U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______ to ______
Commission File Number: 001-14498
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BLUEFLY, INC.
(Name of registrant as specified in its charter)
Delaware 13-3612110
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
42 West 39th Street, New York, NY 10018
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (212) 944-8000
---------------------------------------
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
As of April 23, 2002, the issuer had outstanding 9,205,331 shares of Common
Stock, $.01 par value.
BLUEFLY, INC.
TABLE OF CONTENTS
PAGE
----
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2002 (unaudited) and
December 31, 2001 3
Consolidated Statements of Operations for the three months ended
March 31, 2002 and 2001 (unaudited) 4
Consolidated Statements of Cash Flows for the three months ended
March 31, 2002 and 2001 (unaudited) 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Part II. Other Information 16
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use Of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
2
Part I - FINANCIAL INFORMATION
Item 1. - Financial Statements
BLUEFLY, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
--------- ------------
2002 2001
---- ----
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 3,763,000 $ 5,419,000
Inventories, net 6,247,000 6,388,000
Accounts receivable 1,235,000 1,252,000
Prepaid expenses 247,000 219,000
Other current assets 139,000 255,000
------------ ------------
Total current assets 11,631,000 13,533,000
Property and equipment, net 1,354,000 1,155,000
Other assets 532,000 193,000
------------ ------------
Total assets $ 13,517,000 $ 14,881,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 3,631,000 $ 3,338,000
Accrued expenses and other current liabilities 1,567,000 2,268,000
Deferred revenue 465,000 691,000
------------ ------------
Total current liabilities 5,663,000 6,297,000
Note payable to shareholder 182,000 182,000
Commitments and contingencies
Shareholders' equity:
Series A Preferred stock - $.01 par value; 500,000 shares authorized and
500,000 shares issued and outstanding as of March 31, 2002 and December
31, 2001, respectively (liquidation preference: $10 million plus accrued dividends) 5,000 5,000
Series B Preferred stock - $.01 par value; 9,000,000 shares authorized and
8,910,782 shares issued and outstanding as of March 31, 2002 and December
31, 2001, respectively (liquidation preference: $30 million plus accrued dividends) 89,000 89,000
Common stock - $.01 par value; 40,000,000 shares authorized and 9,205,331 shares
issued and outstanding as of March 31, 2002 and December 31, 2001, respectively 92,000 92,000
Additional paid-in capital 72,519,000 72,184,000
Accumulated deficit (65,033,000) (63,968,000)
------------ ------------
Total shareholders' equity 7,672,000 8,402,000
============ ============
Total liabilities and shareholders' equity $ 13,517,000 $ 14,881,000
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
3
BLUEFLY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
-----------------------------
2002 2001
---- ----
Net sales $ 7,646,000 $ 4,646,000
Cost of sales 5,146,000 3,363,000
------------ ------------
Gross profit 2,500,000 1,283,000
Selling, marketing and fulfillment expenses 2,421,000 3,541,000
General and administrative expenses 1,077,000 1,651,000
------------ ------------
Total 3,498,000 5,192,000
Operating loss (998,000) (3,909,000)
Interest income 32,000 63,000
Interest expense (the three months ended March 31, 2001 includes a
$13,007,000 one-time, non-cash charge in connection with the
conversion of debt and redeemable preferred equity to (99,000) (13,185,000)
permanent equity) ------------ ------------
Net loss $ (1,065,000) $(17,031,000)
Preferred stock dividends (609,000) (1,066,000)
------------ ------------
Net loss available to common shareholders $ (1,674,000) $(18,097,000)
============ ============
Basic and diluted loss per common share $(0.18) $(3.57)
====== ======
Weighted average common shares outstanding,
basic and diluted 9,205,331 5,067,587
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
4
BLUEFLY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
-----------------------------
2002 2001
---- ----
Cash flows from operating activities
Net loss $ (1,065,000) $(17,031,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 203,000 202,000
Warrants issued for service -- 41,000
Beneficial conversion - interest expense -- 13,007,000
Provision for returns (295,000) (347,000)
Changes in operating assets and liabilities:
(Increase) decrease in
Inventories 141,000 842,000
Accounts receivable 17,000 (43,000)
Prepaid expenses (28,000) (465,000)
Other current assets 66,000 58,000
Other assets (12,000) 20,000
Increase (decrease) in
Accounts payable 293,000 (466,000)
Accrued expenses and other current liabilities (406,000) (440,000)
Deferred revenue (226,000) 205,000
------------ ------------
Net cash used in operating activities (1,312,000) (4,417,000)
------------ ------------
Cash flows from investing activities
Purchase of property, equipment and capitalized software (344,000) (44,000)
------------ ------------
Net cash used in investing activities (344,000) (44,000)
------------ ------------
Cash flows from financing activities
Net proceeds from Rights Offering -- 9,665,000
------------ ------------
Net cash provided by financing activities -- 9,665,000
------------ ------------
Net (decrease) increase in cash and cash equivalents (1,656,000) 5,204,000
Cash and cash equivalents - beginning of period 5,419,000 5,350,000
------------ ------------
Cash and cash equivalents - end of period $ 3,763,000 $ 10,554,000
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ -- $ --
============ ============
Income taxes $ -- $ --
============ ============
Non-cash investing and financing activities:
Warrant issued to factor $ 80,000 $ 45,000
============ ============
Warrant issued to shareholder $ 255,000 $ 74,000
============ ============
Beneficial conversion charge on conversion of debt to equity $ -- $ 20,851,000
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
5
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Bluefly, Inc. and its wholly owned subsidiary (collectively the "Company"). All
significant intercompany balances and transactions have been eliminated in
consolidation. The consolidated financial statements have been prepared without
audit in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. The results of operations of any interim period are not
necessarily indicative of the results of operations to be expected for the
fiscal year. For further information, refer to the consolidated financial
statements and accompanying footnotes included in the Company's Form 10-K for
the year ended December 31, 2001.
The Company has sustained net losses and negative cash flows from operations
since the establishment of Bluefly.com. The Company's ability to meet its
obligations in the ordinary course of business is dependent on its ability to
establish profitable operations or raise additional financing through public or
private debt or equity financing, or other sources to fund operations. The
Company may seek additional equity or debt financings to maximize the growth of
its business or if anticipated operating results are not achieved. If such
financings are not available on terms acceptable to the Company, the Company
will seek to delay or reduce its expenditures in order to prolong the
availability of sufficient cash flow to satisfy its obligations while additional
funding is sought. The inability to obtain additional financing, when needed,
would have a material adverse effect on the Company's business, prospects,
financial condition and results of operations.
There have been no changes in significant accounting policies since December 31,
2001.
NOTE 2 - THE COMPANY
The Company is a leading Internet retailer of designer fashions and home
accessories at outlet store prices. The Company's Web store ("Bluefly.com" or
"Web Site"), which launched in September 1998, sells over 400 brands of designer
apparel, accessories and home products at discounts that typically range between
30% and 75% off comparable retail prices.
NOTE 3 - STANDBY COMMITMENT
On March 27, 2002, the Company entered into a Standby Commitment Agreement (the
"Soros Standby Agreement") with Quantum Industrial Partners LDC, a Cayman
Islands limited duration company ("QIP"), and SFM Domestic Investments LLC, a
Delaware limited liability company ("SFMDI", QIP and SFMDI are each affiliates
of Soros Private Equity Partners LLC and are collectively and individually
sometimes referred to as "Soros"). Under the Soros Standby Agreement, Soros has
agreed to provide the Company with up to four million dollars ($4,000,000) of
additional financing on a standby basis at any time prior to January 1, 2003;
provided, however, that the Company may draw down on the Standby Commitment
Amount only at such time as its total cash balances are less than $1,000,000.
Such financing can be made in one or more tranches as determined by the members
of the Company's Board of Directors who are not Soros designees, and any and all
financings made shall be on terms that are consistent with those in the market
at the time the draw is made for similar investments by investors similar to
Soros in companies similar to the Company. Subject to certain limitations the
Standby Commitment Amount shall be reduced on a dollar-for-dollar basis by the
gross cash proceeds received by the Company or any of its subsidiaries from the
issuance of any equity or convertible securities after March 27, 2002. In
exchange for this commitment, but not as a substitute for additional
consideration that Soros would receive if and when any financing is made
pursuant to the Soros Standby Agreement, the Company issued to Soros a warrant
to purchase 100,000 shares of the Company's common stock, par value $0.01 per
share ("Common Stock") at an exercise price of $1.68 per share (the 20 day
trailing average of the closing sale price of its Common Stock on the date of
issuance), exercisable at any time until March 27, 2007. The Company valued the
warrant using the Black-Scholes option pricing model and credited additional
paid-in capital for approximately $157,000. This amount is being amortized over
the term of the commitment.
NOTE 4 - FINANCING AGREEMENT
On March 22, 2002, the Company amended its Financing Agreement (the "Rosenthal
Financing Agreement") with Rosenthal & Rosenthal, Inc. ("Rosenthal"), pursuant
to which Rosenthal provides the Company with certain credit accommodations,
6
BLUEFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
including loans and advances, factor-to-factor guarantees, letters of credit in
favor of suppliers or factors and purchases of payables owed to its suppliers
(the "Loan Facility"). Under the terms of this amendment (the "Rosenthal
Amendment"), the Company extended the Rosenthal Financing Agreement until March
30, 2003, reduced the annual fee it pays Rosenthal for the Loan Facility from
$20,000 to $10,000, agreed to a decrease from $2.5 million to $1.5 million in
the face amount of the standby letter of credit that Soros is maintaining (the
"Soros Guarantee") to help collateralize the Loan Facility, and limited the
maximum amount available under the Loan Facility to an amount equal to the Soros
Guarantee plus the lowest of (x) $1 million, (y) 20% of the book value of the
Company's inventory and (z) the full liquidation value of the Company's
inventory. In addition, pursuant to the Rosenthal Amendment, the Company
adjusted the threshold amount that entitles Rosenthal to take control of certain
of the Company's cash accounts for a period of time to be 90% of the maximum
amount available under the Loan Facility instead of 90% of the Soros Guarantee,
as had been provided previously. As of March 31, 2002, the maximum amount
available under the Loan Facility was $2.5 million. The Company has
approximately $2.4 million outstanding as of such date, of which approximately
$1.5 million are in the form of unfunded letters of credit and factors
guarantees.
As partial consideration for the Rosenthal Amendment, the Company extended from
March 30, 2006 to March 30, 2007 the termination date of the warrant issued to
Rosenthal on March 30, 2001 to purchase 50,000 shares of Common Stock at an
exercise price of $2.34 per share. The Company revalued the warrant as of the
new measurement date, using the Black-Scholes option pricing model and credited
additional paid-in capital for approximately $80,000. This amount is being
amortized over the life of the Loan Facility.
On March 22, 2002, in connection with the Rosenthal Amendment, the Company
amended the Reimbursement Agreement (the "Reimbursement Agreement") pursuant to
which Soros agreed to guarantee a portion of the Loan Facility to reduce the
total amount of standby letters of credit that Soros is obligated to issue to
collateralize the Loan Facility to $1.5 million from $4 million. The Company is
obligated to reimburse Soros for any amounts it pays to Rosenthal pursuant to
the Reimbursement Agreement. The Company's obligation to Rosenthal is
collateralized by a lien on substantially all of its assets and it has granted
Soros a subordinated lien on substantially all of its assets, including its cash
balances, in order to collateralize the reimbursement obligations of Soros. In
exchange for Soros' agreement to maintain the Soros Guarantee until August 15,
2003, the Company issued to Soros a warrant to purchase 60,000 shares of its
Common Stock at an exercise price of $1.66 per share (the 20 day trailing
average of the closing sale price of its Common Stock on the date of issuance),
exercisable at any time until March 30, 2007. The Company valued the warrant
using the Black-Scholes option pricing model and credited additional paid-in
capital for approximately $98,000. This amount is being amortized over the life
of the Loan Facility.
NOTE 5 - EARNINGS (LOSS) PER SHARE
The Company has determined Earnings (Loss) Per Share in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." Basic earnings (loss) per share excludes dilution and is computed by
dividing earnings (loss) available to common shareholders by the weighted
average number of common shares outstanding for the period.
Diluted earnings (loss) per share is computed by dividing earnings (loss)
available to common shareholders by the weighted average number of common shares
outstanding for the period, adjusted to reflect potentially dilutive securities.
Due to the loss from continuing operations, options and warrants to purchase
5,123,953 shares of Common Stock and Preferred Stock convertible into 13,184,286
shares of Common Stock were not included in the computation of diluted earnings
per share because the result of the exercise of such inclusion would be
antidilutive.
NOTE 6 - RECLASSIFICATIONS
Certain amounts in the consolidated financial statements of the prior period
have been reclassified to conform to the current period presentation for
comparative purposes.
7
BLUEFLY, INC.
MARCH 31, 2002
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
Overview
Bluefly, Inc. is a leading Internet retailer of designer fashions and home
accessories at outlet store prices. We sell over 400 brands of designer apparel,
accessories and home products at discounts up to 75% off retail prices. We were
incorporated in 1991 under the laws of the state of New York as Pivot
Corporation. In 1994, we changed our name to Pivot Rules, Inc. We had our
initial public offering in May of 1997. In June 1998, we discontinued our golf
sportswear line to devote our time and resources to building Bluefly.com, a Web
site to sell end of season and excess inventory of apparel and accessories. We
launched the Web site in September 1998 and changed our name to Bluefly, Inc. in
October 1998. In February 2001, we changed our state of incorporation from New
York to Delaware.
We have grown rapidly since launching our Web site in September 1998. Our net
sales increased approximately 65% to $7,646,000 for the three months ended March
31, 2002 from $4,646,000 for the three months ended March 31, 2001. In addition,
our net loss for the first quarter of 2002 decreased to $1,065,000 from
$17,031,000 in the first quarter of 2001. The loss for the first quarter 2001,
included a one-time, non-cash charge of $13,007,000 related to the conversion of
debt and redeemable preferred equity into permanent equity. The rest of the
decrease was due to an increase in gross profit and a decrease in both selling,
marketing and fulfillment expenses and general and administrative expenses as a
percentage of revenue.
At March 31, 2002 we had an accumulated deficit of $65,033,000. Historical net
losses and the accumulated deficit resulted primarily from the costs associated
with developing and marketing our Web site and building our infrastructure. In
order to expand our business, we intend to invest in sales, marketing,
merchandising, operations, information systems, site development and additional
personnel to support these activities. We therefore expect to continue to incur
substantial operating losses at least until the fourth quarter of 2002. Although
we expect to be profitable in the fourth quarter of 2002, we anticipate losses
in the first two quarters of 2003 and perhaps beyond. Although we have
experienced revenue growth in recent years, this growth may not be sustainable
and therefore should not be considered indicative of future performance.
Significant Accounting Policies
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 returns and recoverability of inventories. Actual amounts could
differ significantly from these estimates.
Revenue Recognition
Gross sales consists primarily of revenue from product sales and shipping and
handling revenue on our Web site, and is net of promotional discounts. Revenue
is recognized when goods are received by our customers, which occurs only after
credit card authorization. Net sales represent gross sales, less provisions for
returns, credit card chargebacks, and adjustments for uncollected sales taxes.
Provision for Returns and Doubtful Accounts
We generally permit returns for any reason within 90 days of the sale.
Accordingly, we establish a reserve for estimated future returns and bad debt at
the time of shipment based primarily on historical data. However, our future
return and bad debt rates could differ significantly from historical patterns,
which would adversely affect our operating results.
8
BLUEFLY, INC.
MARCH 31, 2002
Inventory Valuation
Inventories, which consist of finished goods, are stated at the lower of cost or
market value. Cost is determined by the first-in, first-out ("FIFO") method. We
review our inventory levels in order to identify slow-moving merchandise and use
markdowns to clear merchandise. Markdowns may be used if inventory exceeds
customer demand for reasons of style, changes in customer preference or lack of
consumer acceptance of certain items, or if it is determined that the inventory
in stock will not sell at its currently marked price. Such markdowns may have an
adverse impact on earnings, depending on the extent of the markdowns and amount
of inventory affected.
Results Of Operations
The following table sets forth our statement of operations data, for the three
months ended March 31st. All data in thousands except as indicated below:
2002 2001 2000
---- ---- ----
As a % of As a % of As a % of
Net Sales Net Sales Net Sales
Net sales $ 7,646 100.0% $ 4,646 100.0 % $ 3,736 100.0 %
Cost of sales 5,146 67.3% 3,363 72.4 % 3,068 82.1%
----- ----- -----
Gross profit 2,500 32.7% 1,283 27.6 % 668 17.9%
Selling, marketing and fulfillment expenses 2,421 31.7% 3,541 76.2% 5,139 137.5%
General and administrative expenses 1,077 14.1% 1,651 35.5% 1,267 33.9%
----- ----- - -----
Total operating expenses 3,498 45.8% 5,192 111.7% 6,406 171.4%
Operating loss from continuing operations (998) (13.1)% (3,909) (84.1)% (5,738) (153.6)%
Interest (expense) other income (67) (0.9)% (13,122) (282.4)% 71 1.9%
------ -------- -------
Net loss (1,065) (13.9)% (17,031) (366.6)% (5,667) (151.7)%
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 three months ended March 31st, as indicated below:
2002 2001 2000
---- ---- ----
Average Order Size (including shipping & handling) $161.76 $129.11 $98.66
Average Order Size Per New Customer (including shipping & handling) $144.73 $114.79 $91.74
Average Order Size Per Repeat Customer (including shipping & handling) $171.53 $143.05 $111.05
Registered Users 1,193,888 926,385 508,715
Registered Users Added During the Period 68,597 63,122 172,715
Total Customers 312,510 209,497 87,511
Customers Added during the Period 24,873 24,257 32,630
Revenue from Repeat Customers as a % of total Revenue 67% 56% 40%
Customer Acquisition Costs $9.40 $40.84 $103.89
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.
9
BLUEFLY, INC.
MARCH 31, 2002
For The Three Months Ended March 31, 2002 Compared To The Three Months Ended
March 31, 2001
Net sales: Gross sales for the three months ended March 31, 2002, increased by
74% to $11,342,000, from $6,513,000 for the three months ended March 31, 2001.
For the three months ended March 31, 2002, we recorded a provision for returns
and credit card chargebacks and other discounts of $3,696,000, or approximately
32.6% of gross sales. For the three months ended March 31, 2001, the provision
for returns and credit card chargebacks and other discounts was $1,867,000 or
approximately 28.7% of gross sales. The increase in this provision as a
percentage of gross sales is related primarily to an increase in the return
rate. We believe that the increase in return rate is partly the result of the
increase in average order size which grew to $161.76 in the first quarter of
2002 from $129.11 in the first quarter of 2001. The increase in average order
size, we believe, is related to our change in product mix, which is now focused
on higher priced goods, as well as the fact that a greater percentage of our
business now comes from repeat customers who tend to have higher average order
sizes than new customers.
After the necessary provisions for returns, credit card chargebacks and
adjustments for uncollected sales taxes, our net sales for the three months
ended March 31, 2002 were $7,646,000. This represents an increase of 65%
compared to the three months ended March 31, 2001, in which net sales totaled
$4,646,000. Because the number of new customers acquired in the first quarter of
2002 only slightly exceeded that of the first quarter of 2001, the growth in net
sales was largely driven by the increases in average order size and sales to
repeat customers. We believe that the increase in sales to repeat customers and
the negligible growth in the number of new customers was the result of increased
marketing efforts to repeat customers and a reduction in the amount of
advertising we do that is directed to new customers.
Cost of sales: Cost of sales consists of the cost of product sold to customers,
in-bound and out-bound shipping costs, inventory reserves, commissions and
packing materials. Cost of sales for the three months ended March 31, 2002
totaled $5,146,000, resulting in gross margin of approximately 32.7%. Cost of
sales for the three months ended March 31, 2001 totaled $3,363,000, resulting in
gross margin of 27.6%. Gross profit increased by 94%, to $2,500,000 for the
three months ended March 31, 2002 compared to $1,283,000 for the three months
ended March 31, 2001. The increase in gross margin resulted primarily from
improved product margins.
Selling, marketing and fulfillment expenses: Selling, marketing and fulfillment
expenses decreased by approximately 32% in the first quarter of 2002 compared to
the first quarter of 2001. Selling, marketing and fulfillment expenses were
comprised of the following:
Three Months Ended Three Months Ended Percentage Difference
------------------ ------------------ ---------------------
March 31, 2002 March 31, 2001 increase (decrease)
-------------- -------------- ------------------
Marketing 362,000 1,205,000 (70.0%)
Operating 1,051,000 865,000 21.5%
Technology 769,000 1,130,000 (31.9%)
Creative Services 239,000 341,000 (29.9%)
--------- --------- -------
2,421,000 3,541,000 (31.6%)
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 70% is largely related to a shift in our customer acquisition
strategy. Consistent with our streamlined operating plan announced in June 2001,
we significantly reduced our advertising expenditures and focused more on email
and direct mail programs. Primarily as a result of this shift, we were able to
decrease our customer acquisition costs for the three months ended March 31,
2002 by approximately 77% to $9.40 per customer from $40.84 per customer for the
three months ended March 31, 2001.
Operating expenses include all costs related to inventory management,
fulfillment, customer service, and credit card processing. Operating expenses
increased in the first quarter of 2002 by approximately 22% compared to the
first quarter of 2001. Variable costs associated with the increased sales volume
(picking and packing orders, processing returns and credit card fees) increased
10
BLUEFLY, INC.
MARCH 31, 2002
in connection with the increase in gross sales.
Technology expenses consist primarily of Web site hosting and staff related
costs. For the three months ended March 31, 2002 technology expenses decreased
by approximately 32%. This reduction is primarily related to a reduction in our
Web site hosting costs in connection with our move to a new web hosting
facility.
Creative Services expenses include expenses related to our photo studio, image
processing, and Web site design. In 2002, this amount decreased by approximately
30% primarily due to jobs that were eliminated in June 2001.
As a percentage of net sales, our selling, marketing and fulfillment expenses,
decreased to 31.7% in the first quarter of 2002 from 76.2% in the first quarter
of 2001. The decrease resulted primarily from a more targeted marketing strategy
aimed at our existing customer base and the cost savings we derived from our
move to a new web hosting facility.
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 three months ended
March 31, 2002 decreased by approximately 35% to $1,077,000 as compared to
$1,651,000 for the three months ended March 31, 2001. The decrease in general
and administrative expenses was largely the result of jobs that were eliminated
in connection with the Company's June 2001 streamlined operating plan, and its
related benefits. The number of employees categorized as general and
administrative for the three months ended March 31, 2002 was 24, compared to 29
for the three months ended March 31, 2001.
As a percentage of net sales, general and administrative expenses decreased to
14.1% in 2002 from 35.5% in 2001.
Loss from operations: Operating loss decreased by 75% in the first quarter of
2002 to $998,000 from $3,909,000 in the first quarter of 2001 as a result of the
increase in gross margin and decreases, as a percentage of net sales, in
selling, marketing and fulfillment expenses and general and administrative
expenses.
Interest expense and other income, net: Interest expense for the three months
ended March 31, 2002 totaled $99,000, and related primarily to fees paid in
connection with our Loan Facility. For the three months ended March 31, 2001,
interest expense totaled $13,185,000. This amount consisted principally of
approximately $13,007,000 of non-cash, one-time charges that were incurred in
connection with the conversion of our notes payable and redeemable equity into
permanent equity. This amount also included interest expense of $175,000,
related to the interest on the notes payable that were issued during fiscal 2000
and converted in fiscal 2001.
Interest income for the three months ended March 31, 2002 decreased to $32,000
from $63,000 for the three months ended March 31, 2001, which represented
interest earned on our cash balance.
Liquidity And Capital Resources
General
At March 31, 2002, the Company had approximately $3.8 million of liquid assets,
entirely in the form of cash and cash equivalents, and working capital of
approximately $6.0 million. In addition, as of March 31, 2002, the Company had
$4.0 million available under the Standby Commitment and approximately $2.4
million of borrowings committed under the Loan Facility, leaving approximately
$100,000 of availability.
We fund our operations through cash on hand, operating cash flow and the Loan
Facility. 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
dependent, among other things, on the Company having at least $1.5 million of
tangible net worth and $3.5 million of working capital. 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
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BLUEFLY, INC.
MARCH 31, 2002
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.
Loan Facility
Pursuant to the Rosenthal Financing Agreement, as amended, 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 maximum amount available
under the Loan Facility is an amount equal to the amount of Soros Guarantee plus
the lowest of (x) $1 million, (y) 20% of the book value of our inventory and (z)
the full liquidation value of our inventory. However, the maximum availability
under the Loan Facility can never exceed $10 million. Under the Loan Facility,
we are required to have at least $1,500,000 of tangible net worth and $3,500,000
of working capital. 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%. As of March 31, 2002, maximum availability
under the Loan Facility was approximately $2.5 million. The Company has
approximately $2.4 million outstanding as of such date, of which approximately
$1.5 million are in the form of unfunded letters of credit and factors
guarantees.
We also pay Rosenthal (a) an annual facility fee equal to a certain percentage
of the maximum inventory facility available under the Loan Facility and (b)
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 or guarantee plus,
a certain percentage of the face amount of such letters of credit or guarantees
for each thirty (30) days or a portion thereof that such letters of credit or
guarantees are 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 upon an event of default and certain of our
cash accounts in the event that the total amount of monies loaned to us under
the Loan Facility exceeds 90% of the maximum amount available under the Loan
Facility for more than 10 days. We also issued to Rosenthal on March 31, 2001 a
warrant to purchase 50,000 shares of our Common Stock at an exercise price of
$2.34 exercisable, as amended, for six years from the date of issuance.
In connection with the Loan Facility, we entered into a Reimbursement Agreement
with Soros pursuant to which Soros issued a standby letter of credit at closing
in the amount of $2.5 million in favor of Rosenthal to guarantee a portion of
the Company's obligations under the Rosenthal Financing Agreement, we agreed to
reimburse Soros for any amounts it pays to Rosenthal pursuant to such guarantee
and we granted Soros a subordinated lien on substantially all of our assets,
including our cash balances, in order to secure our reimbursement obligations.
In connection with the recent amendment of the Rosenthal Financing Agreement,
the face amount of the standby letter of credit issued by Soros was reduced from
$2.5 to $1.5 million, Soros' obligation to issue at our request another standby
letter of credit for up to an additional $1.5 million was terminated and Soros
agreed to maintain the $1.5 million standby letter of credit until August 15,
2003. In consideration for the issuance of the original $2.5 million standby
letter of credit, we issued to Soros a warrant to purchase 100,000 shares of our
Common Stock at an exercise price equal to $0.88, exercisable at any time prior
to September 15, 2011. In consideration for Soros' agreement to maintain the
$1.5 million standby letter of credit until August 15, 2003, we issued to Soros
a warrant to purchase 60,000 shares of our Common Stock at an exercise price
equal to $1.66 per share (the 20 day trailing average of the closing sale price
of our Common Stock on the date of issuance), exercisable at any time prior to
March 30, 2007.
Subject to certain conditions, if we default on any of our obligations under the
Rosenthal Financing Agreement, Rosenthal has the right to draw upon the Soros
Guarantee to satisfy any such obligations. If and when Rosenthal draws on the
Soros Guarantee, pursuant to the terms of the Reimbursement Agreement, we would
have the obligation to, among other things, reimburse Soros for any amounts
drawn under the Soros Guarantee plus interest accrued thereon. In addition, to
the extent that Rosenthal draws on the Soros Guarantee during the continuance of
a default under the Rosenthal Financing Agreement or at any time that the total
amount outstanding under the Loan Facility exceeds 90% of the Soros Guarantee,
we will be required to issue to Soros a warrant (each a "Contingent Warrant") to
purchase a number of shares of Common Stock equal to the quotient of (a) any
amounts drawn under the Soros Guarantee and (b) 75% of the average of the
closing price of our Common Stock on the ten days preceding the date of issuance
of such warrant. Each Contingent Warrant will be exercisable for ten years from
the
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BLUEFLY, INC.
MARCH 31, 2002
date of issuance at an exercise price equal to 75% of the average closing price
of our Common Stock on the ten days preceding the ten days after the date of
issuance.
Under the Rosenthal Financing Agreement, Soros has the right to purchase all of
our obligations from Rosenthal at any time during the term of the Rosenthal
Financing Agreement. With respect to such Buyout Option, Soros has the right to
request that Rosenthal make a draw under the Soros Guarantee as consideration to
Soros for the purchase of such obligations.
Standby Commitment
On March 27, 2002, we entered into the Standby Commitment Agreement with Soros.
Under the Soros Standby Agreement, Soros has agreed to provide us with up to
four million dollars ($4,000,000) of additional financing on a standby basis at
any time prior to January 1, 2003; provided, however, that we may draw down on
the Standby Commitment Amount only at such time that our total cash balances are
less than $1,000,000. Such financing can be made in one or more tranches as
determined by the members of our Board of Directors who are not Soros designees,
and any and all financings made shall be on terms that are consistent with those
in the market at the time the draw is made for similar investments by investors
similar to Soros in companies similar to us. Subject to certain limitations the
Standby Commitment Amount shall be reduced on a dollar-for-dollar basis by the
gross cash proceeds received by the Company or any of its subsidiaries from the
issuance of any equity or convertible securities after March 27, 2002. In
exchange for this commitment, but not as a substitute for additional
consideration that Soros would receive if and when any financing is made
pursuant to the Soros Standby Agreement, we issued to Soros a warrant to
purchase 100,000 shares of our Common Stock at an exercise price of $1.68 per
share (the 20 day trailing average of the closing sale price of our Common Stock
on the date of issuance), exercisable at any time until March 27, 2007. In
connection with the issuance of this warrant, Soros agreed that the issuance of
this warrant shall not trigger the anti-dilution provision contained in Section
5.8.6 of our Certificate of Incorporation.
Commitments And Long Term Obligations
As of March 31, 2002, we had the following commitments and long term
obligations:
2002 2003 2004 2005 2006 Thereafter Total
Marketing and Advertising $ 421,000 -- -- -- -- -- $ 421,000
Operating Leases $ 490,000 486,000 437,000 443,000 449,000 1,267,000 $3,572,000
Employment Contracts $ 749,000 495,000 28,000 -- -- -- $1,272,000
Note payable to shareholder $ -- -- -- 182,000 -- -- $ 182,000
---------- ---------- ---------- ---------- ---------- --------- ----------
Grand total $1,660,000 981,000 465,000 625,000 449,000 1,267,000 $5,447,000
In March of 2002, we moved our web hosting services to a new facility to host
Bluefly.com and provide certain hardware and software as well as year-round
24-hour systems support. Under this new agreement we are committed to pay
$68,500, $82,200, $82,200 and $13,700 for fiscal years 2002, 2003, 2004 and
2005, respectively.
On March 12, 2002, we entered into a Software License and Service Agreement with
Blue Martini. Beginning in March 2002, with the assistance of consultants from
Blue Martini, we plan to develop an upgraded version of our Web site based on
Blue Martini Software. Under this agreement we are committed to pay $295,000
during fiscal 2002. Once launched, we expect that the new Web site will provide
us with better tools to create and manage on-site marketing promotions, more
robust analytical tools to measure the performance of on-site promotions,
greater site stability, and a more efficient platform from which to scale our
technology infrastructure should any future growth in our business dictate such
a need. We expect to launch the new Web site during the third quarter of 2002.
Of course, there can be no assurance that the new Web site will be launched when
scheduled, that there will not be start up problems or that such expectations
will prove to be correct or that they will have a positive effect on our
business.
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.
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BLUEFLY, INC.
MARCH 31, 2002
However, our marketing budget and our ability to hire such employees are 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. Due to our limited
working capital, a number of our suppliers have limited our payment terms and,
in some cases, have required us to pay for merchandise in advance of delivery.
We anticipate that the proceeds from the Rosenthal Financing Agreement and the
Standby Commitment Agreement together with existing resources and cash generated
from operations, should be sufficient to satisfy our cash requirements through
the end of fiscal 2002. However, we may seek additional debt and/or equity
financing in order to maximize the growth of our business. There can be no
assurance that any additional financing or other sources of capital will be
available to us upon acceptable terms, or at all. The inability to obtain
additional financing, if needed, would have a material adverse effect on our
business, prospects, financial condition and results of operations.
Recent Accounting Pronouncements
Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission (the "Commission"), requires all companies to
include a discussion of critical accounting policies or methods used in the
preparation of financial statements. Note 2 of the notes to the consolidated
financial statements includes a summary of the significant accounting policies
and methods used in the preparation of our consolidated financial statements.
For a brief discussion of the more significant accounting policies and methods
used by us, please see, "Significant Accounting Policies."
In addition, Financial Reporting Release No. 61 was recently released by the
Commission, and requires all companies to include a discussion addressing, among
other things, liquidity, off balance sheet arrangements, contractual obligations
and commercial commitments. For a discussion of these issues, please read
"Liquidity and Capital Resources."
In October 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 144 ("SFAS No. 144"), "Accounting for the Impairment or Disposal
of Long-Lived Assets." This statement supersedes FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of" and certain provisions of APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business (as previously
defined in that Opinion). The provisions of SFAS No. 144 are effective for
fiscal years beginning after December 15, 2001. We do not anticipate that the
adoption of SFAS No. 144 will have a material impact on our consolidated
financial statements.
In June 2001, the FASB issued Statement No. 143 ("SFAS No. 143"), "Accounting
for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. SFAS No. 143 shall
be effective for financial statements issued for fiscal years beginning after
June 15, 2002. Earlier application is encouraged. Initial application of this
Statement shall be as of the beginning of an entity's fiscal year. We do not
anticipate that the adoption of SFAS No. 143 will have a material impact on our
consolidated financial statements.
In July 2001, the FASB issued SFAS No. 142 ("SFAS No. 142"), "Goodwill and Other
Intangible Assets". Under SFAS No. 142, goodwill and indefinite lived intangible
assets will no longer be amortized, but rather will be tested for impairment
within six months of adoption and at least annually thereafter effective for
years beginning after December 15, 2001. In addition, the amortization period of
intangible assets with finite lives will no longer be limited. We do not
anticipate that the adoption of SFAS No. 142 will have a material impact on our
consolidated financial statements.
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BLUEFLY, INC.
MARCH 31, 2002
In June 2001, the FASB issued SFAS No. 141 ("SFAS No. 141"),"Business
Combinations." SFAS No. 141 requires all business combinations initiated after
June 30, 2001 be accounted for under the purchase method. In addition, SFAS No.
141 establishes criteria for the recognition and measurement of intangible
assets separately from goodwill. SFAS No. 141 may require us to reclassify the
carrying amounts of certain intangible assets into or out of goodwill, based
upon certain criteria. We do not anticipate that the adoption of SFAS No. 141
will have a material impact on our consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We have assessed our vulnerability to certain market risks, including interest
rate risk associated with financial instruments included in cash and cash
equivalents and our notes payable. Due to the short-term nature of these
investments we have determined that the risks associated with interest rate
fluctuations related to these financial instruments do not pose a material risk
to us.
Special Note Regarding Forward Looking Statements
This report may include statements that constitute "forward-looking" statements,
usually containing the words "believe," "project," "expect," or similar
expressions. These statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Forward-looking statements
inherently involve risks and uncertainties that could cause actual results to
differ materially from the forward-looking statements. The risks and
uncertainties are detailed from time to time in reports filed by the company
with the Securities and Exchange Commission, including Forms 8-A, 8-K, 10-Q, and
10-K. These risks and uncertainties include, but are not limited to, the
following: the Company's limited working capital, need for additional capital
and potential inability to raise such capital; the competitive nature of the
business and the potential for competitors with greater resources to enter such
business; risks of litigation for sale of unauthentic or damaged goods and
litigation risks related to sales in foreign countries; availability formulas
under the Rosenthal credit facility which limit the amount of funds available
for borrowing; the Company's potential inability to make repayments under the
Rosenthal credit facility and the possible shareholder dilution that could
result if the Soros standby letter of credit is drawn upon; the risk of default
by the Company under the Rosenthal financing agreement and the consequences that
might arise from the Company having granted a lien on substantially all of its
assets under that agreement; consumer acceptance of the Internet as a medium for
purchasing apparel; recent losses and anticipated future losses; potential
adverse effects on gross margin resulting from markdowns and allowances; the
risk that favorable trends in sales, gross profit, gross margin and reduced
sales, marketing and fulfillment expenses and operating losses will continue;
the capital intensive nature of such business (taking into account the need for
advertising to promote such business); the dependence on third parties and
certain relationships for certain services, including uncertainty arising from a
lack of operating history with the company's new fulfillment center; the
successful hiring and retaining of personnel; the dependence on continued growth
of online commerce; rapid technological change; online commerce security risks;
governmental regulation and legal uncertainties; management of potential growth;
and unexpected changes in fashion trends.
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BLUEFLY, INC.
MARCH 31, 2002
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
We currently and from time to time, are involved in litigation incidental to the
conduct of our business. However we are not party to any lawsuit or proceeding
which in the opinion of management is likely to have a material adverse effect
on us.
Item 2. Changes in Securities and Use Of Proceeds
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) The following is a list of exhibits filed as part of this Report:
None.
(b) Reports on Form 8-K:
None.
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BLUEFLY, INC.
MARCH 31, 2002
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
BLUEFLY, INC.
By: /s/ E. Kenneth Seiff
-----------------------------
E. Kenneth Seiff
CEO and President
By: /s/ Patrick C. Barry
-----------------------------
Patrick C. Barry
Chief Financial Officer
April 23, 2002
17