity or debt financing. Operating cash flow is affected by
revenue and gross margin levels, as well as return rates, and any deterioration
in our performance on these financial measures would have a negative impact on
our liquidity. Total availability under the Loan Facility is based upon our
inventory levels and is dependent, among other things, on the Company having at
least $7.0 million of tangible net worth and $6.0 million of working capital and
cash balances of at least $750,000 (exclusive of the $1.25 million cash
collateral pledged to Rosenthal to secure our obligations under the Loan
Facility). In addition, both availability under the Loan Facility and our
operating cash flows are affected by the payment terms that we receive from
suppliers and service providers, and the extent to which suppliers require us to
request Rosenthal to provide credit support under the Loan Facility. We believe
that our suppliers' decision-making with respect to payment terms and/or the
type of credit support requested is largely driven by their perception of our
credit rating, which is affected by information reported in the industry and
financial press and elsewhere as to our financial strength. Accordingly,
negative perceptions as to our financial strength could have a negative impact
on our liquidity.
We anticipate that our existing resources and working capital should be
sufficient to satisfy our cash requirements through the end of fiscal 2005. Of
course, there can be no assurance that such expectations will prove to be
correct. If we do not achieve our operating plan, and additional financing is
not available, future operations may need to be modified, scaled back or
discontinued. Moreover, we may seek additional debt and/or equity financing in
order to maximize the growth of our business and accelerate customer
acquisition. There can be no assurance that any additional financing or other
sources of capital will be available to us upon acceptable terms, or at all.
LOAN FACILITY
Pursuant to the Loan Facility, Rosenthal provides us with certain credit
accommodations, including loans and advances, factor-to-factor guarantees,
letters of credit in favor of suppliers or factors and purchases of payables
owed to our suppliers. The Rosenthal Financing Agreement was amended in April
2004 to: (i) extend the term until March 30, 2005 (later extended further, as
described below); (ii) substitute $1.25 million of cash collateral pledged by
the Company for the $2.0 million standby letter of credit previously provided by
Soros as collateral security for the Company's obligations under the Loan
Facility; (iii) decrease the maximum amount available under the Loan Facility
from $4.5 million to $4.0 million; (iv) increase the tangible net worth
requirement to $7.0 million; (v) increase the working capital requirement to
$6.0 million; and (vi) increase the minimum cash balance that the Company is
required to maintain to $750,000 (exclusive of the $1.25 million in cash
collateral). Because we removed the requirement that Soros provide a standby
letter of credit to secure the Loan Facility, we are no longer subject to an
agreement with Soros that previously required us to issue additional warrants to
Soros with an exercise price equal to 75% of
23
market price in the event that Rosenthal were to draw on Soros' letter of
credit. In February 2005, the Rosenthal Financing Agreement was further extended
to March 30, 2006. All other terms of the Rosenthal Financing Agreement remained
the same.
Interest accrues monthly on the average daily amount outstanding under the Loan
Facility during the preceding month at a per annum rate equal to the prime rate
plus 1%. We pay an annual facility fee equal to 1.5% of the portion of the Loan
Facility that is provided on the basis of our inventory level. This formula
currently results in an annual facility fee of $33,750. We also pay Rosenthal
certain fees to open letters of credit and guarantees in an amount equal to a
certain percentage of the face amount of the letter of credit for each thirty
(30) days such letter of credit, or a portion thereof, remains open.
In consideration for the Loan Facility, among other things, we granted to
Rosenthal a first priority lien on substantially all of our assets, including
control of all of our cash accounts (including the $1.25 million of cash
collateral, which has been placed in a segregated, restricted account) upon an
event of default and certain of our cash accounts in the event that the total
amount of funded debt loaned to us under the Loan Facility exceeds 90% of the
maximum amount available under the Loan Facility for more than 10 days.
Under the terms of the Loan Facility, Soros has the right to purchase all of our
obligations from Rosenthal at any time during its term.
COMMITMENTS AND LONG TERM OBLIGATIONS
As of December 31, 2004, we had the following commitments and long term
obligations:
2005 2006 2007 2008 THEREAFTER TOTAL
------------ ------------ ------------ ------------ ------------ ------------
Marketing and Advertising $ 150,000 -- -- -- -- $ 150,000
Operating Leases 462,000 469,000 481,000 441,000 476,000 $ 2,329,000
Capital Leases 139,000 54,000 27,000 -- -- $ 220,000
Employment Contracts 1,219,000 1,030,000 324,000 -- -- $ 2,573,000
Notes payable to shareholders -- 4,000,000 * -- -- -- $ 4,000,000
------------ ------------ ------------ ------------ ------------ ------------
Grand total $ 1,970,000 $ 5,553,000 $ 832,000 $ 441,000 $ 476,000 $ 9,272,000
* Notes were reclassified to long term in February 2005, See "Recent
Developments"
We believe that in order to grow the business, we will need to make additional
marketing and advertising commitments in the future. In addition, we expect to
hire and train additional employees for the operations and development of
Bluefly.com. However, our marketing budget and our ability to hire such
employees is subject to a number of factors, including our results of operations
as well as the amount of additional capital that we raise.
In order to continue to expand our product offerings, we intend to expand our
relationships with suppliers of end-of-season and excess name brand apparel and
fashion accessories. We expect that our suppliers will continue to include
designers and retail stores that sell excess inventory as well as third-party
end-of-season apparel aggregators. To achieve our goal of offering a wide
selection of top name brand designer clothing and fashion accessories, we may
acquire certain goods on consignment and may explore leasing or partnering
select departments with strategic partners and distributors,
RECENT ACCOUNTING PRONOUNCEMENTS
In March, 2004, the Emerging Issues Task Force issued EITF 03-6, "Participating
Securities and the Two-Class Method under FASB Statement No. 128". This
statement provides additional guidance on the calculation and disclosure
requirements for earnings per share. The FASB concluded in EITF 03-6 that
companies with multiple classes of common stock or participating securities, as
defined by SFAS No. 128, calculate and disclose earnings per share based on the
two-class method. The adoption of this statement does not have an impact to the
Company's financial statement presentation as the Company is currently in a loss
position.
In December 2004, the FASB issued Statement No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123R"), which replaces SFAS 123 and supersedes APB No. 25. Under
the new standard, companies will no longer be able to account for stock-based
compensation transactions using the intrinsic value method in accordance with
APB No. 25. Instead, companies will be
24
required to account for such transactions using a fair-value method and to
recognize the expense in the statements of income. The adoption of SFAS 123R
will also require additional accounting related to the income tax effects and
additional disclosure regarding the cash flow effects resulting from share-based
payment arrangements. SFAS 123R will be effective for periods beginning after
June 15, 2005 and allows, but does not require, companies to restate prior
periods. We are evaluating the impact of adopting SFAS 123R and expect that we
will record substantial non-cash stock compensation expenses. The adoption of
SFAS 123R is not expected to have a significant effect on our financial
condition or cash flows but the non-cash charges associated therewith are
expected to have a significant, adverse effect on our results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have assessed our vulnerability to certain market risks, including interest
rate risk associated with financial instruments included in cash and cash
equivalents and our notes payable. Due to the short-term nature of these
investments we have determined that the risks associated with interest rate
fluctuations related to these financial instruments do not pose a material risk
to us.
ITEM 8. FINANCIAL STATEMENTS
(a) Index to the Financial Statements
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets as of December 31, 2004 and 2003 F-2
Consolidated Statements of Operations for the three years
ended December 31, 2004, 2003 and 2002 F-3
Consolidated Statements of Changes in Shareholders' Equity
for the three years ended December 31, 2004, 2003 and 2002 F-4
Consolidated Statements of Cash Flows for the three years
ended December 31, 2004, 2003 and 2002 F-5
Notes to Consolidated Financial Statements F-6
Schedule II - Valuation and Qualifying Accounts S-1
25
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
of Bluefly, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Bluefly, Inc. and its subsidiary at December 31, 2004 and December 31, 2003, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2004 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 18, 2005
F-1
BLUEFLY, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2004 and 2003
(dollars rounded to the nearest thousand)
- --------------------------------------------------------------------------------
2004 2003
--------------- ---------------
ASSETS
Current assets
Cash and cash equivalents $ 6,685,000 $ 7,721,000
Restricted cash 1,253,000 -
Inventories, net 12,958,000 11,340,000
Accounts receivable, net of allowance for doubtful accounts 1,206,000 1,157,000
Prepaid expenses and other current assets 1,353,000 706,000
--------------- ---------------
Total current assets 23,455,000 20,924,000
Property and equipment, net 1,933,000 1,659,000
Other assets 153,000 415,000
--------------- ---------------
Total assets $ 25,541,000 $ 22,998,000
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 4,190,000 $ 3,122,000
Accrued expenses and other current liabilities 3,526,000 3,869,000
Deferred revenue 1,697,000 1,252,000
Notes payable to related party shareholders - 216,000
--------------- ---------------
Total current liabilities 9,413,000 8,459,000
Notes payable to related party shareholders 4,000,000 4,000,000
Long-term interest payable to related party shareholders 658,000 159,000
Long-term obligations under capital lease 81,000 101,000
--------------- ---------------
Total liabilities 14,152,000 12,719,000
=============== ===============
Commitments and contingencies (Note 8)
Shareholders' equ