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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2006
[ ] 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.
(Exact 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 [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of August 2, 2006, the issuer had outstanding 129,205,660 shares of Common
Stock, $.01 par value.
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BLUEFLY, INC.
TABLE OF CONTENTS
PAGE
----
Part I. Financial Information
Item 1. Financial Statements
Condensed Balance Sheets as of June 30, 2006
and December 31, 2005 (unaudited) 3
Condensed Statements of Operations for the six months ended
June 30, 2006 and 2005 (unaudited) 4
Condensed Statements of Operations for the three months ended
June 30, 2006 and 2005 (unaudited) 5
Condensed Statements of Changes in Shareholders' Equity for the
six months ended June 30, 2006 (unaudited) 6
Condensed Statements of Cash Flows for the six months ended
June 30, 2006 and 2005 (unaudited) 7
Condensed Notes to Financial Statements (unaudited) 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Item 4. Controls and Procedures 22
Part II. Other Information 23
Item 1. Legal Proceedings 23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 6. Exhibits 24
Signature 25
Part I - FINANCIAL INFORMATION
Item 1. - Financial Statements
BLUEFLY, INC.
CONDENSED BALANCE SHEETS (Unaudited)
JUNE 30, DECEMBER 31,
2006 2005
------------- -------------
ASSETS
Current assets
Cash and cash equivalents $ 23,997,000 $ 9,408,000
Inventories, net 21,130,000 16,893,000
Accounts receivable, net of allowance for doubtful accounts 2,119,000 1,717,000
Prepaid inventory 615,000 485,000
Prepaid expenses 464,000 915,000
Other current assets 528,000 419,000
------------- -------------
Total current assets 48,853,000 29,837,000
Property and equipment, net 2,789,000 2,895,000
Other assets 282,000 313,000
------------- -------------
Total assets $ 51,924,000 $ 33,045,000
============= =============
Current liabilities
Accounts payable $ 3,531,000 $ 5,662,000
Allowance for sales returns 2,926,000 3,407,000
Accrued expenses and other current liabilities 2,723,000 1,083,000
Deferred revenue 2,264,000 1,784,000
------------- -------------
Total current liabilities 11,444,000 11,936,000
Notes payable to related party shareholders -- 4,000,000
Long-term interest payable to related party shareholders -- 1,217,000
Long-term obligations under capital lease -- 27,000
------------- -------------
Total liabilities 11,444,000 17,180,000
------------- -------------
Commitments and contingencies
Shareholders' equity
Series A Preferred stock - $.01 par value; 500,000 shares authorized, 0 and 460,000
shares issued and outstanding as of June 30, 2006 and December 31, 2005, respectively
(liquidation preference: $0 as of June 30, 2006, and $9.2 million plus accrued
dividends of $5.9 million as of December 31, 2005) -- 5,000
Series B Preferred stock - $.01 par value; 9,000,000 shares authorized,0 and 8,889,414
shares issued and outstanding as of June 30, 2006 and December 31, 2005, respectively
(liquidation preference: $0 as of June 30, 2006, and $30 million plus accrued dividends
of $9.5 million as of December 31, 2005) -- 89,000
Series C Preferred stock - $.01 par value; 3,500 shares authorized, 0 and 1,000 shares
issued and outstanding as of June 30, 2006 and December 31, 2005, respectively
(liquidation preference: $0 as of June 30, 2006, and $1 million plus accrued dividends
of $286,000 as of December 31, 2005) -- --
Series D Preferred stock - $.01 par value; 7,150 shares authorized, 0 and 6,313.43 issued
and outstanding as of June 30, 2006 and December 31, 2005, respectively (liquidation
preference: $0 as of June 30, 2006, and $6.3 million plus accrued dividends of $2.4 million
as of December 31, 2005) -- --
Series E Preferred stock - $.01 par value; 1,000 shares authorized, 0 and 1,000 issued and
outstanding as of June 30, 2006 and December 31, 2005, respectively (liquidation preference:
$0 as of June 30, 2006, and $1.0 million plus accrued dividends of $347,000 as of December
31, 2005) -- --
Series F Preferred stock - $.01 par value; 7,000 shares authorized, 857.143 and 5,279.714
issued and outstanding as of June 30, 2006 and December 31, 2005, respectively
(liquidation preference: $3.9 million plus accrued dividends of $61,000 as of June 30,
2006, and $5.3 million plus accrued dividends of $192,000 as of December 31, 2005) -- --
Common stock - $.01 par value; 152,000,000 and 92,000,000 shares authorized as of June 30,
2006 and December 31, 2005, respectively, and 128,205,660 and 19,059,166 shares issued
and outstanding as of June 30, 2006 and December 31, 2005, respectively 1,282,000 191,000
Additional paid-in capital 148,167,000 115,527,000
Accumulated deficit (108,969,000) (99,947,000)
------------- -------------
Total shareholders' equity 40,480,000 15,865,000
------------- -------------
Total liabilities and shareholders' equity $ 51,924,000 $ 33,045,000
============= =============
The accompanying notes are an integral part of these condensed
financial statements.
3
BLUEFLY, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
---------------------------
2006 2005
------------ ------------
Net sales $ 33,669,000 $ 25,531,000
Cost of sales 19,784,000 15,995,000
------------ ------------
Gross profit 13,885,000 9,536,000
Selling, marketing and fulfillment expenses 13,041,000 8,103,000
General and administrative expenses 5,650,000 3,188,000
------------ ------------
Total operating expenses 18,691,000 11,291,000
Operating loss (4,806,000) (1,755,000)
Interest and other income 112,000 69,000
Interest and other expense (471,000) (376,000)
------------ ------------
Net loss $ (5,165,000) $ (2,062,000)
Preferred stock dividends (2,221,000) (2,284,000)
Deemed dividends related to beneficial conversion feature
on Series F Preferred Stock (3,857,000) --
------------ ------------
Net loss available to common shareholders $(11,243,000) $ (4,346,000)
============ ============
Basic and diluted loss per common share $ (0.37) $ (0.28)
============ ============
Weighted average common shares outstanding
(basic and diluted) 30,372,393 15,360,334
============ ============
The accompanying notes are an integral part of these condensed
financial statements.
4
BLUEFLY, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED
JUNE 30,
---------------------------
2006 2005
------------ ------------
Net sales $ 16,793,000 $ 12,029,000
Cost of sales 9,747,000 7,378,000
------------ ------------
Gross profit 7,046,000 4,651,000
Selling, marketing and fulfillment expenses 5,577,000 4,068,000
General and administrative expenses 3,223,000 1,602,000
------------ ------------
Total operating expenses 8,800,000 5,670,000
Operating loss (1,754,000) (1,019,000)
Interest and other income 67,000 29,000
Interest and other expense (214,000) (179,000)
------------ ------------
Net loss $ (1,901,000) $ (1,169,000)
Preferred stock dividends (990,000) (1,169,000)
Deemed dividends related to beneficial conversion feature
on Series F Preferred Stock (3,857,000) --
------------ ------------
Net loss available to common shareholders $ (6,748,000) $ (2,338,000)
============ ============
Basic and diluted loss per common share $ (0.17) $ (0.15)
============ ============
Weighted average common shares outstanding
(basic and diluted) 40,267,334 15,420,956
============ ============
The accompanying notes are an integral part of these condensed
financial statements.
5
BLUEFLY, INC.
CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 2005, 2004 AND FOR THE SIX MONTHS ENDED JUNE 30, 2006
(Unaudited)
SERIES A SERIES B SERIES C
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
$.01 PAR VALUE $.01 PAR VALUE $.01 PAR VALUE
------------------ ----------------------- ------------------
NUMBER NUMBER NUMBER
OF OF OF
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- ------- ------------ -------- -------- -------
Balance at January 1, 2004 460,000 5,000 8,889,414 89,000 1,000 -
-------- ------- ------------ -------- -------- -------
Sale of Common Stock and Warrants in connection with the
January 2004 financing (net of issuance costs of $423,000) - - - - - -
Change in Value of Warrants - - - - - -
Exercise of Employee Stock Options - - - - - -
Expense recognized in connection with Issuance of Options - - - - - -
Net loss - - - - - -
-------- ------- ------------ -------- -------- -------
Balance at December 31, 2004 460,000 $ 5,000 8,889,414 $ 89,000 1,000 $ -
-------- ------- ------------ -------- -------- -------
Sale of Series F Preferred Stock ($1,000 per share
net of expenses of $249,000) - - - - - -
Shares Of Series D Preferred Stock - - - - - -
Converted into Common Stock
Shares Of Series F Preferred Stock - - - - - -
Converted into Common Stock
Expense recognized in connection with Issuance of Options - - - - - -
Exercise of Employee Options - - - - - -
Net Loss - - - - - -
-------- ------- ------------ -------- -------- -------
Balance at December 31, 2005 460,000 $ 5,000 8,889,414 $ 89,000 1,000 $ -
-------- ------- ------------ -------- -------- -------
Conversion Of Preferred Stock (460,000) (5,000) (8,889,414) (89,000) (1,000) -
Options Expense - - - - - -
Sale of Common Stock - - - - - -
(net of expenses of approximately $2.0 million) - - - - - -
Warrants Issued to Third-Party - - - - - -
Dividends Paid - - - - - -
Deemed Dividend related to beneficial conversion feature on - - - - - -
Series F Preferred Stock - - - - - -
Net Loss - - - - - -
-------- ------- ------------ -------- -------- -------
Balance at June 30, 2006 - $ - - $ - - $ -
-------- ------- ------------ -------- -------- -------
SERIES D SERIES E SERIES F
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
$.01 PAR VALUE $.01 PAR VALUE $.01 PAR VALUE
------------------ ----------------------- ------------------
NUMBER NUMBER NUMBER
OF OF OF
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- ------- ------------ -------- -------- -------
Balance at January 1, 2004 7,136 - 1,000 - - -
-------- ------- ------------ -------- -------- -------
Sale of Common Stock and Warrants in connection with the
January 2004 financing (net of issuance costs of $423,000) - - - - - -
Change in Value of Warrants - - - - - -
Exercise of Employee Stock Options - - - - - -
Expense recognized in connection with Issuance of Options - - - - - -
Net loss - - - - - -
-------- ------- ------------ -------- -------- -------
Balance at December 31, 2004 7,136 $ - 1,000 $ - - $ -
-------- ------- ------------ -------- -------- -------
Sale of Series F Preferred Stock ($1,000 per share
net of expenses of $249,000) - - - - 7,000 -
Shares Of Series D Preferred Stock (823) $ - - - - -
Converted into Common Stock
Shares Of Series F Preferred Stock - - - - (1,720) $ -
Converted into Common Stock
Expense recognized in connection with Issuance of Options - - - - - -
Exercise of Employee Options - - - - - -
Net Loss - - - - - -
-------- ------- ------------ -------- -------- -------
Balance at December 31, 2005 6,313 $ - 1,000 $ - 5,280 $ -
-------- ------- ------------ -------- -------- -------
Conversion Of Preferred Stock (6,313) - (1,000) - (4,423) -
Options Expense - - - - - -
Sale of Common Stock - - - - - -
(net of expenses of approximately $2.0 million) - - - - - -
Warrants Issued to Third-Party - - - - - -
Dividends Paid - - - - - -
Deemed Dividend related to beneficial conversion feature on - - - - - -
Series F Preferred Stock - - - - - -
Net Loss - - - - - -
-------- ------- ------------ -------- -------- -------
Balance at June 30, 2006 - $ - - $ - 857 $ -
-------- ------- ------------ -------- -------- -------
COMMON STOCK
$.01 PAR VALUE
------------------------ ADDITIONAL TOTAL
NUMBER OF PAID-IN ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
----------- ----------- ------------- ------------- -------------
Balance at January 1, 2004 12,894,166 129,000 102,392,000 (92,336,000) 10,279,000
----------- ----------- ------------- ------------- -------------
Sale of Common Stock and Warrants in connection with the
January 2004 financing (net of issuance costs of $423,000) 1,543,209 15,000 4,562,000 - 4,577,000
Change in Value of Warrants - - (564,000) - (564,000)
Exercise of Employee Stock Options 804,381 8,000 733,000 - 741,000
Expense recognized in connection with Issuance of Options - - 147,000 - 147,000
Net loss - - - (3,791,000) (3,791,000)
----------- ----------- ------------- ------------- -------------
Balance at December 31, 2004 15,241,756 $ 152,000 $ 107,270,000 $ (96,127,000) $ 11,389,000
----------- ----------- ------------- ------------- -------------
Sale of Series F Preferred Stock ($1,000 per share - - 6,751,000 - 6,751,000
net of expenses of $249,000)
Shares Of Series D Preferred Stock 1,454,645 15,000 (15,000) - -
Converted into Common Stock
Shares Of Series F Preferred Stock 765,481 8,000 (8,000) - -
Converted into Common Stock
Expense recognized in connection with Issuance of Options - - 41,000 - 41,000
Exercise of Employee Options 1,597,284 16,000 1,488,000 - 1,504,000
Net Loss - - - (3,820,000) (3,820,000)
----------- ----------- ------------- ------------- -------------
Balance at December 31, 2005 19,059,166 $ 191,000 $ 115,527,000 $ (99,947,000) $ 15,865,000
----------- ----------- ------------- ------------- -------------
Conversion Of Preferred Stock 48,170,884 481,000 (387,000) - -
Options Expense - - 1,223,000 - 1,223,000
Sale of Common Stock - - - - -
(net of expenses of approximately $2.0 million) 60,975,610 610,000 47,392,000 - 48,002,000
Warrants Issued to Third-Party - - 67,000 - 67,000
Dividends Paid - - (19,512,000) - (19,512,000)
Deemed Dividend related to beneficial conversion feature on - - 3,857,000 (3,857,000) -
Series F Preferred Stock - - - - -
Net Loss - - - (5,165,000) (5,165,000)
----------- ----------- ------------- ------------- -------------
Balance at June 30, 2006 128,205,660 $ 1,282,000 $ 148,167,000 $(108,969,000) $ 40,480,000
----------- ----------- ------------- ------------- -------------
The accompanying notes are an integral part of these condensed
financial statements.
6
BLUEFLY, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
---------------------------
2006 2005
------------ ------------
Cash flows from operating activities
Net loss $ (5,165,000) $ (2,062,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 729,000 639,000
Stock options expense 1,223,000 27,000
Warrant issued to consultant 67,000 --
Provisions for returns (482,000) (607,000)
Bad debt expense 448,000 142,000
Reserve for inventory obsolescence 615,000 453,000
Warrant issued to supplier 133,000 135,000
Changes in operating assets and liabilities:
(Increase) decrease in
Inventories (4,985,000) (2,310,000)
Accounts receivable (850,000) (645,000)
Prepaid inventory (130,000) (66,000)
Prepaid expenses 451,000 176,000
Other current assets (109,000) 543,000
Increase (decrease) in
Accounts payable (2,131,000) (291,000)
Accrued expenses and other current liabilities 1,641,000 (504,000)
Interest payable to related party shareholders 271,000 267,000
Deferred revenue 480,000 203,000
------------ ------------
Net cash used in operating activities (7,794,000) (3,900,000)
------------ ------------
Cash flows from investing activities
Purchase of property and equipment (592,000) (1,608,000)
------------ ------------
Net cash used in investing activities (592,000) (1,608,000)
------------ ------------
Cash flows from financing activities
Net proceeds from June 2006 Financing 48,002,000 --
Net proceeds from June 2005 Financing -- 6,752,000
Net proceeds from exercise of stock options -- 410,000
Payments of capital lease obligation (27,000) (124,000)
Repayment of related party Notes Payable and interest (5,488,000) --
Dividends paid to related party shareholders (19,512,000) --
------------ ------------
Net cash provided by financing activities 22,975,000 7,038,000
------------ ------------
Net increase in cash and cash equivalents 14,589,000 1,530,000
Cash and cash equivalents - beginning of period 9,408,000 6,685,000
------------ ------------
Cash and cash equivalents - end of period $ 23,997,000 $ 8,215,000
============ ============
Supplemental schedule of non-cash investing and financing activities:
Cash paid for interest $ 92,000 $ 56,000
============ ============
Cash paid for interest - to related shareholder $ 1,488,000 --
============ ============
Warrant issued to consultant $ 67,000 --
============ ============
Deemed dividend related to beneficial conversion feature on Series F Preferred Stock $ 3,875,000 --
============ ============
The accompanying notes are an integral part of these condensed
financial statements.
7
BLUEFLY, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS - Unaudited
JUNE 30, 2006
NOTE 1 - BASIS OF PRESENTATION
The accompanying financial statements include the accounts of Bluefly, Inc. (the
"Company"). The financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnote disclosures
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting mainly of
normal recurring accruals) considered necessary for a fair statement 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 due
to seasonal and other factors. For further information, refer to the financial
statements and accompanying footnotes included in the Company's Form 10-K for
the year ended December 31, 2005. On January 1, 2006 the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 123(R) "Share-Based
Payment."
The Company has sustained net losses and negative cash flows from operations
since the formation of Bluefly.com. The Company's ability to meet its
obligations in the ordinary course of business is dependent on its ability to
establish profitable operations, or find other sources to fund operations. The
Company believes that its current funds, together with working capital, and its
availability under its existing Credit Facility, will be sufficient to enable it
to meet its planned expenditures through at least the next 12 months.
NOTE 2 - THE COMPANY
The Company is a leading Internet retailer that sells over 350 brands of
designer apparel, accessories and home products at discounts of up to 75% off of
retail value. The Company's e-commerce Web site ("Bluefly.com" or "Web Site")
was launched in September 1998.
During 2005, the Company dissolved its wholly owned subsidiary. This subsidiary
had no operations.
NOTE 3 - JUNE 2006 FINANCING
On June 15, 2006 (the "Closing Date"), the Company completed a private placement
(the "Private Placement") through the sale of 60,975,610 shares of its common
stock, par value $0.01 per share (the "Common Stock"), at a price of $0.82 per
share. The Private Placement was made to affiliates of Maverick Capital, Ltd.
("Maverick") and Prentice Capital Management, LP ("Prentice"). The aggregate
proceeds from the Private Placement was $50 million, almost half of which was
purchased by each of Maverick and Prentice. The purchase price of $0.82 per
share represents an 11% premium to the closing bid price of the Common Stock on
June 5, 2006, the date of signing of the definitive stock purchase agreement.
The shares purchased in the Private Placement included 203,016 shares of Common
Stock that were purchased by a holder of Series D Convertible Preferred Stock in
connection with the exercise of such holder's preemptive rights. The amount
purchased by Maverick and Prentice in the Private Placement was reduced on a pro
rata basis as a result of the exercise of such holder's preemptive rights.
Concurrent with the closing of the Private Placement, affiliates of Soros Fund
Management LLC ("Soros") converted all of their outstanding Series A, Series B,
Series C, Series D, Series E and Series F Convertible Preferred Stock
(collectively, the "Preferred Stock") into 44,729,960 shares of the Company's
Common Stock. The remaining shares of Series D Convertible Preferred Stock,
which were held by investors other than Soros, automatically converted into an
aggregate of 1,073,936 shares of Common Stock. The only Preferred Stock that
remains outstanding is approximately 857 shares of Series F Convertible
Preferred Stock. As a result of the Private Placement, and in accordance with
the terms of the anti-dilution provisions contained in the Certificate of
Powers, Designations, Preferences and Rights of Series F Convertible Preferred
Stock, the conversion price of the Series F Convertible Preferred Stock was
adjusted to $0.82 per share. The Company has the right to redeem such shares of
Series F Convertible Preferred Stock, at the face value thereof of $857,143,
plus accrued dividends, to the extent the Board of Directors of the Company
determines to do so. Allen & Company LLC acted as placement agent for the
Private Placement and was paid a commission of 5% of the gross proceeds, half of
which was paid by the Company and the other half by Soros. Of the commission
paid by the Company, $1 million was paid through the issuance of Common Stock
and the remainder was paid in cash.
8
BLUEFLY, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS - Unaudited
JUNE 30, 2006
On the Closing Date, the Company paid Soros $25 million in cash, which
represented $4,000,000 of the principal and $1,488,376 of accrued but unpaid
interest on the outstanding convertible notes (the "Notes") held by Soros and
the majority of the accrued but unpaid dividends on the shares of Preferred
Stock that were converted by Soros in connection with the Private Placement,
with the remaining accrued but unpaid dividends on such shares of Preferred
Stock paid in shares of common stock. The remaining proceeds will be used by the
Company for general corporate purposes. As a result of the Private Placement and
the conversion of the Preferred Stock, Soros collectively owns approximately 39%
of the Company's Common Stock, and each of Maverick and Prentice own
approximately 24% of the Company's Common Stock.
As a result of the Private Placement, the conversion price of the Company's
Series F Convertible Preferred Stock, the majority of which was held by Soros,
automatically decreased from $2.32 to $0.82. In accordance with FASB Emerging
Issue Task Force Issue No. 00-27, "Application of Issue No. 98-5 to Certain
Convertible Instruments," this reduction in the conversion price of the
Company's Series F Preferred Stock resulted in the Company recording a
beneficial conversion feature in the approximate amount of approximately $3.9
million as part of its second quarter financial results. This non-cash charge,
which is analogous to a dividend, resulted in an adjustment to the Company's
computation of Loss Per Share.
The Company has agreed to use its commercially reasonable efforts to (i) prepare
and file with the Securities and Exchange Commission (the "Commission") a
registration statement (the "Registration Statement") to register the shares of
Common Stock sold in the Private Placement within 120 days of the Closing Date
and (ii) cause the Registration Statement to be declared effective by the
Commission within 180 days of the Closing Date. The Company will be liable for
certain penalties for the failure to meet such filing and effective date
deadlines. The Investors also received certain "piggy-back" registration rights
covering the Common Stock purchased in the Private Placement.
NOTE 4 - FINANCING AGREEMENT
The Company has a three year revolving credit facility (the "Credit Facility")
with Wells Fargo Retail Finance, LLC ("Wells Fargo"). Under the terms of the
Credit Facility, Wells Fargo provides the Company with a revolving credit
facility and issues letters of credit in favor of suppliers or factors. The
Credit Facility is secured by a lien on substantially all of the Company's
assets. Historically, the Credit Facility has also been secured by a $2,000,000
letter of credit issued by Soros in favor of Wells Fargo (the "Soros LC").
Subsequent to quarter end, Wells Fargo agreed to release the Soros LC.
Availability under the Credit Facility is determined by a formula that takes
into account the amount of the Company's inventory and accounts receivable, as
well as the Soros LC. The maximum availability is currently $7,500,000, but can
be increased to $12,500,000 at the Company's request, subject to certain
conditions. As of June 30, 2006, total availability under the Credit Facility,
after giving effect to an $850,000 availability reserve that Wells Fargo had
historically required, was approximately $6,650,000, of which $2,859,000 was
committed, leaving approximately $3,791,000 available for further borrowings.
Subsequent to quarter end, Wells Fargo agreed that it would no longer require
the availability reserve, although it has the right under the Credit Facility to
establish reserves in the future, as it deems appropriate.
Interest accrues monthly on the average daily amount outstanding under the
Credit Facility during the preceding month at a per annum rate equal to the
prime rate plus 0.75% or LIBOR plus 2.75%. The Company also pays a monthly
commitment fee on the unused portion of the facility (i.e., $7,500,000 less the
amount of loans outstanding) equal to 0.35%. The Company also pays Wells Fargo
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. For the
three months ended June 30, 2006, the Company incurred approximately $42,000 in
connection with these fees.
Subject to certain conditions, if the Company defaulted on any of its
obligations under the Credit Facility, Wells Fargo had the right to draw upon
the Soros LC to satisfy any such obligations. If Wells Fargo drew on the Soros
LC, pursuant to the terms of a reimbursement agreement between the Company and
Soros, the Company would have had the obligation to, among other things,
reimburse Soros for any amounts drawn under the Soros LC, plus interest accrued
thereon. In addition, the Company was required to pay Soros Fund Management LLC
an annual fee in connection with the issuance and maintenance of the Soros LC in
an amount equal to the fee that the Company would be required to pay in order to
have a similar letter of credit issued under the Credit Facility. For the
current year the annual fee was $55,000. The Company was also required to
reimburse Soros for any costs and expenses associated with the issuance and
maintenance of the Soros LC.
9
BLUEFLY, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS - Unaudited
JUNE 30, 2006
Under the terms of the Credit Facility, Soros has the right to purchase all of
the Company's obligations from Wells Fargo at any time if the Company is then in
default under the Credit Facility.
NOTE 5 - LOSS PER SHARE
The Company has determined Loss Per Share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." Basic
loss per share excludes dilution and is computed by dividing loss available to
common shareholders by the weighted average number of common shares outstanding
for the period.
Diluted loss per share is computed by dividing 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, the following options and warrants to purchase
shares of Common Stock and Preferred Stock convertible into shares of Common
Stock were not included in the computation of diluted loss per share because the
result of the exercise of such inclusion would be antidilutive:
Security June 30, 2006 Exercise Prices June 30, 2005 Exercise Prices
------------------ ------------- --------------- ------------- ---------------
Options 8,103,028 $0.69 - $16.47 8,791,285 $0.69 - $16.47
Warrants 1,945,893 $0.78 - $ 3.96 2,083,393 $0.78 - $ 3.96
Preferred Stock --(1) 46,340,671(1)
Convertible Notes --(3) --(2)
(1) Excludes dividends on preferred stock, which are payable in cash or
common stock, at the Company's option, upon conversion, redemption or
liquidation. In June 2006, substantially all of the Company's
Preferred Stock was converted into shares of Common Stock. At June 30,
2006, there were 857 shares of Series F Convertible Preferred Stock
outstanding that are convertible into approximately 1,045,296 shares
of Common Stock (excluding dividends).
(2) Excludes debt issued in connection with the July 2003 financing and
the October 2003 financing, which would have been convertible into
equity securities of the Company sold in any subsequent round of
financing, at the holders option, at a price that is equal to the
lowest price per share accepted by any investor in such subsequent
round of financing. At June 30, 2005, such debt was not convertible
into Common Stock.
(3) In June 2006, all of the convertible notes were paid off.
NOTE 6 - STOCK BASED COMPENSATION
The Company's Board of Directors has adopted three stock option plans, one in
April 2005, one in July 2000 and the other in May 1997 (collectively the
"Plans"). The Plans were adopted for the purpose of encouraging key employees,
consultants and directors who are not employees to acquire a proprietary
interest in the growth and performance of the Company, and are similar in
nature. Options are granted in terms not to exceed ten years and become
exercisable as specified when the option is granted. Vesting terms of the
options range from immediately to a ratable vesting period of four years. The
Plans have an aggregate of 15,700,000 shares authorized for issuance.
Before January 1, 2006, the Company accounted for stock-based compensation under
the recognition and measurement principles of Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" ("APB 25"),
and related interpretations. The Company did not recognize compensation expense
related to stock options granted to employees and directors where the exercise
price was at or above fair value at the date of grant. Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation,"
established accounting and disclosure requirements using a fair-value-based
method of accounting for stock-based employee compensation plans. As permitted
by SFAS No. 123, the Company elected to continue to apply the
intrinsic-value-based method of APB No. 25 described above, and
10
BLUEFLY, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS - Unaudited
JUNE 30, 2006
adopted only the disclosure requirements of SFAS No. 123, as amended by SFAS No.
148, "Accounting For Stock-Based Compensation - Transition and Disclosure."
On January 1, 2006, the start of the first quarter of fiscal 2006, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 123
(revised 2004), "Share-Based Payment" ("SFAS No. 123(R)"), which requires that
the costs resulting from all share-based payment transactions be recognized in
the financial statements at their fair values. The Company adopted SFAS No.
123(R) using the modified prospective application method under which the
provisions of SFAS No. 123(R) apply to new awards and to awards modified,
repurchased, or cancelled after the adoption date. Additionally, compensation
cost for the portion of the awards for which the requisite service has not been
rendered that are outstanding as of the adoption date is recognized in the
Statement of Operations over the remaining service period after the adoption
date based on the award's original estimate of fair value. Results for prior
periods have not been restated. Total share-based compensation expense recorded
in the Statement of Operations for the three and six months ended June 30, 2006
is $611,000 and $1,223,000, respectively.
On March 29, 2005, the SEC published Staff Accounting Bulletin ("SAB") No. 107,
which provides the Staff's views on a variety of matters relating to stock-based
payments. SAB No. 107 requires stock-based compensation be classified in the
same expense line items as cash compensation. The application of SFAS No. 123(R)
had the following effect on Q2 2006 reported amounts relative to amounts that
would have been reported using the intrinsic value method under previous
accounting:
As a result of adopting SFAS No. 123(R), the Company's operating loss and net
loss for the three and six months ended June 30, 2006 was $611,000 and
$1,223,000 higher, respectively, than if it had continued to account for
share-based compensation under APB No. 25. Basic and diluted loss per share for
the three and six months ended June 30, 2006 would have been $0.02 and $0.04 per
share, respectively, lower if the Company had not adopted SFAS No.123(R). There
was no effect on the Company's cash flows.
The following table illustrates the effect on net income and net income per
common share applicable to common stockholders for the three and six months
ended June 30, 2005 as if the Company had applied the fair value recognition
provisions for stock-based employee compensation of SFAS No. 123, as amended.
For purposes of the pro forma presentation, option forfeitures are accounted for
as they occurred and no amounts of compensation expense have been capitalized
into inventory or other assets, but instead were considered as period expenses
(in thousands, except per share data):
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2005 JUNE 30, 2005
------------- -------------
Net loss, as reported $ (1,169,000) $ (2,062,000)
Deduct: total stock based compensation
expense determined under fair value
based methods for all awards (702,000) (1,414,000)
Add: Stock-based employee compensation
Expense included in net loss 11,000 27,000
Pro forma net loss applicable to common shareholders (1,860,000) (3,449,000)
Net Loss per share applicable to common shareholders
Basic and diluted, as reported $ (0.15) $ (0.28)
Basic and diluted, pro forma $ (0.20) $ (0.37)
11
BLUEFLY, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS - Unaudited
JUNE 30, 2006
The fair value of options granted is estimated on the date of grant using a
Black-Scholes option pricing model. Expected volatilities are calculated based
on the historical volatility of the Company's stock. Management monitors share
option exercise and employee termination patterns to estimate forfeiture rates
within the valuation model. The expected holding period of options represents
the period of time that options granted are expected to be outstanding. The
risk-free interest rate for periods within the expected life of the option is
based on the interest rate of U.S. Treasury note in effect on the date of the
grant. The Company had previously recorded expense in accordance with APB No. 25
for certain options issued to its CEO and President that were issued below
market. Prior to the adoption of FAS 123(R), the Company recognized actual
forfeitures when they occurred but has not recorded a cumulative effect
adjustment to record estimated forfeitures related to these below market options
as the balance was immaterial.
The table below presents the assumptions used to calculate the fair value of
options granted during the three and six months ended June 30, 2006 and 2005,
respectively.
THREE SIX THREE SIX
MONTHS MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2006 2006 2005 2005
-------- -------- -------- --------
Expected holding period (years) 6.0 6.0 6.0 6.0
Risk-free interest rate 4.40% 4.76% 3.86% 4.39%
Dividend yield 0.00% 0.00% 0.00% 0.00
Volatility 109% 109% 128% 135%
The following table summarizes the Company's stock option activity:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
------------ ------------
Balance at December 31, 2005 8,038,528 $ 1.97
------------
Options granted 131,000 $ 1.12
Options canceled (66,500) $ 1.66
Options exercised - $ 0.00
------------
Balance at June 30, 2006 8,103,028 $ 1.96
Eligible for exercise at December 31, 2005 4,969,929 $ 2.15
Eligible for exercise at June 30, 2006 5,840,623 $ 2.08
The stock options are exercisable in different periods through 2016. Additional
information with respect to the outstanding options as of June 30, 2006, is as
follows:
12
BLUEFLY, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS - Unaudited
JUNE 30, 2006
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- --------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE OPTIONS EXERCISE
PRICES VESTED UNVESTED LIFE PRICE EXERCISABLE PRICE
-------------------- ---------- ---------- ----------- ----------- ------------ -----------
$0.00 - $1.66 3,720,121 1,354,995 7.4 Years $ 1.23 3,720,121 $ 1.20
$1.66 - $3.32 1,797,117 865,395 7.1 Years $ 2.33 1,797,117 $ 2.46
$3.32 - $4.98 58,985 42,015 7.6 Years $ 3.92 58,985 $ 3.92
$4.98 - $6.64 22,250 - 2.5 Years $ 5.11 22,250 $ 5.11
$6.64 - $9.96 52,750 - 3.1 Years $ 9.17 52,750 $ 9.17
$9.96 - $11.62 104,250 - 3.5 Years $ 11.20 104,250 $ 11.20
$11.62 - $14.94 6,250 - 3.4 Years $ 14.04 6,250 $ 14.04
$14.94 - $16.60 78,900 - 2.6 Years $ 15.13 78,900 $ 15.13
$0.69 - $16.60 5,840,623 2,262,405 7.1 Years $ 1.96 5,840,623 $ 2.08
The total fair value of the 360,954 shares that vested during the quarter and
the 870,694 shares that vested during the six months ended Ju ne 30, 2006 was
approximately $549,000 and $1,341,000, respectively. The weighted average fair
value of the options granted during the quarter was $0.95. At June 30, 2006, the
aggregate intrinsic value of the fully vested options "expected to vest" was
$565,000 and the weighted average remaining contractual life of the options was
6.5 years. The Company has not capitalized any compensation cost, or modified
any of its stock option grants during the first half of 2006. No options were
exercised during the quarter and no cash was used to settle equity instruments
granted under the Plans during the second quarter of 2006.
As of June 30, 2006, the total compensation cost related to non-vested awards
not yet recognized was $3.2 million. Total compensation cost is expected to be
recognized over 2 years on a weighted average basis.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Bluefly, Inc. is a leading Internet retailer that sells over 350 brands of
designer apparel, accessories and home furnishings at discounts of up to 75% off
of retail value. We launched our Web site in September 1998. Over the past four
years, our sales have grown at a compounded annual growth rate of almost 22%,
while our gross margin percentage has increased from 31.0% in the second quarter
of 2003 to 42.0% in the second quarter of 2006.
The recent increase in our margin and sales is the direct result of the
merchandise strategy that we began to implement in spring 2004. As part of that
strategy, we are bringing current season merchandise and the latest fashion
trends to our customer for great value. While there will be some fluctuation in
our gross margin percentage from quarter to quarter as we further develop our
merchandising and marketing strategy, we believe that we will be able to
maintain margins well above our levels from 2003 and earlier.
We believe that there is an opportunity to accelerate the growth of our business
while continuing to provide our customers with the great values that they have
become accustomed to. In an effort to take advantage of this opportunity, we
launched a national advertising campaign in 2005. We continued the campaign into
the first half of 2006, and plan to continue it for the rest of the year. We
intend to continuously review the results of the campaign and use the learnings
to refine and improve upon our marketing strategy.
Our net sales increased by approximately 40% to $16,793,000 for the three months
ended June 30, 2006 from $12,029,000 for the three months ended June 30, 2005.
Our gross margin increased to 42.0% in 2006 from 38.7% in 2005, 40.1% in 2004
and 31% in 2003. Our gross profit increased by 51% to $7,046,000 for the three
months ended June 30, 2006 from $4,651,000 for
13
BLUEFLY, INC.
JUNE 30, 2006
the three months ended June 30, 2005. This growth in gross profit was driven by
the increase in net sales, and by the increase in gross margins. Our operating
loss increased by 72% to $1,754,000 for the three months ended 2006, from
$1,019,000 for the three months ended 2005. This increase was primarily a result
of the increased marketing expenditures in the second quarter of 2006, the
payment of executive bonuses in connection with our recent financing in June
2006, and the inclusion of stock option expenses as a result of the adoption of
SFAS No. 123(R).
As of June 30, 2006, we had a receivable of $352,000 due from a third party
service provider that purchases inventory from the Company to be distributed
internationally. This amount related to activity that occurred primarily in the
second quarter. We believe that it is not probable that we will collect this
amount in its entirety. Accordingly, we have increased our bad debt expense
which is included in general and administrative expenses.
We increased our spending in marketing (excluding staff related costs) by 63% to
$1,309,000 for the second quarter of 2006, from $804,000 for the second quarter
2005. A large portion of the increased marketing expense was a result of the
costs associated with our national advertising campaign, which was launched in
September 2005. In general, we intend to market our business more aggressively
than we have in previous years. This more aggressive growth strategy will cause
our marketing expense as a percentage of revenue to increase in the short-term;
however, we believe that it is a prudent investment in our business given that
our margin structure and average order size have historically resulted in a
relatively high positive contribution to overhead and marketing on a customer's
first order.
In connection with the recent financing in June 2006, we paid $675,000 of
bonuses. Of this amount, $650,000 are included in general and administrative
expenses.
On January 1, 2006, we adopted SFAS No. 123(R), which requires expensing of
stock options. As a result, we recorded total share-based compensation expenses
of $611,000 for the three months ended June 30, 2006. Results for prior periods
have not been restated due to the adoption based on the modified prospective
approach. Had they been restated, additional share-based compensation expenses
of approximately $691,000 would have been recorded for the three months ended
June 30, 2005.
Our reserve for returns and credit card chargebacks increased to 41.8% of gross
sales for the second quarter 2006 compared to 39.9% for the second quarter of
2005. The increase was primarily caused by an increase in average order size as
well as a shift in our merchandise mix towards certain product categories that
historically have generated higher return rates. However, we believe that this
increase in return rates has been more than offset by the higher gross margins
and average order sizes that have been generated by this shift in merchandise
mix.
A portion of our inventory includes merchandise that we either purchased with
the intention of holding for the appropriate season or were unable to sell
through in its entirety in a prior season and have determined to hold for the
next selling season, subject (in some cases) to appropriate mark-downs. In
recent years, we have increased the amount of inventory purchased on a pack and
hold basis in order to take advantage of opportunities in the market.
At June 30, 2006, we had an accumulated deficit of $108,969,000. The net losses
and accumulated deficit resulted primarily from the costs associated with
developing and marketing our Web site and building our infrastructure, as well
as non cash beneficial conversion charges resulting from decreases in the
conversion price of our Preferred Stock and the payment of dividends to holders
of preferred stock. 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. Therefore, we
may continue to incur substantial operating losses. 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
14
BLUEFLY, INC.
JUNE 30, 2006
of inventories, useful lives of property and equipment, calculation of stock
based compensation 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.
104 "Revenue Recognition". 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:
o A customer executes an order.
o The product price and the shipping and handling fee have been
determined.
o Credit card authorization has occurred and collection is reasonably
assured.
o 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.
Stock-Based Compensation
As of January 1, 2006, we adopted SFAS No. 123(R), which requires us to measure
compensation cost for all outstanding unvested share-based awards at fair value
and recognize compensation over the service period for awards expected to vest.
The estimation of stock awards that will ultimately vest requires judgment, and
to the extent actual results differ from our estimates, such amounts will be
recorded as a cumulative adjustment in the period estimates are revised. We
consider historical experience when estimating expected forfeitures. Actual
results may differ substantially from these estimates.
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 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.
15
BLUEFLY, INC.
JUNE 30, 2006
RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2006 COMPARED TO THE SIX MONTHS ENDED JUNE 30,
2005
The following table sets forth our statement of operations data, for the six
months ended June 30th. All data is in thousands except as indicated below:
2006 2005 2004
---------------------- ---------------------- ----------------------
As a % of As a % of As a % of
Net Sales Net Sales Net Sales
--------- --------- ---------
Net sales $ 33,669 100.0% $ 25,531 100.0% $ 20,609 100.0%
Cost of sales 19,784 58.8% 15,995 62.6% 13,020 63.2%
--------- --------- ---------
Gross profit 13,885 41.2% 9,536 37.4% 7,589 36.8%
Selling, marketing and fulfillment expenses 13,041 38.7% 8,103 31.7% 6,659 32.3%
General and administrative expenses 5,650 16.8% 3,188 12.5% 3,146 15.3%
--------- --------- ---------
Total operating expenses 18,691 55.5% 11,291 44.2% 9,805 47.6%
Operating loss (4,806) (14.3)% (1,755) (6.8)% (2,216) (10.8)%
Interest (expense) and other income (359) (1.1)% (307) (1.2)% 378 1.9%
--------- --------- ---------
Net loss (5,165) (15.4)% (2,062) (8.0)% (1,838) (8.9)%
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 six months ended June 30th, as indicated below:
2006 2005 2004
---------- ---------- ----------
Average Order Size (including shipping & handling) $ 246.13 $ 207.54 $ 188.61
New Customers Added during the Period 76,487 66,326 58,813
Net sales: Gross sales for the six months ended June 30, 2006 increased by
approximately 36% to $56,117,000 from $41,214,000 for the six months ended June
30, 2005. For the six months ended June 30, 2006, we recorded a provision for
returns and credit card chargebacks and other discounts of $22,448,000, or
approximately 40% of gross sales. For the six months ended June 30, 2005, the
provision for returns and credit card chargebacks and other discounts was
$15,683,000, or approximately 38.1% of gross sales. The increase in this
provision as a percentage of gross sales resulted from an increase in the return
rate. The increase was primarily caused by an increase in average order size as
well as a shift in our merchandise mix towards certain product categories that
historically have generated higher return rates. However, we believe that this
increase in return rates has been more than offset by the higher gross margins
and average order sizes that have been generated by this shift in merchandise
mix.
After the necessary provisions for returns, credit card chargebacks and
adjustments for uncollected sales taxes, our net sales for the six months ended
June 30, 2006 were $33,669,000. This represents an increase of approximately
31.9% compared to the six months ended June 30, 2005, in which net sales totaled
$25,531,000. The growth in net sales resulted from both an increase in the
number of new customers acquired (approximately 15% higher compared to the first
half 2005) and an increase in average order size (over 18% higher compared to
the first half 2005). For the six months ended June 30, 2006 revenue from
shipping and handling (which is included in net sales) increased approximately
8% in 2006 to $1,970,000 from $1,825,000 in 2005.
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 six months ended June 30, 2006 totaled
$19,784,000, resulting in gross margin of approximately 41.2%. Cost of sales for
the six months ended June 30, 2005 totaled $15,995,000, resulting in gross
margin of 37.4%. Gross profit increased by approximately 46%, to $13,885,000 for
the six months ended June 30, 2006 compared
16
BLUEFLY, INC.
JUNE 30, 2006
to $9,536,000 for the six months ended June 30, 2005. The growth in gross margin
was primarily the result of increased product margins, which was driven by a
merchandising strategy that focused on negotiating better prices with vendors as
well as selling more in-season product. In-season merchandise has more value to
our customers and therefore demands higher margins.
Selling, marketing and fulfillment expenses: Selling, marketing and fulfillment
expenses increased by 61% in the first six months of 2006 compared to the first
six months of 2005. Selling, marketing and fulfillment expenses were comprised
of the following:
Six Months Ended As a % of Six Months Ended As a % of Percentage Difference
June 30, 2006 Net Sales June 30, 2005 Net Sales increase (decrease)
---------------- ---------------- ---------------- ---------------- ---------------------
Marketing $ 5,760,000 17.1% $ 1,935,000 7.6% 198%
Operating 3,699,000 11.0% 3,208,000 12.6% 15%
Technology 1,989,000 5.9% 1,840,000 7.2% 8%
E-Commerce 1,593,000 4.7% 1,120,000 4.3% 42%
$ 13,041,000 38.7% $ 8,103,000 31.7% 61%
As a percentage of net sales, our selling, marketing and fulfillment expenses
increased to 38.7% for the six months ended June 30, 2006 from 31.7% for the six
months ended June 30, 2005. This increase was primarily related to the increase
in advertising spending from our advertising campaign and the recording of stock
option expenses as a result of our adoption of SFAS No. 123(R).
Marketing expenses include expenses related to paid search, online and print
advertising, television, fees to marketing affiliates, direct mail campaigns as
well as staff related costs. Marketing expenses increased by a higher percentage
than our percentage increase in revenue because we focused more of our marketing
initiatives on our national advertising campaign. Of the $3.8 million
incremental marketing costs in the first half of 2006 compared to 2005,
approximately $3.1 million related to the national advertising campaign and
$403,000 was related to paid search. While this more aggressive growth strategy
will cause our marketing expense as a percentage of revenue to increase in the
short-term, we believe that it is a prudent investment in our business given
that our improved margin structure and average order size have historically
resulted in a relatively high positive contribution to overhead on a customer's
first order.
Operating expenses include all costs related to inventory management,
fulfillment, customer service, and credit card processing. Operating expenses
increased in the first six months of 2006 by approximately 15% compared to the
first six months of 2005 as a result of variable costs associated with the
increased sales volume (e.g., picking and packing orders, processing returns and
credit card fees) and an increase in salary related expenses. These increases
were partially offset by a decrease in credit card fees attributed to a refund
from one of our credit card processors.
Technology expenses consist primarily of staff related costs, amortization of
capitalized costs and Web site hosting. For the six months ended June 30, 2006,
technology expenses increased by approximately 8% compared to the six months
ended June 30, 2005. This increase resulted from an increase in salary related
expenses, including the expensing of employee stock options in the current year,
as well as an increase in software support. This increase was partially offset
by a decrease in depreciation and web hosting expense.
E-Commerce expenses include expenses related to our photo studio, image
processing, and Web site design. For the six months ended June 30, 2006,
e-commerce expenses increased by approximately 42% as compared to the six months
ended June 30, 2005, primarily due to an increase in salary related expenses as
well as an increase in expenses associated with photo shoots and the result of
recording employee stock option expenses in the current period.
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 six months ended
June 30, 2006 increased by approximately 77% to $5,650,000 as compared to
$3,188,000 for the six months ended June 30, 2005. The increase in general and
administrative expenses was primarily the result of the recording of $957,000 of
expense related to employee stock options in the six month period, an increase
of $352,000 in
17
BLUEFLY, INC.
JUNE 30, 2006
bad debt expense related to a receivable due from a third party service provider
that purchases inventory from the Company to be distributed internationally,
increased consulting and professional fees of $119,000, increased public company
expenses of $172,000 and increased depreciation expense of $172,000. In
addition, in June 2006 the Company paid approximately $650,000 of executive
bonuses in connection with the financing that closed during the second quarter
2006. Most of these bonuses are included in general and administrative expenses.
As a percentage of net sales, general and administrative expenses for the first
half of 2006 increased to approximately 16.8% from 12.5% for the first half of
2005.
Loss from operations: Operating loss increased by approximately 174% in the
first six months of 2006 to $4,806,000 from $1,755,000 in the first six months
of 2005, as the increase in net sales and gross margin were more than offset by
the incremental marketing expenses and the recording of stock option expenses as
a result of the adoption of SFAS No. 123(R).
Interest and other income: Other income for the six months ended June 30, 2006
increased to $112,000 from $69,000 for the six months ended June 30, 2005. These
amounts relate primarily to interest income earned on our cash balances.
Interest and other expense: Interest expense for the six months ended June 30,
2006 totaled $471,000, compared to $376,000 for the six months ended June 30,
2005. Interest expense relates to fees paid in connection with our Credit
Facility, as well as interest expense on the Notes.
FOR THE THREE MONTHS ENDED JUNE 30, 2006 COMPARED TO THE THREE MONTHS ENDED JUNE
30, 2005
The following table sets forth our statement of operations data, for the three
months ended June 30th. All data is in thousands, except as indicated below:
2006 2005 2004
------------------------ ------------------------ ------------------------
As a % of As a % of As a % of
Net Sales Net Sales Net Sales
--------- --------- ---------
Net sales $ 16,793 100.0% $ 12,029 100.0% $ 9,495 100.0%
Cost of sales 9,747 58.0% 7,378 61.3% 5,688 59.9%
---------- ---------- ----------
Gross profit 7,046 42.0% 4,651 38.7% 3,807 40.1%
Selling, marketing and fulfillment expenses 5,577 33.2% 4,068 33.8% 3,210 33.8%
General and administrative expenses 3,223 19.2% 1,602 13.3% 1,394 14.7%
---------- ---------- ----------
Total operating expenses 8,800 52.4% 5,670 47.1% 4,604 48.5%
Operating loss (1,754) (10.4)% (1,019) (8.4)% (797) (8.4)%
Interest (expense) and other income, net (147) (0.9)% (150) (1.2)% 89 0.9%
---------- ---------- ----------
Net loss (1,901) (11.3)% (1,169) (9.6)% (708) (7.5)%
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 June 30th, as indicated below:
2006 2005 2004
---------- ---------- ----------
Average Order Size (including shipping & handling) $ 248.32 $ 216.09 $ 187.52
New Customers Added during the Period 37,779 29,561 25,478
NET SALES: Gross sales for the three months ended June 30, 2006 increased by
approximately 44% to $28,872,000 from $20,003,000 for the three months ended
June 30, 2005. For the three months ended June 30, 2006, we recorded a provision
for returns and credit
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BLUEFLY, INC.
JUNE 30, 2006
card chargebacks and other discounts of $12,079,000, or approximately 41.8% of
gross sales. For the three months ended June 30, 2005, the provision for returns
and credit card chargebacks and other discounts was $7,974,000, or approximately
39.9% of gross sales. The increase in this provision as a percentage of gross
sales resulted from an increase in the return rate. The increase was primarily
caused by an increase in average order size as well as a shift in our
merchandise mix towards certain product categories that historically have
generated higher return rates. However, we believe that this increase in return
rates has been more than offset by the higher gross margins and average order
sizes that have been generated by this shift in merchandise mix.
After the necessary provisions for returns, credit card chargebacks and
adjustments for uncollected sales taxes, our net sales for the three months
ended June 30, 2006 were $16,793,000. This represents an increase of 39.6%
compared to the three months ended June 30, 2005, in which net sales totaled
$12,029,000. The growth in net sales resulted from both an increase in the
number of new customers acquired (approximately 28% higher compared to second
quarter 2005) and an increase in average order size (approximately 15% higher
compared to the second quarter 2005). For the three months ended June 30, 2006,
revenue from shipping and handling increases approximately 16% to 1,005,000 in
2006 from 864,000 in 2005.
Cost of sales: Cost of sales for the three months ended June 30, 2006 totaled
$9,747,000, resulting in gross margin of approximately 42.0%. Cost of sales for
the three months ended June 30, 2005 totaled $7,378,000, resulting in gross
margin of 38.7%. Gross profit increased by 51%, to $7,046,000 for the three
months ended June 30, 2006 compared to $4,651,000 for the three months ended
June 30, 2005. The growth in gross margin was primarily the result of increased
product margins, which was driven by a merchandising strategy that focused on
negotiating better prices with vendors as well as selling more in-season
product. In-season merchandise has more value to our customers and therefore
demands higher margins.
Selling, marketing and fulfillment expenses: Selling, marketing and fulfillment
expenses increased by approximately 37.1% in the second quarter of 2006 compared
to the second quarter of 2005. Selling, marketing and fulfillment expenses were
comprised of the following:
As a % As a %
Three Months Ended of Net Three Months Ended of Net Percentage Difference
June 30, 2006 Sales June 30, 2005 Sales increase (decrease)
------------------ ------------------ ------------------ ------------------ ---------------------
Marketing 1,729,000 10.3% 1,041,000 8.7% 66%
Operating 1,949,000 11.6% 1,504,000 12.5% 30%
Technology 1,017,000 6.0% 945,000 7.8% 8%
E-Commerce 882,000 5.3% 578,000 4.8% 53%
------------------ ------------------ ------------------ ------------------ ---------------------
$ 5,577,000 33.2% $ 4,068,000 33.8% 37%
As a percentage of net sales, our selling, marketing and fulfillment expenses
decreased slightly to 33.2% for the three months ended June 30, 2006 from 33.8%
for the three months ended June 30, 2005. This decrease was primarily related to
economies of scale in operating and technology expenses, which were partially
offset by increases in advertising spending from our advertising campaign and
the recording of stock option expenses as a result of our adoption of SFAS No.
123(R).
Of the $688,000 incremental marketing costs in the second quarter 2006 compared
to 2005, approximately $261,000 related to the national advertising campaign and
$253,000 related to paid search. While this more aggressive growth strategy will
cause our marketing expense as a percentage of revenue to increase in the
short-term, we believe that it is a prudent investment in our business given
that our improved margin structure and average order size have historically
resulted in a relatively high positive contribution to overhead on a customer's
first order.
Operating expenses increased in the second quarter of 2006 by approximately 30%
compared to the second quarter of 2005 as a result of variable costs associated
with the increased sales volume (e.g., picking and packing orders, processing
returns and credit card fees). These increases were partially offset by a
decrease in credit card fees attributed to a refund from one of our credit card
processors.
For the three months ended June 30, 2006, technology expenses increased by
approximately 8% compared to the three months ended June 30, 2005. This increase
resulted from an increase in salary related expenses, including the expensing of
employee
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BLUEFLY, INC.
JUNE 30, 2006
stock options in the current year, as well as an increase in software support.
This increase was offset partially by a decrease in depreciation and web hosting
expense.
For the three months ended June 30, 2006, e-commerce expenses increased by
approximately 53% as compared to the three months ended June 30, 2005, primarily
due to an increase in salary related expenses as well as an increase in expenses
associated with photo shoots and the result of recording employee stock option
expenses in the current period.
General and administrative expenses: General and administrative expenses for the
three months ended June 30, 2006 increased by approximately 101% to $3,223,000
as compared to $1,602,000 for the three months ended June 30, 2005. The increase
in general and administrative expenses was primarily the result of the recording
of $475,000 of expense related to employee stock options in the current period,
an increase of $352,000 in bad debt expense related to a receivable due from a
third party service provider that purchases inventory from the Company to be
distributed internationally, increased public company expenses of $83,000 and
increased depreciation expense of $70,000. In addition, the Company paid
approximately $650,000 in executive bonuses related to the financing that closed
in the second quarter of 2006. Most of these bonuses are included in general and
administrative expenses.
As a percentage of net sales, general and administrative expenses for the second
quarter of 2006 increased to approximately 19.2% from 13.3% for the second
quarter of 2005.
Loss from operations: Operating loss increased by 72% in the second quarter of
2006 to $1,754,000 from $1,019,000 in the second quarter of 2005 as the increase
in net sales and gross margin were more than offset by the incremental marketing
expenses and the recording of stock option expenses as a result of the adoption
of SFAS No. 123(R).
Interest and other income: Other income for the second quarter ended June 30,
2006 increased to $67,000 from $29,000 for the second quarter ended June 30,
2005. These amounts relate primarily to interest income earned on our cash
balances.
Interest and other expense: Interest expense for the three months ended June 30,
2006 totaled $214,000, compared to $179,000 for the three months ended June 30,
2005. Interest expense relates to fees paid in connection with our Credit
Facility, as well as interest expense on the Notes.
LIQUIDITY AND CAPITAL RESOURCES
General
At June 30, 2006, we had approximately $24.0 million in the form of cash and
cash equivalents. Working capital at June 30, 2006 and 2005 was $37.4 million
and $12.3 million, respectively, and at December 31, 2005 was $17.9 million (the
June 30, 2005 amount excludes the approximately $1.26 million of restricted cash
that we regained access to upon refinancing our previous credit facility). In
addition, as of June 30, 2006, we had approximately $2.8 million committed under
the Credit Facility, leaving approximately $3.8 million of availability,
compared to availability of $600,000 under our previous credit facility at June
30, 2005.
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 Credit Facility is based primarily
upon our inventory levels. In addition, both availability under the Credit
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 Wells Fargo to provide credit support under the Credit
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. In addition, newer vendors generally do not
provide us with payment terms that are as favorable as those we get from
existing relationships and, in some instances, new vendors may require
prepayments. We have increased our prepayments in order to open up new
relationships and gain access to inventory that was not previously available to
us, as well as in connection with our advertising campaign, as in some
circumstances we need to pay in advance of production. As of June 30, 2006, we
had approximately $615,000 of prepaid inventory on our balance sheet.
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BLUEFLY, INC.
JUNE 30, 2006
In addition, our inventory levels as of June 30, 2006 were approximately $6.5
million higher than at June 30, 2005. The increase in inventory generally
reflects a ramp up in connection with our sales growth as well as opportunistic
buying of fresh inventory that has not previously been available to us. However,
the increased inventory level could adversely affect our flexibility in taking
advantage of other buying opportunities that may become available in the near
term.
On June 15, 2006, we raised $50 million of additional capital through the sale
of 60,975,610 shares of our Common Stock. We used $25 million of the proceeds
from such sale to pay all accrued but unpaid dividends on the Preferred Stock
converted by Soros in connection with such sale and to payoff the convertible
promissory notes held by Soros. The remaining proceeds from the sale will be
used for general corporate purposes.
We believe that our current funds, together with operating cash flow, and
availability under our existing Credit Facility will be sufficient to enable us
to meet our planned expenditures through at least the next 12 months.
Credit Facility
In July 2005, we entered into a new three year revolving credit facility with
Wells Fargo Retail Finance, LLC. Pursuant to the Credit Facility, Wells Fargo
provides the Company with a revolving loan and issues letters of credit in favor
of suppliers or factors. The Credit Facility is secured by a lien on all of the
Company's assets. Historically, the Credit Facility has also been secured by the
Soros LC. Subsequent to quarter end, Wells Fargo agreed to release the Soros LC.
Availability under the Credit Facility is determined by a formula that takes
into account the amount of the Company's inventory and accounts receivable. The
maximum availability is currently $7,500,000, but can be increased to
$12,500,000 at the Company's request, subject to certain conditions. As of June
30, 2006, total availability under the Credit Facility, after giving effect to
the required $850,000 availability reserve, was approximately $6,650,000 of
which $2,859,000 was committed, leaving approximately $3,791,000 available for
further borrowings. Subsequent to quarter end, Wells Fargo agreed that it would
no longer require the $850,000 availabilty reserve, although it has the right
under the Credit Facility to establish reserves in the future as it deems
appropriate.
Interest accrues monthly on the average daily amount outstanding under the
Credit Facility during the preceding month at a per annum rate equal to the
prime rate plus 0.75% or LIBOR plus 2.75%. We also pay a monthly commitment fee
on the unused portion of the facility (i.e., $7,500,000 less the amount of loans
outstanding) equal to 0.35%. We also pay Wells Fargo certain fees to open
letters of credit and guarantees in an amount equal to a certain specified
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.
Under the terms of the Credit Facility, Soros has the right to purchase all of
our obligations from Wells Fargo at any time if we are then in default under the
Credit Facility.
Commitments and Long Term Obligations
As of June 30, 2006, we had the following commitments and long term obligations:
Less than 1-3 3-5 More than
Total 1 year years years 5 years
------------ ------------ ------------ ------------ ------------
Marketing and Advertising $ 1,625,000 1,625,000 -- -- --
Purchase Orders $ 10,062,000 10,062,000 -- -- --
Operating Leases $ 1,689,000 527,000 1,162,000 -- --
Capital Leases $ 40,000 40,000 -- -- --
Employment Contracts $ 2,317,000 980,000 1,337,000 -- --
------------ ------------ ------------ ------------ ------------
Grand total $ 15,733,000 13,234,000 2,499,000 -- --
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.
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BLUEFLY, INC.
JUNE 30, 2006
Off Balance Sheet Arrangements
Certain warrants issued in conjunction with our preferred stock financing are
equity linked derivatives and accordingly represent an off balance sheet
arrangement. Each of these warrants meet the scope exception in paragraph 11(a)
of FAS 133 and are accordingly not accounted for as derivatives for purposes of
FAS 133, but instead included as a component of equity.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes--an
interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the
accounting for uncertainty in tax positions. This Interpretation requires an
entity to recognize the impact of a tax position in its financial statements if
that position is more likely than not to be sustained on audit based on the
technical merits of the position. The provisions of FIN 48 are effective as of
the beginning of fiscal year 2007, with the cumulative effect of the change in
accounting principle recorded as an adjustment to opening retained earnings.
Early application of FIN 48 is encouraged. The Company is evaluating the timing
of its adoption of FIN 48 and the potential effects of implementing this
Interpretation on its financial condition and results of operations.
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.
ITEM 4. CONTROLS AND PROCEDURES.
As of the end of the period covered by this Form 10-Q, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer along with our Chief Financial Officer, of
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based
upon that evaluation, our Chief Executive Officer along with our Chief Financial
Officer concluded that our disclosure controls and procedures are effective in
ensuring that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act are recorded, processed, summarized and
reported, within the time periods specified in the Commission's rules and forms.
There have been no changes in our internal control over financial reporting that
occurred during the Company's most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
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 us 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:
our history of losses and anticipated future losses; the success of our
advertising campaign; risks associated with Soros, Maverick and Prentice each
owning a significant portion of our stock; the potential failure to forecast
revenues and/or to make adjustments to our operating plans necessary as a result
of any failure to forecast accurately; unexpected changes in fashion trends;
cyclical variations in the apparel and e-commerce markets; the risk of default
by us under the Credit Facility and the consequences that might arise from us
having granted a lien on substantially all of our assets under that agreement;
risks of litigation for sale of unauthentic or damaged goods and litigation
risks related to sales in foreign countries; the dependence on third parties and
certain relationships for certain services, including our dependence on U.P.S.
(and the risks of a mail slowdown due to terrorist activity) and our dependence
on our third-party web hosting, fulfillment and customer service centers; online
commerce security risks; risks related to brand owners' efforts to limit our
ability to purchase products indirectly; management of potential growth; the
competitive nature of our business and the potential for competitors with
greater resources to enter the business; the availability of merchandise; the
need to further establish brand name recognition; risks associated with our
ability to handle increased traffic and/or continued improvements to our Web
site; rising return rates; dependence upon executive personnel; the successful
hiring and retaining of new personnel; risks associated with expanding our
operations; risks associated with potential infringement of other's intellectual
property; the potential inability to protect our intellectual property; and
government regulation and legal uncertainties; uncertainties relating to the
imposition of sales tax on Internet sales.
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BLUEFLY, INC.
JUNE 30, 2006
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. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
In July 2006, we issued 1,000,000 shares of Common Stock to Allen, in
satisfaction of $1,000,000 of the placement fee due to Allen in connection with
the June 2006 Financing. The issuance of such Common Stock was deemed exempt
from the registration provisions of the Securities Act of 1933, as amended (the
"Securities Act"), by reason of the provision of Section 4(2) of the Securities
Act regarding Allen's status as an accredited investor (as such term is defined
under Rule 501 promulgated under the Securities Act), and its acquisition of
shares of Common Stock for investment and not with a current view to
distribution thereof, except as such distribution may be permissible under
applicable law. The certificates representing the shares of Common Stock issued
in the transaction contain a legend to the effect that such shares are not
registered under the Securities Act and may not be transferred except pursuant
to a registration which has become effective under the Securities Act or
pursuant to an exemption from such registration.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 19, 2006, we held our annual meeting of stockholders. At the meeting, our
stockholders voted for six directors, electing Alan Kane, Melissa Payner-Gregor,
Barry Erdos, Christopher G. McCann, Martin Miller and Ann Jackson as members of
our board of directors. In addition, our stockholders voted in favor of a
proposal to approve an amendment to our certificate of incorporation to increase
the number of authorized shares of common stock and in favor of a proposal to
approve certain anti-dilution adjustment provisions of our Series F Convertible
Preferred Stock. The results of the voting were as follows:
PROPOSAL VOTES FOR VOTES WITHHELD
------------------------------------- ---------- --------------
Election of Alan Kane 69,162,678 294,370
Election of Melissa Payner-Gregor 69,380,648 76,400
Election of Barry Erdos 69,166,825 290,223
Election of Christopher G. McCann 69,219,178 237,870
Election of Martin Miller 69,138,775 318,273
Election of Ann Jackson 69,221,378 235,670
Abstentions and
Votes For Votes Against Broker Non-Votes
---------- -------------- ----------------
Approval of Charter Amendment 68,863,397 579,621 14,030
Approval of Certain Anti-Dilution
Adjustment Provisions to our Series
F Convertible Preferred Stock 58,191,361 853,758 10,411,929
In addition to the directors elected at the meeting, Neal Moszkowski and David
Wassong were elected to the Board of Directors as the designees of the Series A
Preferred Stock and the Series B Preferred Stock, respectively. Information
regarding changes in the Board of Directors subsequent to the annual meeting of
stockholders is described in a Current Report on Form 8K filed with the
Securities and Exchange Commission on August 2, 2006 which is incorporated by
reference herein.
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BLUEFLY, INC.
JUNE 30, 2006
ITEM 6. EXHIBITS
The following is a list of exhibits filed as part of this Report:
EXHIBIT NUMBER DESCRIPTION
-------------- ---------------------------------------------------------------
10.1 Stock Purchase Agreement, dated as of June 5, 2006, by and
among Bluefly, Inc., Quantum Industrial Partners LDC, SFM
Domestic Investments, LLC and the investors listed on the
signature pages attached thereto (filed as Exhibit 10.1 to the
Current Report on Form 8-K filed by Bluefly, Inc. on June 7,
2006).*
10.2 Form of Voting Agreement by and among Bluefly, Inc., Quantum
Industrial Partners LDC, SFM Domestic Investments, LLC,
Maverick Fund USA, Ltd., Maverick Fund, L.D.C., Maverick Fund
II, Ltd. and Prentice-Bluefly, LLC (filed as Exhibit 10.2 to
the Current Report on Form 8-K filed by Bluefly, Inc. on June
7, 2006).*
10.3 Fee Letter, dated June 5, 2006, by and among Bluefly, Inc.,
Quantum Industrial Partners LDC and SFM Domestic Investments,
LLC (filed as Exhibit 10.3 to the Current Report on Form 8-K
filed by Bluefly, Inc. on June 7, 2006).*
10.4 Waiver Letter, dated June 5, 2006, by and between Bluefly, Inc.
and Wells Fargo Retail Finance, LLC (filed as Exhibit 10.4 to
the Current Report on Form 8-K filed by Bluefly, Inc. on June
7, 2006).*
31.1 Certification Pursuant to Rule 13a-14(a)/15d-14(a)
31.2 Certification Pursuant to Rule 13a-14(a)/15d-14(a)
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
* Previously filed; incorporated herein by reference.
24
BLUEFLY, INC.
JUNE 30, 2006
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/ Melissa Payner-Gregor
-------------------------
Melissa Payner-Gregor
Chief Executive Officer
By: /s/ Patrick C. Barry
-------------------------
Patrick C. Barry
Chief Financial Officer
August 4, 2006
25